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Taxes and the Form of Ownership of Foreign Corporate Equity

  • Gordon, R.H.
  • Jun, J.

Investors can achieve international diversification in their portfolios not only through purchasing foreign equity directly but also through investing in domestic firms which then invest abroad. Yet these alternative approaches are taxed very differently. A number of countries have also imposed various forms of capital controls restricting direct purchases of foreign equity. This paper estimates the degree to which these tax and nontax factors have affected the relative use of these two alternative methods of international diversification, using data on investment in the U.S. by investors from each of ten other countries during the period 1980-1989. While the composition of equity flows differs dramatically across countries, taxes do not appear to play an important role in the data in explaining this variation. Part of the explanation appears to be that tax distortions adjust endogenously to avoid large scale portfolio investments abroad. With the increasing integration of capital markets and the easing of capital controls in many countries, we have seen and expect to continue to see reductions in the tax distortions affecting the form of international capital flows.

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Paper provided by Yale - Economic Growth Center in its series Papers with number 652.

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Length: 37 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:fth:yalegr:652
Contact details of provider: Postal: U.S.A.; YALE UNIVERSITY, ECONOMIC GROWTH CENTER, YALE STATION NEW-HAVEN CONNECTICUT 06520 U.S.A
Phone: (203) 432-3610
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Web page: http://www.econ.yale.edu/~egcenter/

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  1. James M. Poterba & Lawrence H. Summers, 1984. "The Economic Effects of Dividend Taxation," Working papers 343, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Hines, James R, Jr, 1996. " Dividends and Profits: Some Unsubtle Foreign Influences," Journal of Finance, American Finance Association, vol. 51(2), pages 661-89, June.
  3. Joel B. Slemrod, 1990. "Tax Effects on Foreign Direct Investment in the United States: Evidence from a Cross-Country Comparison," NBER Chapters, in: Taxation in the Global Economy, pages 79-122 National Bureau of Economic Research, Inc.
  4. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
  5. Martin Feldstein, 1978. "Inflation and the Stock Market," NBER Working Papers 0276, National Bureau of Economic Research, Inc.
  6. Hines, J.R.J. & Hubbard, R.G., 1989. "Coming Home To America - Devidend Repatriations By U.S. Multinationals," Papers 146, Princeton, Woodrow Wilson School - Public and International Affairs.
  7. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
  8. Randall Morck, 2006. "Corporations," Harvard Institute of Economic Research Working Papers 2101, Harvard - Institute of Economic Research.
  9. Harry Grubert & Timothy Goodspeed & Deborah L. Swenson, 1993. "Explaining the Low Taxable Income of Foreign-Controlled Companies in the United States," NBER Chapters, in: Studies in International Taxation, pages 237-276 National Bureau of Economic Research, Inc.
  10. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1, 07.
  11. Roger H. Gordon & Joel Slemrod, 1988. "Do We Collect Any Revenue from Taxing Capital Income?," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 89-130 National Bureau of Economic Research, Inc.
  12. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
  13. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
  14. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
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