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Effects of Equalization Tax on Multinational Investments and Transfer Pricing

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Author Info

  • Seppo Kari
  • Jouko Ylä-Liedenpohja

Abstract

This paper analyzes effects of equalization tax on the decisions of a multinational company. Equalization tax is an extra corporation tax on dividend distributions to ensure that the underlying profit of a dividend has borne a tax in the corporate sector equal to the imputation credit given to the shareholder. Equalization tax is shown to increase incentives for home-country real and financial investments and for transfer pricing to shift taxable income even from low-tax countries to high-tax home-countries of the parent companies. The current EU process of exchanging the imputation system and an equalization tax for a classical system may thus have adverse tax revenue effects in the countries concerned, but improves efficiency of the global economy.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 337.

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Date of creation: 15 Jun 2004
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Handle: RePEc:fer:dpaper:337

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Related research

Keywords: Dividend taxation; International taxation; Investment incentives; Transfer pricing;

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References

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  1. Michael Devereux & Harold Freeman, 1995. "The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes," International Tax and Public Finance, Springer, vol. 2(1), pages 85-106, February.
  2. Robin Boadway & Neil Bruce, 1988. "Problems with Integrating Corporate and Personal Income Taxes in an Open Economy," Working Papers 735, Queen's University, Department of Economics.
  3. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
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Cited by:
  1. Seppo Kari & Ylä-Liedenpohja & Jouko, 2005. "Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven," Discussion Papers 367, Government Institute for Economic Research Finland (VATT).

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