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Foreign Direct Investment and the Prospects for Tax Co-Ordination in Europe

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Author Info
Agnes Benassy-Quere
Lionel Fontagne
Amina Lahreche-Revil

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Abstract

The growing globalisation of OECD economies, associated to the progresses in European integration, tends to increase the mobility of capital and to deepen the pressure on tax policies. On the one hand, tax policies are tied by the Stability pact criteria: the limit imposed on budget deficits leaves little scope for tax rates to decrease. On the other hand, the growing mobility of capital tends to increase the elasticity of tax bases to tax rates, hence reducing the autonomy of governments in increasing taxes. In this particular context, tax interdependencies are rising between countries and regions. Two issues are of particular concern, and could have different outcomes depending on the way they are tackled. First, countries could engage in an action on tax levels; depending on whether this action is co- operative or not leads to tax harmonisation or tax competition. Second, countries could have to reconsider fiscal schemes, since the growing interdependence of countries tends to dissociate the notions of residence and source of revenue, and rises an incentive for tax evasion (namely, when exemption schemes are applied, profits taxes are paid in the country where the investment is located; investors are therefore incited to locate their affiliates in low tax countries. Conversely, when credit schemes are applied, foreign investors pay their home country taxes, and there is no particular incentive to evade the national tax system). The issue of fiscal harmonisation is all the more stringent that the scope for tax competition is enhanced with EMU (intra-European exchange rate risk disappears with the euro, which considerably reduces impediments to trade, FDI and labour mobility, and increases the mobility of the tax bases). In the area of corporate taxes however, the scope for competition will depend on the sensitiveness of firms to tax discrepancies across possible locations for instance, if agglomerations economies are dominant, tax competition would have a negligible impact).

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Paper provided by CEPII research center in its series Working Papers with number 2000-06.

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Date of creation: May 2000
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Handle: RePEc:cii:cepidt:2000-06

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Related research
Keywords: Tax competition; Tax harmonisation; Foreign direct investment; EMU;

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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  15. Head, C. Keith & Ries, John C. & Swenson, Deborah L., 1999. "Attracting foreign manufacturing: Investment promotion and agglomeration," Regional Science and Urban Economics, Elsevier, vol. 29(2), pages 197-218, March. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marcel Gérard, 2006. "Reforming the Taxation of Multijurisdictional Enterprises in Europe, a Tentative Appraisal," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Svetlana Raudonen, 2008. "The Impact of Corporate Taxation on Foreign Direct Investment: a Survey," Working Papers 182, School of Economics and Business Administration, Tallinn University of Technology. [Downloadable!]
  3. Kai Carstensen & Farid Toubal, 2003. "Foreign Direct Investment in Central and Eastern European Countries: A Dynamic Panel Analysis," Kiel Working Papers 1143, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  4. Thierry Warin & André Fourçans, 2006. "Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View," Middlebury College Working Paper Series 0604, Middlebury College, Department of Economics. [Downloadable!]
  5. Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Investments in Europe - are Italian Regions Doomed?," ERSA conference papers ersa05p148, European Regional Science Association. [Downloadable!]
  6. Assaf Razin & Efraim Sadka, 2007. "Productivity and Taxes as Drivers of FDI," NBER Working Papers 13094, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Signe Krogstrup, 2004. "Are Corporate Tax Burdens Racing to the Bottom in the European Union?," EPRU Working Paper Series 04-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  8. Jeffrey Carpenter & Stephen Burks & Lorenz Götte, 2006. "Performance Pay and the Erosion of Worker Cooperation: Field experimental evidence," Middlebury College Working Paper Series 0603, Middlebury College, Department of Economics. [Downloadable!]
    Other versions:
  9. Keith Head & Thierry Mayer, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center. [Downloadable!]
  10. Roberta De Santis & Maria Cristina Mercuri & Claudio Vicarelli, 2001. "Taxes and Location of Foreign Direct Investments: an Empirical Analysys for the European Union Countries," ISAE Working Papers 24, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
  11. Horst Raff, 2002. "Preferential Trade Agreements and Tax Competition for Foreign Direct Investment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  12. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer, vol. 14(2), pages 115-133, April. [Downloadable!] (restricted)
  13. Roberto Basile & Luigi Benfratello & Davide Castellani, 2005. "Attracting Foreign Direct Investments in Europe: are Italian Regions Doomed?," Development Working Papers 200, Centro Studi Luca d\'Agliano, University of Milano. [Downloadable!]
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