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

  • Seppo Kari

    ()

    (Government Institute for Economic Research)

  • Jouko Ylä-Liedenpohja

    ()

    (University of Tampere and CESifo)

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.

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Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

Volume (Year): 5 (2004/2005)
Issue (Month): 1 (December)
Pages: 28-43

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Handle: RePEc:bic:journl:v:5:y:2004/2005:i:1:p:28-43
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  1. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
  2. Seppo Kari & Jouko Ylä-Liedenpoha, 2002. "Classical Corporation Tax as a Global Means of Tax Harmonization," CESifo Working Paper Series 665, CESifo Group Munich.
  3. Miller, Paul & Mulvey, Charles, 1996. "Unions, Firm Size and Wages," The Economic Record, The Economic Society of Australia, vol. 72(217), pages 138-53, June.
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  8. Alex Bryson, 2002. "The union membership wage premium: an analysis using propensity score matching," LSE Research Online Documents on Economics 4953, London School of Economics and Political Science, LSE Library.
  9. Jouko Ylä-Liedenpohja, 2003. "Taxation and Valuation of International Real Investments," CESifo Working Paper Series 1013, CESifo Group Munich.
  10. Lars Calmfors, 1993. "Centralisation of Wage Bargaining and Macroeconomic Performance: A Survey," OECD Economics Department Working Papers 131, OECD Publishing.
  11. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
  12. Seppo Kari & Jouko Ylä-Liedenpohja, 2004. "Effects of Equalization Tax on Multinational Investments and Transfer Pricing," Discussion Papers 337, Government Institute for Economic Research Finland (VATT).
  13. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
  14. Tiiu Paas & Raul Eamets & Jaan Masso & Marit Room, 2003. "Labour Market Flexibility And Migration In The Baltic States: Macro Evidences," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 16, Faculty of Economics and Business Administration, University of Tartu (Estonia).
  15. Mintz, Jack M. & Tsiopoulos, Thomas, 1994. "The effectiveness of corporate tax incentives for foreign investment in the presence of tax crediting," Journal of Public Economics, Elsevier, vol. 55(2), pages 233-255, October.
  16. Lindhe, Tobias & Södersten, Jan & Öberg, Ann, 2001. "Economic Effects of Taxing Closed Corporations under a Dual Income Tax," Working Paper Series 2001:16, Uppsala University, Department of Economics.
  17. Blanchard, Olivier & Jimeno, Juan F, 1995. "Structural Unemployment: Spain versus Portugal," American Economic Review, American Economic Association, vol. 85(2), pages 212-18, May.
  18. Weichenrieder, Alfons J., 1998. "Foreign profits and domestic investment," Journal of Public Economics, Elsevier, vol. 69(3), pages 451-463, September.
  19. Sinn, Hans-Werner, 1984. "Die Bedeutung des Accelerated Cost Recovery System fur den internationalen Kapitalverkehr. (The Significance of the Accelerated Cost Recovery System for International Capital Movements. With English s," Kyklos, Wiley Blackwell, vol. 37(4), pages 542-76.
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