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"Tax Sparing" and Direct Investment in Developing Countries

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  • James R. Hines, Jr.

Abstract

This paper analyzes the effect of and performance of foreign direct investment (FDI). sparing foreign investment income to permit investors to receive the full benefits of host country tax reductions. For example, Japanese firms investing in countries with whom Japan has agreements are entitled to claim foreign tax credits for income taxes that they would have paid to foreign governments in the absence of tax holidays and other special abatements. Most high-income capital-exporting countries grant "tax sparing" for FDI in developing countries, while the United States does not. Comparisons of Japanese and American investment patterns reveal that the volume of Japanese FDI located in countries with whom Japan has than what it would have been otherwise. In addition, Japanese firms are subject to 23% lower tax rates than are their American counterparts in countries with whom Japan has agreements. Similar patters appear when with the United Kingdom are used as instruments for Japanese sparing influences the level and location of foreign direct investment and the willingness of foreign governments to offer tax concessions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6728.

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Date of creation: Sep 1998
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Publication status: published as Tax Sparing and Direct Investment in Developing Countries , James R. Hines Jr.. in International Taxation and Multinational Activity , Hines. 2000
Handle: RePEc:nbr:nberwo:6728

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Cited by:
  1. Zhiyong An, 2012. "Taxation and foreign direct investment (FDI): empirical evidence from a quasi-experiment in China," International Tax and Public Finance, Springer, vol. 19(5), pages 660-676, October.
  2. Arjan Lejour, 2014. "The Foreign Investment Effects of Tax Treaties," CPB Discussion Paper 265, CPB Netherlands Bureau for Economic Policy Analysis.
  3. Kelly D. Edmiston & Shannon Mudd & Neven T. Valev, 2004. "Incentive Targeting, Influence Peddling, and Foreign Direct Investment," International Tax and Public Finance, Springer, vol. 11(5), pages 647-660, 09.
  4. Hines, James R. Jr., 1999. "The Case against Deferral: A Deferential Reconsideration," National Tax Journal, National Tax Association, vol. 52(n. 3), pages 385-404, September.
  5. Michael Keen & David E. Wildasin, 2001. "Pareto Efficiency in International Taxation," Public Economics 0112003, EconWPA.
  6. Baskaran, Thushyanthan & Lopes da Fonseca, Mariana, 2013. "The economics and empirics of tax competition: A survey," Center for European, Governance and Economic Development Research Discussion Papers 163, University of Goettingen, Department of Economics.
  7. Zee, Howell H. & Stotsky, Janet G. & Ley, Eduardo, 2002. "Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries," World Development, Elsevier, vol. 30(9), pages 1497-1516, September.
  8. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  9. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.

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