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http://ssrn.com/abstract=922041
 
 

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Taxation and the Financial Structure of Foreign Direct Investment


Padraig James Moore


Trinity College (Dublin) - Institute for International Integration Studies (IIIS)

Frances Ruane


University of Dublin - Institute for International Integration Studies (IIIS) & Department of Economics

October 2005

IIIS Discussion Paper No. 88

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.

Number of Pages in PDF File: 34

JEL Classification: F21, F23, H25, H87, F36, G32

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Date posted: August 8, 2006  

Suggested Citation

Moore, Padraig James and Ruane, Frances, Taxation and the Financial Structure of Foreign Direct Investment (October 2005). IIIS Discussion Paper No. 88. Available at SSRN: http://ssrn.com/abstract=922041 or http://dx.doi.org/10.2139/ssrn.922041

Contact Information

Padraig James Moore (Contact Author)
Trinity College (Dublin) - Institute for International Integration Studies (IIIS) ( email )
The Sutherland Centre, Level 6, Arts Building
Trinity College
Dublin 2
Ireland
Frances Ruane
University of Dublin - Institute for International Integration Studies (IIIS) & Department of Economics ( email )
The Sutherland Centre, Level 6, Arts Building
Trinity College
Dublin 2
Ireland
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