Corporate Income Taxation Uncertainty and Foreign Direct Investment

Abstract

This paper analyzes the effects of legal uncertainty, as measured by differences in legal systems, the existence of double tax agreements, and corruption, around corporate income taxation on foreign direct investment (FDI). We find that an increase in the ratio of the statutory corporate income tax rate of the destination relative to the source country exhibits a negative impact on foreign direct investment, as do different legal systems, but not double tax agreements. An interaction term between the tax rate and measures of legal uncertainty find that big tax difference lead to an increase in foreign direct investment given a different legal system or the existence of a double tax agreement. This points to the presence of speculative entry for tax motives.