Effects of Equalization Tax on Multinational Investments and Transfer Pricing

Seppo Kari and Jouko Ylä-Liedenpohja

No 337, Discussion Papers from VATT Institute for Economic Research

Abstract: This paper analyzes effects of equalization tax on the decisions of a multinational company. Equalization tax is an extra corporation tax on dividend distributions to ensure that the underlying profit of a dividend has borne a tax in the corporate sector equal to the imputation credit given to the shareholder. Equalization tax is shown to increase incentives for home-country real and financial investments and for transfer pricing to shift taxable income even from low-tax countries to high-tax home-countries of the parent companies. The current EU process of exchanging the imputation system and an equalization tax for a classical system may thus have adverse tax revenue effects in the countries concerned, but improves efficiency of the global economy.

Keywords: Dividend taxation, International taxation, Investment incentives, Transfer pricing, International comparisons, Kansainväliset vertailut, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, F230 - Multinational Firms; International Business (International Competitiveness), H250 - Business Taxes and Subsidies including sales and value-added (VAT), H320 - Fiscal Policies and Behavior of Economic Agents: Firm, (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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Journal Article: Effects of an Equalization Tax on Multinational Investments and Transfer Pricing (2005)
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