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Effects of Equalization Tax on Multinational Investments and Transfer Pricing

  • Seppo Kari
  • Jouko Ylä-Liedenpohja

This paper analyzes effects of equalization tax on the decisions of a multinational company. 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. 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 the parent companies. The current EU process of exchanging the imputation system and an equalization tax for a classical system may thus have adverse tax revenue effects in the countries concerned, but improves efficiency of the global economy.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 337.

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Date of creation: 15 Jun 2004
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Handle: RePEc:fer:dpaper:337
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  1. Michael Devereux & Harold Freeman, 1995. "The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes," International Tax and Public Finance, Springer, vol. 2(1), pages 85-106, February.
  2. Seppo Kari, 1999. "Dynamic Behaviour of the Firm Under Dual Income Taxation," Research Reports 51, Government Institute for Economic Research Finland (VATT).
  3. Boadway, Robin & Bruce, Neil, 1992. "Problems with integrating corporate and personal income taxes in an open economy," Journal of Public Economics, Elsevier, vol. 48(1), pages 39-66, June.
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