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Cost of Capital for Cross-Border Investment: The Fallacy of Estonia as a Tax Haven

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  • Seppo Kari

    () (Government Institute for Economic Research)

  • Jouko Ylä-Liedenpohja

    () (University of Tampere and CESifo)

Abstract

The initial cost of equity of a foreign subsidiary, financed by its parent from abroad, and the opportunity cost of reinvesting its marginal foreign profits both depend on repatriation taxes. Only investments financed from intramarginal 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.

Suggested Citation

  • 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.
  • Handle: RePEc:bic:journl:v:5:y:2004/2005:i:1:p:28-43
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    References listed on IDEAS

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    Cited by:

    1. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 2008 - 2015 264, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Michael P Devereux, 2007. "Taxes in the EU New Member States and the Location of Capital and Profit," Working Papers 0703, Oxford University Centre for Business Taxation.

    More about this item

    Keywords

    repatriation taxes; taxation of multinationals; cross-border investment; Estonia;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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