OECD Tax Policy Studies

1990-0538 (online)
1990-0546 (print)
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This series consists of studies analysing the effects of tax policies that have occurred in the past or might be considered for the future. Its primary purpose is to assist policy makers in designing tax policies that are suited to their objectives.

Also available in French
Corporate Tax Incentives for Foreign Direct Investment

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20 Aug 2001
9789264188402 (PDF) ;9789264183445(print)

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This report examines the currently highly topical issue of corporate tax incentives for foreign direct investment (FDI). The ability to offer an internationally competitive tax system is increasingly seen today as a determinative factor influencing FDI. With corporate income tax identified as the component that impacts most directly on multinational companies, much of the pressure for lowering host country tax burdens to attract capital is focused upon this tax. At the same time, corporate taxation plays an important withholding function, raising revenues on domestic-source income that might otherwise escape the tax net. The desire to tax this income while not discouraging foreign investors raises critical questions concerning the sensitivity of FDI to taxation and the appropriate setting of various tax provisions that determine the host country tax burden and influence investment and financing behaviour.

This report considers various corporate tax measures to encourage FDI and a range of issues relevant to assessing their use. Given the central question of how much additional investment can be expected from tax relief and at what cost, the report summarises recent empirical findings which show increasing sensitivity of FDI to host country tax burdens, consistent with trends towards increasing globalisation of production. Other findings are considered which highlight tax-planning opportunities created by certain approaches, leading to unintended revenue leakage. The report emphasises the need to assess possible host and home country tax interactions which can influence tax incentive results, and more generally the need to look beyond what conventional economic analysis might suggest.

While the report is intended primarily as a guide for policy makers in emerging market economies, it may serve as a reference document to tax policy analysts more generally

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Table of Contents

Executive Summary
Chapter 1. The Role of Corporate Income Tax and the Rationale for TAx Incentives for FDI
Chapter 2. Corporate Tax Incentives for FDI: Main Types and Channels of Influence
Chapter 3. Assessing Host and Home Country Tax-Interaction Effects
Chapter 4. Empirical Findings onthe Sensitivity of FDI to Host Country Tax Burdens
Chapter 5. Perspectives on the Pros and Cons of Alternative Tax Relief Instruments
Chapter 6. An Overview of the Main Issues
Annex 1. Profit Repatriation Tax Rates under Alternative Home Country Tax Systems
Annex 2. Host Country Tax Incentive Relief under HomeCountry Tax Deferral
Annex 3. Possible Irrelevance of Home Country Taxation: Distinguishing FDI Financed by Retentions versus New Equity Capital
Annex 4. Investment Equation of Altshuler, Grubert and Newlon (1998)
Annex 5. Illustration of Unintended Tax Avoidance Facilitated by Tax Holiday Incentive
Annex 6. Econometric Findings on the Implications of High Statutory Corporate Tax Rates
Annex 7. Analysing the Influence of Financing Incentives (Imputation Relief and Divident Withholding Tax Rate Reduction)

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