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Foreign Direct Investment under Oligopoly: Profit Shifting of Profit Capturing?

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  • Eckhard Janeba

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

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 420.

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Length: 16 pages
Date of creation: Nov 1993
Date of revision:
Handle: RePEc:bon:bonsfa:420

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

Related research

Keywords: Foreign Direct Investment; Corporate Taxation; Profit Shifting; Imperfect Competition;

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References

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  1. repec:fth:louvco:9073 is not listed on IDEAS
  2. James A. Brander & Barbara J. Spencer, 1984. "Export Subsidies and International Market Share Rivalry," NBER Working Papers 1464, National Bureau of Economic Research, Inc.
  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. Bond, Eric W., 1991. "Optimal tax and tariff policies with tax credits," Journal of International Economics, Elsevier, vol. 30(3-4), pages 317-329, May.
  5. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December.
  6. 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.
  7. James Levinsohn & Joel Slemrod, 1990. "Taxes, Tariffs, and The Global Corporation," NBER Working Papers 3500, National Bureau of Economic Research, Inc.
  8. 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.
  9. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  10. Eaton, Jonathan & Grossman, Gene M, 1986. "Optimal Trade and Industrial Policy under Oligopoly," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 383-406, May.
  11. 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.
  12. 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).
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