IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Taxation of domestic dividend income and foreign investment holdings

  • Mishra, Anil V.
  • Ratti, Ronald A.

This paper highlights the role of dividend imputation in influencing cross-border equity flows. We account for the dividend imputation scheme employed by various countries at different periods of time. In this paper it is argued that the heavier is domestic taxation of domestic dividend income, the more attractive is foreign investment to domestic agents. Dividend imputation eliminates the double taxation of domestic income, reduces the effective tax rate on domestic investment and makes investment in foreign securities less attractive. A fall of 10% in effective tax rate on domestic dividend income reduces foreign equity investment by about 5%. Domestic investors who are paid dividends under a dividend imputation system receive a credit for the tax paid at the company level and this reduces the effective tax rate. Cross-border equity investment is increased if tax credit rises for taxes paid overseas. Empirical analysis is based on bilateral investments among 23 mature economies over 2001–2011.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S1059056014000239
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal International Review of Economics & Finance.

Volume (Year): 31 (2014)
Issue (Month): C ()
Pages: 218-231

as
in new window

Handle: RePEc:eee:reveco:v:31:y:2014:i:c:p:218-231
DOI: 10.1016/j.iref.2014.01.018
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Clinton Feuerherdt & Stephen Gray & Jason Hall, 2010. "The Value of Imputation Tax Credits on Australian Hybrid Securities," International Review of Finance, International Review of Finance Ltd., vol. 10(3), pages 365-401.
  2. Philip R. Lane & Gian M Milesi-Ferretti, 2004. "International Investment Patterns," IMF Working Papers 04/134, International Monetary Fund.
  3. Harry Huizinga & Gaëtan Nicodème, 2003. "Foreign ownership and corporate income taxation : an empirical evaluation," European Economy - Economic Papers 2008 - 2015 185, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  4. Davies, Ronald & Norback, Pehr-Johan & Tekin-Koru, Ayca, 2007. "The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata," MPRA Paper 6031, University Library of Munich, Germany.
  5. Ferreira, Miguel A. & Matos, Pedro, 2008. "The colors of investors' money: The role of institutional investors around the world," Journal of Financial Economics, Elsevier, vol. 88(3), pages 499-533, June.
  6. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  7. Aviat, Antonin & Coeurdacier, Nicolas, 2007. "The geography of trade in goods and asset holdings," Journal of International Economics, Elsevier, vol. 71(1), pages 22-51, March.
  8. Portes, Richard & Rey, Hélène, 1999. "The Determinants of Cross-Border Equity Flows," CEPR Discussion Papers 2225, C.E.P.R. Discussion Papers.
  9. Leonie Bell & Tim Jenkinson, 2001. "New evidence of the impact of dividend taxation and on the identity of the marginal investor," OFRC Working Papers Series 2001fe14, Oxford Financial Research Centre.
  10. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
  11. Cannavan, Damien & Finn, Frank & Gray, Stephen, 2004. "The value of dividend imputation tax credits in Australia," Journal of Financial Economics, Elsevier, vol. 73(1), pages 167-197, July.
  12. Demirguc-Kunt, A. & Huizinga, H., 1993. "Barriers to Portfolio Investments in Emerging Stock Markets," Papers 9341, Tilburg - Center for Economic Research.
  13. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  14. Harry Huizinga & Soeren Bo Nielsen, . "Capital Income and Profits Taxation with Foreign Ownerwhip of Firms," EPRU Working Paper Series 95-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  15. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
  16. Robert Brooks & Bhavish Jugurnath & Mark Stewart, 2004. "Dividend taxation and Corporate investment: A comparative study between the classical system and imputation system of dividend taxation in the United States and Australia," Econometric Society 2004 Australasian Meetings 97, Econometric Society.
  17. Desai, Mihir A. & Dharmapala, Dhammika, 2009. "Taxes, institutions and foreign diversification opportunities," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 703-714, June.
  18. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  19. repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g708pipbp is not listed on IDEAS
  20. French, Kenneth R & Poterba, James M, 1991. "Investor Diversification and International Equity Markets," American Economic Review, American Economic Association, vol. 81(2), pages 222-26, May.
  21. Huizinga, Harry & Voget, Johannes, 2006. "International Taxation and the Direction and Volume of Cross-Border M&As," CEPR Discussion Papers 5974, C.E.P.R. Discussion Papers.
  22. Michael P Devereux, 2008. "Taxation of Outbound Direct Investment: Economic Principles and Tax Policy Considerations," Working Papers 0824, Oxford University Centre for Business Taxation.
  23. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
  24. Weichenrieder, Alfons J., 1998. "Foreign profits and domestic investment," Journal of Public Economics, Elsevier, vol. 69(3), pages 451-463, September.
  25. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
  26. John R. Graham, 2003. "Taxes and Corporate Finance: A Review," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1075-1129.
  27. Laurence Booth, 1987. "The Dividend Tax Credit and Canadian Ownership Objectives," Canadian Journal of Economics, Canadian Economics Association, vol. 20(2), pages 321-39, May.
  28. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  29. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, 06.
  30. Miller, Merton H & Scholes, Myron S, 1982. "Dividends and Taxes: Some Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1118-41, December.
  31. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  32. Sanjo, Yasuo, 2012. "Country risk, country size, and tax competition for foreign direct investment," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 292-301.
  33. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
  34. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  35. Errunza, Vihang & Losq, Etienne, 1989. " Capital Flow Controls, International Asset Pricing, and Investors' Welfare: A Multi-country Framework," Journal of Finance, American Finance Association, vol. 44(4), pages 1025-37, September.
  36. Deng, Lu & Li, Sifei & Liao, Mingqing & Wu, Weixing, 2013. "Dividends, investment and cash flow uncertainty: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 112-124.
  37. Sanjo, Yasuo, 2013. "Country size and tax policy for international joint ventures in an integrated market," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 37-53.
  38. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
  39. Edwards, Alexander & Shevlin, Terry, 2011. "The value of a flow-through entity in an integrated corporate tax system," Journal of Financial Economics, Elsevier, vol. 101(2), pages 473-491, August.
  40. Sergei Sarkissian, 2004. "The Overseas Listing Decision: New Evidence of Proximity Preference," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 769-809.
  41. John C. Handley & Krishnan Maheswaran, 2008. "A Measure of the Efficacy of the Australian Imputation Tax System," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 82-94, 03.
  42. McDonald, Robert L, 2001. "Cross-Border Investing with Tax Arbitrage: The Case of German Dividend Tax Credits," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 617-57.
  43. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
  44. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:31:y:2014:i:c:p:218-231. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.