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Corporate income tax competition, double taxation treaties, and foreign direct investment

  • Janeba, Eckhard

In the presence of international-capital mobility foreign direct investment is influenced by corporate income taxation and the rules how taxes paid in the host country are treated at home. In this paper the exemption, credit and deduction method are considered as tax rules. First, it is shown that under the exemption method there exist tax rate combinations that lead to a reversal of capital flows compared to a free-trade situation. Second, the decision on the tax rule and the corporate tax rate is endogenized as outcome in a non-cooperative game. All tax rules lead to the same inefficient outcome. Therefore, for each tax rule we analyze the conditions for Pareto-improving tax cooperation. It is shown that only the credit method requires neither compensatory payments nor fully harmonized tax rates.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 56 (1995)
Issue (Month): 2 (February)
Pages: 311-325

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Handle: RePEc:eee:pubeco:v:56:y:1995:i:2:p:311-325
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  1. Bond, E.W. & Samuelson, L., 1988. "Strategic Behavior And The Rules For International Taxation Of Capital," Papers 3-88-10, Pennsylvania State - Department of Economics.
  2. Bond, Eric W., 1991. "Optimal tax and tariff policies with tax credits," Journal of International Economics, Elsevier, vol. 30(3-4), pages 317-329, May.
  3. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
  4. Roger H. Gordon, 1990. "Can Capital Income Taxes Survive in Open Economies?," NBER Working Papers 3416, National Bureau of Economic Research, Inc.
  5. Mintz, J. & Tulkens, H., 1990. "Strategic use of tax rates and credits in a model of international corporate income tax competition," CORE Discussion Papers 1990073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Gordon, R.H., 1990. "Can Capital Income Taxes Survive in an Open Economies," Working Papers 280, Research Seminar in International Economics, University of Michigan.
  7. Hodder, James E & Senbet, Lemma W, 1990. " International Capital Structure Equilibrium," Journal of Finance, American Finance Association, vol. 45(5), pages 1495-1516, December.
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