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Taxation of outbound direct investment: economic principles and tax policy considerations

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Michael P. Devereux

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Abstract

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonization across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country. Copyright 2008, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oxrep/grn036
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Publisher Info
Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 24 (2008)
Issue (Month): 4 (winter)
Pages: 698-719
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Handle: RePEc:oup:oxford:v:24:y:2008:i:4:p:698-719

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References listed on IDEAS
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  1. Devereux, Michael P & Hubbard, R Glenn, 2003. "Taxing Multinationals," International Tax and Public Finance, Springer, vol. 10(4), pages 469-87, August. [Downloadable!] (restricted)
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  2. Michael Keen & Hannu Piekkola, 1996. "Simple rules for the optimal taxation of international capital income," IFS Working Papers W96/18, Institute for Fiscal Studies.
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  3. Huizinga, Harry & Nielsen, Soren Bo, 1997. "Capital income and profit taxation with foreign ownership of firms," Journal of International Economics, Elsevier, vol. 42(1-2), pages 149-165, February. [Downloadable!] (restricted)
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  4. Bonds, Stephen R. & Devereux, Michael P., 1995. "On the design of a neutral business tax under uncertainty," Journal of Public Economics, Elsevier, vol. 58(1), pages 57-71, September. [Downloadable!] (restricted)
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  5. Devereux, Michael P. & Pearson, Mark, 1995. "European tax harmonisation and production efficiency," European Economic Review, Elsevier, vol. 39(9), pages 1657-1681, December. [Downloadable!] (restricted)
  6. Michael P Devereux & Simon Loretz, 2008. "Increased efficiency through consolidation and formula apportionment in the European Union?," Working Papers 0812, Oxford University Centre for Business Taxation. [Downloadable!]
  7. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March. [Downloadable!]
  8. Mihir A. Desai, 2008. "The Decentering of the Global Firm," Harvard Business School Working Papers 09-054, Harvard Business School. [Downloadable!]
  9. Horst, Thomas, 1980. "A Note on the Optimal Taxation of International Investment Income," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 793-98, June. [Downloadable!] (restricted)
  10. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  11. Jeremy Edwards, 2005. "Gains from Trade in Government Revenue and Pareto-Efficient International Taxation," Topics in Economic Analysis & Policy, Berkeley Electronic Press, vol. 5(1), pages 1385-1385. [Downloadable!] (restricted)
  12. Chiara Criscuolo & Ralf Martin, 2004. "Multinationals and U.S. Productivity Leadership: Evidence from Great Britain," OECD Science, Technology and Industry Working Papers 2004/5, OECD, Directorate for Science, Technology and Industry. [Downloadable!]
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  13. Stiglitz, Joseph E & Dasgupta, P, 1971. "Differential Taxation, Public Goods and Economic Efficiency," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 151-74, April. [Downloadable!] (restricted)
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  14. Bond, Stephen R. & Devereux, Michael P., 2003. "Generalised R-based and S-based taxes under uncertainty," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1291-1311, May. [Downloadable!] (restricted)
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  15. Michael P. Devereux, 2004. "Some Optimal Tax Rules for International Portfolio and Direct Investment," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(1), pages 1-, April.
  16. Devereux, Michael P & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, vol. 60(3), pages 373-399, June. [Downloadable!] (restricted)
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  18. Stephen R Bond & Michael P Devereux & Alexander Klemm, 2007. "The Effects of Dividend Taxes on Equity Prices: A Re-examination of the 1997 UK Tax Reform," Working Papers 0701, Oxford University Centre for Business Taxation. [Downloadable!]
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  19. Alan J. Auerbach & Michael P. Devereux & Helen Simpson, 2008. "Taxing Corporate Income," NBER Working Papers 14494, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  20. Huizinga, Harry & Nielsen, Soren Bo, 2002. "The coordination of capital income and profit taxation with cross-ownership of firms," Regional Science and Urban Economics, Elsevier, vol. 32(1), pages 1-26, January. [Downloadable!] (restricted)
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  21. Bond, Stephen Roy & Devereux, Michael P, 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  22. Gordon, Roger H. & Bradford, David F., 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," Journal of Public Economics, Elsevier, vol. 14(2), pages 109-136, October. [Downloadable!] (restricted)
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  23. Joel Slemrod, 1995. "Free trade taxation and protectionist taxation," International Tax and Public Finance, Springer, vol. 2(3), pages 471-489, October. [Downloadable!] (restricted)
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  24. Johannes Becker & Clemens Fuest, 2007. "Taxing Foreign Profits with International Mergers and Acquisitions," Working Papers 0719, Oxford University Centre for Business Taxation. [Downloadable!]
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