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Tax Complexity and Inward Investment

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  • Lawless, Martina

    (Central Bank and Financial Services Authority of Ireland)

Abstract

The negative relationship between host-country tax rates and FDI has been tested in a large number of papers. This paper looks at a different channel through which tax systems could affect FDI, namely the complexity of the tax system. Complying with tax authority requirements can be extremely time consuming for business and this implies an additional cost for more complex tax systems. We use measures of the time taken to deal with tax obligations and the number of tax payments for a representative firm compiled by the World Bank to examine their effect on FDI selection and flows from 16 OECD FDI-source countries to 57 host countries. We find a negative and significant effect of tax rates in line with other studies. In addition, the tax complexity measures are found to have a significant inhibiting effect on the presence of FDI for a country pair, but have little impact on the level of the FDI flow once it is established. In other words, the complexity measures affect FDI primarily through the extensive margin. A 10% reduction in tax complexity is found to be comparable in its effect on FDI to a one percentage point reduction in the effective corporate tax rate. The results are robust to the inclusion of other proxies for bureaucracy in the host country.

Suggested Citation

  • Lawless, Martina, 2009. "Tax Complexity and Inward Investment," Research Technical Papers 5/RT/09, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:5/rt/09
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    References listed on IDEAS

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    Cited by:

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    2. Davies, Ronald B., 2013. "The silver lining of red tape," Journal of Public Economics, Elsevier, vol. 101(C), pages 68-76.
    3. James R. Markusen, 2021. "Putting per-capita income back into trade theory," World Scientific Book Chapters, in: BROADENING TRADE THEORY Incorporating Market Realities into Traditional Models, chapter 10, pages 187-197, World Scientific Publishing Co. Pte. Ltd..
    4. Nadejda Komendantova & Leena Ilmola & Anastasia Stepanova, 2016. "Foreign Direct Investment in Russia: Stakeholders' Views and Perceptions," Journal of Economics and Behavioral Studies, AMH International, vol. 8(5), pages 184-193.
    5. Gary Tobin & Keith Walsh, 2013. "What Makes a Country a Tax Haven? An Assessment of International Standards Shows Why Ireland Is Not a Tax Haven," The Economic and Social Review, Economic and Social Studies, vol. 44(3), pages 401-424.

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