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Tax Complexity and Inward Investment

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  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The negative relationship between host-country tax rates and FDI has been tested in a large number of papers. This paper looks at a different channel through which tax systems could affect FDI, namely the complexity of the tax system. Complying with tax authority requirements can be extremely time consuming for business and this implies an additional cost for more complex tax systems. We use measures of the time taken to deal with tax obligations and the number of tax payments for a representative firm compiled by the World Bank to examine their effect on FDI selection and flows from 16 OECD FDI-source countries to 57 host countries. We find a negative and significant effect of tax rates in line with other studies. In addition, the tax complexity measures are found to have a significant inhibiting effect on the presence of FDI for a country pair, but have little impact on the level of the FDI flow once it is established. In other words, the complexity measures affect FDI primarily through the extensive margin. A 10% reduction in tax complexity is found to be comparable in its effect on FDI to a one percentage point reduction in the effective corporate tax rate. The results are robust to the inclusion of other proxies for bureaucracy in the host country.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 5/RT/09.

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Length: 30 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:cbi:wpaper:5/rt/09

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  1. Djankov, Simeon & Freund, Caroline & Pham, Cong S., 2006. "Trading on time," Policy Research Working Paper Series 3909, The World Bank.
  2. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2010. "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 31-64, July.
  3. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers 0822, Oxford University Centre for Business Taxation.
  4. Ronald B. Davies, 2008. "Hunting High and Low for Vertical FDI," Review of International Economics, Wiley Blackwell, vol. 16(2), pages 250-267, 05.
  5. Efraim Sadka & Assaf Razin & Yona Rubinstein, 2004. "Which Countries Export FDI, and How Much?," 2004 Meeting Papers 226, Society for Economic Dynamics.
  6. Assaf Razin & Yona Rubinstein & Efraim Sadka, 2005. "Corporate Taxation and Bilateral FDI with Threshold Barriers," NBER Working Papers 11196, National Bureau of Economic Research, Inc.
  7. Assaf Razin & Efraim Sadka & Hui Tong, 2008. "Bilateral FDI Flows: Threshold Barriers and Productivity Shocks," CESifo Economic Studies, CESifo, vol. 54(3), pages 451-470, September.
  8. James R. Markusen & Keith E. Maskus, 1999. "Discriminating Among Alternative Theories of the Multinational Enterprise," NBER Working Papers 7164, National Bureau of Economic Research, Inc.
  9. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  10. Kelly Edmiston & Shannon Mudd & Neven Valev, 2003. "Tax Structures and FDI: The Deterrent Effects of Complexity and Uncertainty," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 341-359, September.
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Cited by:
  1. Markusen, James R., 2013. "Putting per-capita income back into trade theory," Journal of International Economics, Elsevier, vol. 90(2), pages 255-265.
  2. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.

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