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Taxation of outbound direct investment: economic principles and tax policy considerations

Listed author(s):
  • Michael P. Devereux

This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective. It argues that for traditional systems based on the residence of the investor or the source of the income, nothing less than full harmonization across countries can achieve global optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. However, source-based taxation requires an allocation of the profits of multinational companies to individual jurisdictions; this is not only very difficult in practice, but in some cases is without any conceptual foundation. The taxation of interest income on a residence basis is also hard to justify if the aim of the tax system is to tax only the income arising from economic activity in a given country. Copyright 2008, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/oxrep/grn036
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Article provided by Oxford University Press in its journal Oxford Review of Economic Policy.

Volume (Year): 24 (2008)
Issue (Month): 4 (winter)
Pages: 698-719

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Handle: RePEc:oup:oxford:v:24:y:2008:i:4:p:698-719
Contact details of provider: Web page: http://oxrep.oupjournals.org/

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  1. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, vol. 60(3), pages 373-399, June.
  2. Alan Auerbach & Michael P Devereux & Helen Simpson, 2007. "Taxing corporate income," Working Papers 0705, Oxford University Centre for Business Taxation.
  3. Joel Slemrod, 1995. "Free trade taxation and protectionist taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(3), pages 471-489, October.
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  5. Roger H. Gordon & David F. Bradford, 1980. "Taxation and the stock market valuation of capital gains and dividends : Theory and emphirical results," NBER Chapters, in: Econometric Studies in Public Finance, pages 109-136 National Bureau of Economic Research, Inc.
  6. Devereux, Michael P. & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers.
  7. Edwards Jeremy, 2005. "Gains from Trade in Government Revenue and Pareto-Efficient International Taxation," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-25, December.
  8. Michael Keen & David Wildasin, 2004. "Pareto-Efficient International Taxation," American Economic Review, American Economic Association, vol. 94(1), pages 259-275, March.
  9. Chiara Criscuolo & Ralf Martin, 2005. "Multinationals and US Productivity Leadership: Evidence from Great Britain," CEP Discussion Papers dp0672, Centre for Economic Performance, LSE.
  10. Harry Huizinga & Søren Bo Nielsen, "undated". "The Coordination of Capital Income and Profit Taxation with Cross-Ownership of Firms," EPRU Working Paper Series 96-17, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  11. Devereux, Michael P. & Keuschnigg, Christian, 2009. "The Distorting Arm's Length Principle," CEPR Discussion Papers 7375, C.E.P.R. Discussion Papers.
  12. J. E. Stiglitz & P. Dasgupta, 1971. "Differential Taxation, Public Goods, and Economic Efficiency," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 151-174.
  13. Huizinga, H.P. & Nielsen, S.B., 1997. "Capital income and profit taxation with foreign ownership of firms," Other publications TiSEM b4f6a916-7f7f-4fe1-9cf0-c, Tilburg University, School of Economics and Management.
  14. Desai, Mihir A. & Hines, James R. Jr., 2003. "Evaluating International Tax Reform," National Tax Journal, National Tax Association, vol. 56(3), pages 487-502, September.
  15. Mihir A. Desai, 2008. "The Decentering of the Global Firm," Harvard Business School Working Papers 09-054, Harvard Business School.
  16. Keen, Michael & Piekkola, Hannu, 1997. " Simple Rules for the Optimal Taxation of International Capital Income," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(3), pages 447-461, September.
  17. Bond, Stephen Roy & Devereux, Michael P., 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers.
  18. Stephen Bond & Alexander D Klemm & Michael B. Devereux, 2007. "The Effects of Dividend Taxes on Equity Prices; A Re-examination of the 1997 U.K. Tax Reform," IMF Working Papers 07/204, International Monetary Fund.
  19. Thomas Horst, 1980. "A Note on the Optimal Taxation of International Investment Income," The Quarterly Journal of Economics, Oxford University Press, vol. 94(4), pages 793-798.
  20. Steve Bond & Michael Devereux, 1993. "On the design of a neutral business tax under uncertainty," IFS Working Papers W93/01, Institute for Fiscal Studies.
  21. Steve Bond & Michael Devereux, 1999. "Generalised R-based and S-based taxes under uncertainty," IFS Working Papers W99/09, Institute for Fiscal Studies.
  22. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 2008 - 2015 264, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  23. Michael P. Devereux, 2004. "Some Optimal Tax Rules for International Portfolio and Direct Investment," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(1), pages 1-1, April.
  24. Devereux, Michael P. & Pearson, Mark, 1995. "European tax harmonisation and production efficiency," European Economic Review, Elsevier, vol. 39(9), pages 1657-1681, December.
  25. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  26. Devereux, Michael P & Hubbard, R Glenn, 2003. "Taxing Multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(4), pages 469-487, August.
  27. Michael P Devereux & Simon Loretz, 2008. "Increased efficiency through consolidation and formula apportionment in the European Union?," Working Papers 0812, Oxford University Centre for Business Taxation.
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