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The Taxation of Foreign Profits: a Unified View

  • Michael Devereux

    ()

    (Oxford University Centre for Business Taxation)

  • Clemens Fuest

    ()

    (Centre for European Economic Research (ZEW))

  • Ben Lockwood

    ()

    (Oxford University CBT, CEPR and Department of Economics, University of Warwick,)

This paper synthesizes and extends the literature on the taxation of foreign source income in a framework that covers both greenfield and acquisition investment, and a general constraint linking investment at home and abroad for the multinational by introducing a cost of adjustment for the mobile factor. Unless the cost of adjustment is zero, the domestic tax on foreign-source income should always be set to ensure the optimal allocation of the mobile factor between domestic and foreign assets and should follow the classical rules in the literature; national optimality requires the deduction rule, and global optimality requires the credit rule. Only in the zero-cost case does exemption become optimal. Allowances can be set so as to ensure that domestic and foreign asset purchases are undistorted by the tax system: this requires a cash-flow tax on domestic investment in the greenfield case, and a cross-border cash flow tax on foreign investment in both cases. These basic results extend to various extensions of the model.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 1303.

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Date of creation: 2013
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Handle: RePEc:btx:wpaper:1303
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