Impact of international taxation on FDI location choice

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A new regulation has been introduced in the late s in the USA with an intention to simplify questions of whether a firm was a corporation or a partnership. The application of the rule to foreign circumstances has led to a situation where an entity can be recognized as a corporation by one jurisdiction but not by another.

There are also hybrid instruments that can avoid taxation by being treated as debt in one jurisdiction and equity in another [ 8 ].

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The empirical evidence is broadly consistent with these incentives. The reported profitability of multinational firms is inversely related to local tax rates, a relationship that is at least partly the consequence of tax-motivated debt financing thin capitalization 3 , the pricing of intrafirm transfers, royalty payments 4 and other such methods. Grubert estimates separate equations for dividend, interest, and royalty payments by foreign subsidiaries to American parent companies and finds that high corporate tax rates in countries in which American subsidiaries are located are correlated with higher interest payments and lower dividend payout rates [ 22 ].

Patterns of reported profitability are consistent with other indicators of aggressive tax avoidance behavior. It is widely accepted that firms adjust prices used for within-firm transactions with the goal of reducing their total tax obligations. There is substantial evidence of tax-motivated transfer pricing in US trade prices. Multinational firms typically benefit by reducing prices charged by affiliates in high-tax prices for items and services provided to affiliates in low-tax countries [ 7 , 38 ].

Prior research has found significant effects of tax rates in affiliate and parent countries on the profit shifting behavior of multinational entities; however, the magnitude of the effects varies. The results measured in semi-elasticities range from close to zero to well above one [ 39 ]. The findings of the research based on the profit shifting behavior by US multinationals are supported by European evidence.


Weichenrieder using data on German inbound and outbound FDI finds an empirical correlation between the home country tax rate of a parent and the net of tax profitability of its German affiliate that is consistent with profit shifting behavior. Using a unique dataset containing detailed firm-level information on the parent companies and subsidiaries of European multinationals, Huizinga and Laeven build a model and empirically examine the extent of intra-European profit shifting by European multinationals.

On average, they find a semi-elasticity of reported profits with respect to the top statutory tax rate of 1. They come to the conclusion that international profit shifting leads to a substantial redistribution of national corporate tax revenues [ 41 ]. Evidence of income shifting in response to differences in corporate tax rates and the substantial loss of revenues from a unilateral increase in the corporate tax rate is also supported by the research by using data on a large selection of OECD countries [ 42 ].

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The exception to the findings that support the central message of the basic tax competition model is the paper by Han and Leach who develop a model in which competing governments offer financial incentives to induce individual firms to locate within their jurisdictions [ 43 ]. Equilibrium is described under three specifications of the supplementary taxes.

There is no misallocation of capital under two of these specifications, and there might or might not be capital misallocation under the third. This result contrasts strongly with the basic tax competition model which finds that competition among governments almost always leads to inefficient allocation of resources.

International tax avoidance is evidently a successful activity. Very little tax is paid on the foreign source income of US firms [ 8 ]. This has grave implications for domestic tax policy. It is really another way of saying that greater tax coordination between countries may be an answer to this international problem. In the aftermath of the global financial crisis, and the fiscal problems that followed in many countries, the public and policy makers paid greater attention to the tax avoidance of multinational companies.

Similarly, researchers devoted greater efforts to estimating the scale and nature of the associated tax losses. Corporate tax is an important source of government revenue in all regions of the world.

Corporate Tax and Location Choice for Multinational Firms - Munich Personal RePEc Archive

CIT accounts for a larger share of total tax revenues on average in lower-income countries than in high-income countries [ 6 ]. Making estimates of the global losses due to base erosion and profit shifting requires complex and rigorous research. In particular, they focus on the spillovers from tax policy decisions in individual jurisdictions onto others.

They develop and use an innovative method allowing a distinction between spillover effects through real investment decisions and through avoidance techniques and quantify the revenue losses through the latter. The concentration as a share of gross domestic product GDP is somewhat higher in developing countries compared to OECD economies [ 45 ].

Though the largest losses are suffered by rich economies such as the United States, relative losses are more intensive in lower-income countries. While any estimates of this intentionally hidden phenomenon are necessarily uncertain, the size of magnitude suggests that the economic development of countries may in some cases be substantially damaged by the activities of multinational companies.

However, accumulated losses are staggering. This might be viewed as evidence that lowering corporate tax rates is an effective tool against avoidance. The survey of the literature in this chapter suggests that tax competition and related problems remain high on the agenda of policy makers as well as researchers. Since governments have the dual mission to attract investment into their jurisdiction and collect enough public revenue to provide public services, the tensions arise.

