International tax abitrage via corporate income splitting
If capital for corporate finance was available from a common global pool and at zero transaction cost, then does after-tax arbitrage require harmonisation of income tax rates across jurisdictions? This paper shows that the answer is in the negative. When a corporation has the choice in deciding the fraction of income that it distributes as dividends with the remainder held for future capitalisation, then such choice brings about arbitrage in after-tax rates of return to investors facing a common pre-tax return but different rates of income taxes. Policy implications are drawn from this result.
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- A. C. Miller, 1902. "Fiscal Reciprocity," Journal of Political Economy, University of Chicago Press, vol. 10, pages 255.
- Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
- Prema-chandra Athukorala & Satish Chand, 1998. "Trade Orientation and Productivity Gains from International Production: A Study of Overseas Operations of US Multinationals," Departmental Working Papers 1998-02, The Australian National University, Arndt-Corden Department of Economics.
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