Taxation and the Financial Structure of Foreign Direct Investment

Frances Ruane () and Padraig Moore

The Institute for International Integration Studies Discussion Paper Series from IIIS

Abstract: The vast increase in foreign assets globally has raised interest in how the home country should tax profits flowing from these investments. Broadly speaking, countries have chosen either to exempt foreign income from taxation or to subject foreign income to taxation with credits/deductions given for foreign taxes paid. Recent research has focused on the effect of these foreign income tax rules on the relationship between aggregate FDI flows and corporate tax rates. In this paper we examine how foreign income tax rules can affect the financial structure of subsidiary-level FDI in Europe. The tax-deductibility of interest payments suggests that higher (host-country) corporate tax rates should be associated with a greater proportion of debt-financed FDI, as foreign income tax credit systems should, in theory, limit the benefits of shielding foreign income from host country taxation. Our results indicate that whilst multinationals from tax exemption countries adjust the financial structure of foreign investments in response to corporate tax rates, the effect of corporate tax rates is insignificant for FDI originating from tax credit countries. These results reveal an additional channel through which foreign income tax credit systems attenuate the forces of tax competition.

JEL-codes: F21 F23 F36 G32 H25 H87 (search for similar items in EconPapers)
Date: 2005-12-15
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
https://www.tcd.ie/triss/assets/PDFs/iiis/iiisdp88.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iis:dispap:iiisdp88

Access Statistics for this paper

More papers in The Institute for International Integration Studies Discussion Paper Series from IIIS 01. Contact information at EDIRC.
Bibliographic data for series maintained by Maeve ().