Cost of Capital for Cross-border Investment: The Fallacy of Estonia as a Tax Haven

Seppo Kari and Jouko Ylä-Liedenpohja

No 367, Discussion Papers from VATT Institute for Economic Research

Abstract: The initial cost of capital of a foreign subsidiary, financed by its parent from abroad, is dependent on repatriation taxes and this also applies to all follow-up investments financed from marginal foreign profits, representing the required return on the initial investment. Only investments financed from intra-marginal foreign profits are independent of repatriation taxes, but their cost of capital depends inversely on the dividend tax of the home-country parent?s owners. We calibrate the cost of capital formulae to the Estonian and Finnish parameters of taxing international investment income. The calculations show that Estonian subsidiaries, which pay no tax on undistributed profits but a corporate dividend tax, offer tax benefits to their parents only in terms of intra-marginal profits.

Keywords: Direct investment, tax incentives, corporate tax, International comparisons, Kansainväliset vertailut, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, H250 - Business Taxes and Subsidies including sales and value-added (VAT), H320 - Fiscal Policies and Behavior of Economic Agents: Firm, H870 - International Fiscal Issues; International Public Goods, (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fmk, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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https://www.doria.fi/handle/10024/148346

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Journal Article: Cost of Capital for Cross-Border Investment: The Fallacy of Estonia as a Tax Haven (2004)
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