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International Tax Arbitrage Tax Evasion amd Interest Parity Conditions

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  • Strobel, F.

Abstract

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for internatioanl portfolio investors in an economy with heterogeneous capital income taxation when there is some scope to evade taxes on foreign capital income. We derive tax-modified uncovered interest parity conditions and forward raets similar to the no-tax ones, but augmented by tax-induced "risk-premium" terms.

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Bibliographic Info

Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 98-05.

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Length: 20 pages
Date of creation: 1998
Date of revision:
Handle: RePEc:bir:birmec:98-05

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Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Keywords: TAX EVASION ; ARBITRATION ; INTEREST RATE;

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References

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  1. Talmor, Eli, 1989. "Tax arbitrage restrictions and financial leverage clienteles," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 831-838, December.
  2. Dammon, Robert M & Green, Richard C, 1987. " Tax Arbitrage and the Existence of Equilibrium Prices for Financial Assets," Journal of Finance, American Finance Association, vol. 42(5), pages 1143-66, December.
  3. Schjelderup, Guttorm, 1993. " Optimal Taxation, Capital Mobility and Tax Evasion," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(3), pages 377-86.
  4. Bennett T. McCallum, 1985. "Bank Deregulation, Accounting Systems of Exchange, and the Unit of Account: A Critical Review," NBER Working Papers 1572, National Bureau of Economic Research, Inc.
  5. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  6. Aivazian, Varouj A & Callen, Jeffrey L, 1987. " Miller's Irrelevance Mechanism: A Note," Journal of Finance, American Finance Association, vol. 42(1), pages 169-80, March.
  7. De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  8. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  9. Chris Jones & Frank Milne, 1992. "Tax Arbitrage, Existence of Equilibrium, and Bounded Tax Rebates," Mathematical Finance, Wiley Blackwell, vol. 2(3), pages 189-196.
  10. Ross, Stephen A, 1987. "Arbitrage and Martingales with Taxation," Journal of Political Economy, University of Chicago Press, vol. 95(2), pages 371-93, April.
  11. Dybvig, Philip H & Ross, Stephen A, 1986. " Tax Clienteles and Asset Pricing," Journal of Finance, American Finance Association, vol. 41(3), pages 751-62, July.
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Citations

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Cited by:
  1. Strobel, Frank, 2012. "International tax arbitrage, currency options and put-call parity conditions," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 473-486.
  2. Peter G. Szilagyi & Jonathan A. Batten, 2006. "Arbitrage, Covered Interest Parity and Long-Term Dependence between the US Dollar and the Yen," The Institute for International Integration Studies Discussion Paper Series iiisdp128, IIIS.
  3. Strobel, Frank, 2012. "International tax arbitrage and residence vs. source-based capital income taxation," Research in Economics, Elsevier, vol. 66(4), pages 391-397.

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