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Effects of an Equalization Tax on Multinational Investments and Transfer Pricing

  • Seppo Kari
  • Jouko Ylä-Liedenpohja

This paper analyzes effects of an equalization tax on the decisions of a multinational company. An equalization tax is an extra corporation tax on dividend distributions to ensure that the underlying profit of a dividend has borne a tax in the corporate sector equal to the imputation credit given to the shareholder. An equalization tax is shown to increase incentives for home-country real and financial investments and for transfer pricing to shift taxable income even from low-tax countries to high-tax home countries of parent companies. The current EU process of exchanging imputation systems and equalization tax for classical systems may thus have adverse tax revenue effects in the countries concerned.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 61 (2005)
Issue (Month): 1 (March)
Pages: 45-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200503)61:1_45:eoaeto_2.0.tx_2-e
Contact details of provider: Web page: http://www.mohr.de/fa

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  1. Robin Boadway & Neil Bruce, 1988. "Problems with Integrating Corporate and Personal Income Taxes in an Open Economy," Working Papers 735, Queen's University, Department of Economics.
  2. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
  3. Weichenrieder, Alfons J, 1996. " Transfer Pricing, Double Taxation, and the Cost of Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(3), pages 445-52.
  4. Weichenrieder, Alfons J., 1998. "Foreign profits and domestic investment," Journal of Public Economics, Elsevier, vol. 69(3), pages 451-463, September.
  5. Hans-Werner Sinn, 1990. "Taxation and the Birth of Foreign Subsidiaries," NBER Working Papers 3519, National Bureau of Economic Research, Inc.
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