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Tax competition and phantom FDI

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  • Giuseppe Pulina
  • Skerdilajda Zanaj

Abstract

Offshore financial centers are almost never the final destination of the foreign direct investments (FDI) they receive. A large portion of these investments are phantom FDI, which ultimately flow to third countries or return back to the source country in a process called round‐tripping. This paper develops a model in which onshore countries compete internationally with tax instruments to attract capital from abroad, in the presence of an offshore financial center that encourages phantom FDI. We show that the presence of offshore financial centers is beneficial to technologically advanced countries, whereas it is detrimental to others. Finally, we use this framework to analyze the effectiveness of Controlled Foreign Company (CFC) rules against profit shifting recently implemented in Europe and the associated loss of tax base.

Suggested Citation

  • Giuseppe Pulina & Skerdilajda Zanaj, 2022. "Tax competition and phantom FDI," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(6), pages 1342-1363, December.
    • Handle: RePEc:bla:jpbect:v:24:y:2022:i:6:p:1342-1363
    DOI: 10.1111/jpet.12575
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    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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