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Tax factors affecting FDI allocation in the EU post-socialist states

Jan Pavel, Jana Tepperová and Markéta Arltová

Post-Communist Economies, 2021, vol. 33, issue 6, 710-725

Abstract: The aim of the paper is to reveal the parameters of tax systems – in both the investor and the recipient state – that influence FDI allocation in post-socialist EU countries and cross-border flows of selected types of payments. Our results confirm that investors from EU countries strive to take advantage of both tax rate differences and aggressive tax planning strategies. Regression model estimates show that the investor’s national tax system is of key importance if it allows for the non-taxation of interest income, application of lower rates to royalties and use of special purpose entities. Moreover, the size of FDI is relatively strongly linked to the amount of payments for advisory services and royalties which are often used for aggressive tax planning. The estimated elasticity of FDI to the tax rate is around 1.1 and 1.9 for statutory and effective rates, respectively.

Date: 2021
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DOI: 10.1080/14631377.2020.1827198

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