In order to encourage FDI and other forms of investment, the governments offer tax incentives to potential investors. However, that often means engaging in harmful competition with other jurisdictions. Such behavior is inefficient because it is a zero-sum game. When all governments behave this way, none gain and consequently communities are all worse off than they would have been if public managers had made decisions based on marginal costs.

The tax competition may reduce tax revenues and lead to inefficient underprovision of public services. The recent empiric evidence supports the central message of basic tax competition theory that competition for capital is actually occurring. It is manifested through the overall reduction in statutory and effective corporate income tax rates as well as sensitivity of FDI to tax burden. However, in addition to distortions in capital allocation arising from genuine productive activities, the differential tax regimes create other distortions, like tax arbitrage and tax avoidance by multinational companies.

Governments throughout the world incur significant revenue losses through base erosion and profit shifting. The authors are grateful to Kristina Kalasinskaite of Mykolas Romeris University for her assistance in preparing this chapter. Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution 3. Help us write another book on this subject and reach those readers. Login to your personal dashboard for more detailed statistics on your publications. Edited by Bishnu Pal. We are IntechOpen, the world's leading publisher of Open Access books.

Built by scientists, for scientists. Our readership spans scientists, professors, researchers, librarians, and students, as well as business professionals. Downloaded: Abstract The purpose of this chapter is to review the latest developments in corporate income tax CIT focusing on its international aspects and associated distortions.

Keywords corporate income tax tax competition tax avoidance foreign direct investment multinationals. Introduction Corporate income taxes CIT are paid by companies including those operating in several countries. Tax competition theory There is an extensive literature on the theory of tax competition.

Empirical evidence of tax competition 3. Trends in corporate income taxes As a consequence of the difficulty to develop one and conclusive theory, the empirical literature on tax competition burgeoned in recent years. Tax rates and foreign direct investment Since the s, the relation between FDI and corporate taxation policy has been widely studied, and the pioneers in research have focused primarily on the FDI flows sensitivity to capital tax rate [ 3 ]. Gold and silver production has increased dramatically over the past decade.

1. Introduction

Annually, as of Bolivia extracted and exported more than 11, kilograms of gold and tons of silver. Additionally, Bolivia has increased zinc production, extracting more than , tons each year. Other metals excavated include antimony , iron , and tungsten. Mining the mineral deposits would involve disturbing the country's salt flats called Salar de Uyuni , an important natural feature which boosts tourism in the region.

The government does not want to destroy this unique natural landscape to meet the rising world demand for lithium. In January Bolivia opened a lithium production plant in Uyuni, producing mainly potassium chloride. Annually, manufacturing has accounted for in between 14 and 15 percent of Bolivia's gross domestic product.

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The share of industry as a whole including the mining industry to the GDP increased from 30 percent in to 37,3 percent in Most industry is a small-scale, aimed at regional markets rather than national operations. Inadequate credit options and competition from the black market have kept Bolivia's manufacturing sector from developing fully.

Leading manufactured goods in Bolivia include textiles, clothing, non-durable consumer goods , processed soya, refined metals, and refined petroleum. This sector occupies a prominent place in the manufacturing industry that is continually growing, both in production and number of businesses and jobs. Especially the soybean and its derivatives reached very large export markets in recent years. The largest factories producing soybeans , sunflower seeds, cotton and sugar from cane , are mainly situated in Santa Cruz , although a large edible oil refineries operate in Cochabamba.

All major cities have at least one brewery, one or more soft drink bottling plants, and one or more packaging plants for canned food. The textiles industry was the second largest manufacturing sector after the food industry in the s and was of decreasing importance afterwards, representing progressively diminishing value of total manufacturing.

But since the s the textile industry has increased its growth rate. The cotton and wool industry declined at the expense of synthetic fibers. The largest concentration of textile mills are to be found in La Paz, but also in Santa Cruz and Cochabamba and to a lesser extent in Oruro. The services industry in Bolivia remains undeveloped. Inhabiting one of the poorest countries in South America, Bolivians have weak purchasing power.

The retail sector suffers from weak demand and competition with a large black market of contraband goods. Banking in Bolivia has long suffered from corruption and weak regulation. However, a series of reforms initiated by the Banking Law and subsequent acts are gradually improving Bolivia's banking sector. Bolivia has a central bank and nine private banks. Consolidation occurred following reforms, lowering the number of private banks in Bolivia from 14 in to nine in Foreign participation and investment in Bolivian banks are allowed.

About 90 percent of Bolivian bank deposits are held in U.

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The Bolivian government is trying to change this situation by taxing dollarized accounts while exempting boliviano accounts from the tax. As recently as , 27 percent of all loans were non-performing, leading most foreign investors to focus their resources in the somewhat-safer venue of corporate lending.

Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice
Impact of international taxation on FDI location choice Impact of international taxation on FDI location choice

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