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Taxation of Outbound Direct Investment: Economic Principles and Tax Policy Considerations

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  • Michael P Devereux

    ()
    (Oxford University Centre for Business Taxation)

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 harmonisation 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.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0824.

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Date of creation: 2008
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Handle: RePEc:btx:wpaper:0824

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References

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  1. 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.
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  7. 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.
  8. Joseph E. Stiglitz & Partha Dasgupta, 1970. "Differential Taxation, Public Goods, and Economic Efficiency," Cowles Foundation Discussion Papers 299, Cowles Foundation for Research in Economics, Yale University.
  9. Devereux, Michael P. & Keuschnigg, Christian, 2009. "The Distorting Arm's Length Principle," CEPR Discussion Papers 7375, C.E.P.R. Discussion Papers.
  10. Devereux, Michael P. & Pearson, Mark, 1995. "European tax harmonisation and production efficiency," European Economic Review, Elsevier, vol. 39(9), pages 1657-1681, December.
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  12. 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.
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  14. Bond, Stephen Roy & Devereux, Michael P, 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers.
  15. Mihir A. Desai, 2008. "The Decentering of the Global Firm," Harvard Business School Working Papers 09-054, Harvard Business School.
  16. Devereux, Michael P & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers.
  17. 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.
  18. Alan J. Auerbach & Michael P. Devereux & Helen Simpson, 2008. "Taxing Corporate Income," NBER Working Papers 14494, National Bureau of Economic Research, Inc.
  19. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
  20. 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.
  21. Steve Bond & Michael Devereux, 1993. "On the design of a neutral business tax under uncertainty," IFS Working Papers W93/01, Institute for Fiscal Studies.
  22. Keen, Michael & Piekkola, Hannu, 1997. " Simple Rules for the Optimal Taxation of International Capital Income," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 447-61, September.
  23. Edwards Jeremy, 2005. "Gains from Trade in Government Revenue and Pareto-Efficient International Taxation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-25, December.
  24. Devereux, Michael P & Hubbard, R Glenn, 2003. "Taxing Multinationals," International Tax and Public Finance, Springer, vol. 10(4), pages 469-87, August.
  25. Desai, Mihir A. & Hines, James R. Jr., 2003. "Evaluating International Tax Reform," National Tax Journal, National Tax Association, vol. 56(3), pages 487-502, September.
  26. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 264, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  27. 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.
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Citations

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Cited by:
  1. Johannes Becker & Clemens Fuest, 2011. "The taxation of foreign profits — The old view, the new view and a pragmatic view," Intereconomics: Review of European Economic Policy, Springer, vol. 46(2), pages 92-97, March.
  2. Johannes Becker, 2013. "Taxation of Foreign Profits with Heterogeneous Multinational Firms," The World Economy, Wiley Blackwell, vol. 36(1), pages 76-92, 01.
  3. Manmohan S. Kumar & Dennis P. Quinn, 2012. "Globalization and Corporate Taxation," IMF Working Papers 12/252, International Monetary Fund.
  4. Johannes Becker, 2010. "Strategic Trade Policy through the Tax System," CESifo Working Paper Series 3066, CESifo Group Munich.
  5. Estelle P. Dauchy & Sebastien Bradley & Makoto Hasegawa, 2013. "Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform," Working Papers w0201, Center for Economic and Financial Research (CEFIR).
  6. Peter Egger & Valeria Merlo & Martin Ruf & Georg Wamser, 2012. "Consequences of the New UK Tax Exemption System: Evidence from Micro-level Data," CESifo Working Paper Series 3942, CESifo Group Munich.
  7. Giorgio Barba Navaretti & Anthony J. Venables, 2013. "Multinationals and Industrial Policy," Development Working Papers 352, Centro Studi Luca d\'Agliano, University of Milano, revised 24 Apr 2013.
  8. Christina Elschner & Jost H. Heckemeyer & Christoph Spengel, 2011. "Besteuerungsprinzipien und effektive Unternehmenssteuerbelastungen in der Europäischen Union: Regelt sich die EU‐weite Steuerharmonisierung von selbst?," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 12(1), pages 47-71, 02.
  9. Mishra, Anil V. & Ratti, Ronald A., 2014. "Taxation of domestic dividend income and foreign investment holdings," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 218-231.
  10. Elschner, Christina & Heckemeyer, Jost Henrich & Spengel, Christoph, 2009. "Besteuerungsprinzipien und effektive Unternehmenssteuerbelastungen in der Europäischen Union," ZEW Discussion Papers 09-034, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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