Taxation of Domestic Dividend Income and Foreign Investment Holdings

Anil Mishra () and Ronald Ratti

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper it is argued that the heavier is domestic taxation of domestic dividend income, the more attractive is foreign investment to domestic agents. Dividend imputation schemes play an important role in this discussion. Dividend imputation eliminates the double taxation of domestic income, reduces the effective tax rate on domestic investment and makes investment in foreign securities less attractive. A fall of 10% in effective tax rate on domestic dividend income reduces foreign equity investment by about 5%. Domestic investors paid dividends under a dividend imputation system receive a credit for the tax paid at the company level and this reduces the effective tax rate. Cross-border equity investment is increased if tax credit rises for taxes paid overseas. Empirical analysis is based on bilateral investments among 23 mature economies over 2001-2011. Results are robust to consideration of the global financial crisis and the role of double taxation treaties.

Keywords: Foreign equity investment; Domestic Dividend Taxes; Dividend Imputation Schemes (search for similar items in EconPapers)
JEL-codes: F21 F30 G15 (search for similar items in EconPapers)
Date: 2013-10-04
New Economics Papers: this item is included in nep-acc and nep-pbe
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Related works:
Journal Article: Taxation of domestic dividend income and foreign investment holdings (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50601

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