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Foreign direct investment under oligopoly: Profit shifting or profit capturing?

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  • Janeba, Eckhard

Abstract

In this paper a model of taxation of foreign source corporate income is developed, when the output market is not competitive. Profit shifting policies, similar to those in the new trade literature, are also present in the case of foreign direct investment (FDI). There are, however, important differences to the new trade theory since in case of FDI (i) corporate taxation and double taxation relief are the policy instruments rather than output/revenue taxes, (ii) countries are not symmetric in the sensee that the host country has the first right to tax the multinational's profit and the home country reacts to this by providing double taxation relief, and (iii) output but not corporate taxation is specific to strategic industries. It is argued that (a) variants of a tax credit are analogous to export subsidies, (b) when the home country operates a tax credit system the host country's incentive to capture profits by raising its tax is bounded under imperfect competition, (c) the home country should imitate the host policy wehen the host country offers a tax holiday, and (d) in the presence of non-competitive sectors double taxation relief is a good instrument to target strategic industries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 60 (1996)
Issue (Month): 3 (June)
Pages: 423-445

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Handle: RePEc:eee:pubeco:v:60:y:1996:i:3:p:423-445

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  2. repec:fth:louvco:9073 is not listed on IDEAS
  3. Shapiro, Carl, 1989. "Theories of oligopoly behavior," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 6, pages 329-414 Elsevier.
  4. Gordon, Roger H, 1992. " Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-80, July.
  5. Bond, E.W., 1988. "Optimal Tax And Tariff Policies With Tax Credits," Papers 5-88-1, Pennsylvania State - Department of Economics.
  6. Mintz, J. & Tulkens, H., 1990. "Strategic use of tax rates and credits in a model of international corporate income tax competition," CORE Discussion Papers 1990073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  8. Brander, James A. & Spencer, Barbara J., 1987. "Foreign direct investment with unemployment and endogenous taxes and tariffs," Journal of International Economics, Elsevier, vol. 22(3-4), pages 257-279, May.
  9. James Levinsohn & Joel Slemrod, 1990. "Taxes, Tariffs, and The Global Corporation," NBER Working Papers 3500, National Bureau of Economic Research, Inc.
  10. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  11. Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
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