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Do tax sparing agreements contribute to the attraction of FDI in developing countries?

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  • Céline Azémar

    ()

  • Rodolphe Desbordes
  • Jean-Louis Mucchielli

Abstract

This paper analyses the impact of tax sparing agreements on Japanese foreign direct investment (FDI) distribution in developing countries. These agreements are sometimes concluded between a developed country and a developing country which grants fiscal incentives to foreign investors. In that case, the former agrees not to tax its outward investors in order that the host country fiscal advantage is not compensated for by the increase in its own income taxes. Apart from the United States, the majority of developed countries have included these tax sparing provisions in their fiscal bilateral treaties with developing countries. Their impacts are observed on the distribution of Japanese FDI outflows and average size of capital transaction, on the Japanese firm sales and employment as well as on the difference between the Japanese and U.S. FDI shares, over the 1989-2000 period. The empirical results suggest that each additional year, subsequent to the signature of a tax sparing agreement, increases Japanese FDI activity by 1.7-11%. These findings are robust to the use of an instrumental variable specification and give empirical support to the debate on the exclusion or not of these provisions under the bilateral tax treaty. Thus, this study confirms that tax sparing agreements can be useful instruments to increase the attractiveness of a developing country.

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 14 (2007)
Issue (Month): 5 (October)
Pages: 543-562

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Handle: RePEc:kap:itaxpf:v:14:y:2007:i:5:p:543-562

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Web page: http://www.springerlink.com/link.asp?id=102915

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Keywords: Foreign direct investment; Tax sparing; International taxation;

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Citations

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Cited by:
  1. Azémar, Céline & Delios, Andrew, 2008. "Tax competition and FDI: The special case of developing countries," Journal of the Japanese and International Economies, Elsevier, vol. 22(1), pages 85-108, March.
  2. A. Klemm & S. Van Parys, 2010. "Empirical Evidence on the Effects of Tax Incentives," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/673, Ghent University, Faculty of Economics and Business Administration.
  3. Céline Azémar, 2010. "International corporate taxation and U.S. multinationals' behaviour: an integrated approach," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 232-253, February.
  4. Davies, Ronald B. & Norbäck, Pehr-Johan & Tekin-Koru, Ayça, 2010. "The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata," Working Paper Series 833, Research Institute of Industrial Economics.
  5. Céline Azemar & Grégory Corcos & Andrew Delios, 2006. "Taxation and the international strategy of Japanese multinational enterprises," PSE Working Papers halshs-00590421, HAL.
  6. repec:hal:wpaper:halshs-00590421 is not listed on IDEAS
  7. Kiyoyasu Tanaka, 2009. "Re-estimating the Knowledge-Capital Model: Evidence from Japanese and US Multinational Enterprises," Global COE Hi-Stat Discussion Paper Series gd09-087, Institute of Economic Research, Hitotsubashi University.
  8. Céline Azémar & Andrew Delios, 2007. "The Tax Sparing Provision Influence: A Credit versus Exempt Investors Analysis," Working Papers 2007_31, Business School - Economics, University of Glasgow.

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