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The Tax Sparing Provision Influence: A Credit versus Exempt Investors Analysis

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  • Céline Azémar
  • Andrew Delios

Abstract

This paper is concerned with the impact of tax sparing provisions on the location choices of multinational enterprises. Special attention is paid to the economic in°uence of tax sparing because the OECD proposal to reconsider the inclusion of this provision in bilateral tax treaties is highly controversial. An empirical analysis is proposed in order to apprehend the effects of tax sparing on both credit and exempt investors, since they do not benefit from the same advantages provided by tax sparing. Using data from 54 developing countries over the 1990-2000, and distinguishing Japanese credit investors from French exempt investors, we first find that the asymmetrical sensitivity between exempt and credit investors relative to foreign corporate taxes is considerably reduced with tax measures accounting for tax sparing. Second, we find that tax sparing provisions have a favorable impact on the location choices of credit investors and have no influence on the location choices of exempt investors. Third, the non-robust significance of both a tax sparing adjusted effective interest tax rate and effective royalties tax rate tends to suggest that tax incentives on passive incomes are not really considered by both credit and exempt investors when making the decision of where to invest.

Suggested Citation

  • Céline Azémar & Andrew Delios, 2007. "The Tax Sparing Provision Influence: A Credit versus Exempt Investors Analysis," Working Papers 2007_31, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2007_31
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    File URL: http://www.gla.ac.uk/media/media_44476_en.pdf
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    References listed on IDEAS

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    1. Gropp, Reint & Kostial, Kristina, 2000. "The disappearing tax base: is foreign direct investment eroding corporate income taxes?," Working Paper Series 0031, European Central Bank.
    2. Céline Azémar & Rodolphe Desbordes & Jean-Louis Mucchielli, 2007. "Do tax sparing agreements contribute to the attraction of FDI in developing countries?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(5), pages 543-562, October.
    3. Globerman, Steven & Shapiro, Daniel, 2002. "Global Foreign Direct Investment Flows: The Role of Governance Infrastructure," World Development, Elsevier, vol. 30(11), pages 1899-1919, November.
    4. Joeri Gorter & A. Parikh, 2000. "How mobile is capital within the European Union?," CPB Research Memorandum 172, CPB Netherlands Bureau for Economic Policy Analysis.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    foreign direct investment; tax sparing; credit and exempt tax systems; corporate taxes; interest and royalty taxes;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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