Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven
AbstractThe initial cost of capital of a foreign subsidiary, financed by its parent from abroad, is dependent on repatriation taxes and this also applies to all follow-up investments financed from marginal foreign profits, representing the required return on the initial investment. Only investments financed from intra-marginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent?s owners. We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.
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Bibliographic InfoPaper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 367.
Date of creation: 28 Apr 2005
Date of revision:
Other versions of this item:
- Seppo Kari & Jouko Ylä-Liedenpohja, 2004. "Cost of Capital for Cross-Border Investment: The Fallacy of Estonia as a Tax Haven," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 5(1), pages 28-43, December.
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-09 (All new papers)
- NEP-FMK-2006-07-09 (Financial Markets)
- NEP-PBE-2006-07-09 (Public Economics)
- NEP-PUB-2006-07-09 (Public Finance)
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