Do Complicated Tax Systems Prevent Foreign Direct Investment?

22 Pages Posted: 19 Dec 2012

See all articles by Martina Lawless

Martina Lawless

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Date Written: January 2013

Abstract

The negative relationship between tax rates and FDI is well known. This paper looks at how complexity of the tax system affects FDI. Fulfilling tax requirements can be timeā€consuming, and this implies a cost for more complex tax systems. Alternatively, complexity may provide opportunities to reduce the overall tax bill. We find that measures of tax complexity have a significant inhibiting effect on the presence of FDI for a country pair, but have little impact on the level of FDI flows. A 10% reduction in tax complexity is comparable to a one percentage point reduction in effective corporate tax rates.

Suggested Citation

Lawless, Martina, Do Complicated Tax Systems Prevent Foreign Direct Investment? (January 2013). Economica, Vol. 80, Issue 317, pp. 1-22, 2013, Available at SSRN: https://ssrn.com/abstract=2191336 or http://dx.doi.org/10.1111/j.1468-0335.2012.00934.x

Martina Lawless (Contact Author)

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

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