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Cost of Capital for Cross-Border Investment: The Fallacy of Estonia as a Tax Haven

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  • Seppo Kari

    ()
    (Government Institute for Economic Research)

  • Jouko Ylä-Liedenpohja

    ()
    (University of Tampere and CESifo)

Abstract

The initial cost of equity of a foreign subsidiary, financed by its parent from abroad, and the opportunity cost of reinvesting its marginal foreign profits both depend on repatriation taxes. Only investments financed from intramarginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent’s owners. We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.

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Bibliographic Info

Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 5 (2004/2005)
Issue (Month): 1 (December)
Pages: 28-43

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Handle: RePEc:bic:journl:v:5:y:2004/2005:i:1:p:28-43

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Keywords: repatriation taxes; taxation of multinationals; cross-border investment; Estonia;

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References

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  1. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-18, May.
  2. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
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  5. Seppo Kari & Jouko Ylä-Liedenpoha, 2002. "Classical Corporation Tax as a Global Means of Tax Harmonization," CESifo Working Paper Series 665, CESifo Group Munich.
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  7. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  8. Boeri, Tito & Brücker, Herbert, 2001. "Eastern Enlargement and EU-Labour-Markets: Perceptions, Challenges and Opportunities," IZA Discussion Papers 256, Institute for the Study of Labor (IZA).
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  13. Miller, Paul & Mulvey, Charles, 1996. "Unions, Firm Size and Wages," The Economic Record, The Economic Society of Australia, vol. 72(217), pages 138-53, June.
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  16. Lars Calmfors, 1993. "Centralisation of Wage Bargaining and Macroeconomic Performance: A Survey," OECD Economics Department Working Papers 131, OECD Publishing.
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  19. Tiiu Paas & Raul Eamets & Jaan Masso & Marit Room, 2003. "Labour Market Flexibility And Migration In The Baltic States: Macro Evidences," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 16, Faculty of Economics and Business Administration, University of Tartu (Estonia).
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Cited by:
  1. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 264, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  2. Michael P Devereux, 2007. "Taxes in the EU New Member States and the Location of Capital and Profit," Working Papers 0703, Oxford University Centre for Business Taxation.

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