The 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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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number
367.
Length: Date of creation: 28 Apr 2005 Date of revision: Handle: RePEc:fer:dpaper:367
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Find related papers by JEL classification: 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
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