Foreign Direct Investment and Tax Competition

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Institute for International Economics, 2003 - Business & Economics - 118 pages
In this study, the author addresses two interrelated issues in international taxation. His first objective is to assess empirically the nature and extent of the international mobility of foreign direct investment (FDI). His work is based on the operations of US multinational corporations abroad (production, employment, and capital stock), not simply on financial flows of foreign affiliates. He considers whether distinctions between horizontal and vertical integration can be applied to operations in developed versus developing countries, and whether either form of integration is very sensitive to tax and cost conditions, not only in the host country but also in the United States. Growing sensitivity of FDI to taxes is one reason for governments to be concerned about tax competition among jurisdictions to attract economic activity. Tax competition, however, also arises from an attempt to shift the tax base from one jurisdiction to another, with no real change in the location of real activity. Mutti's second objective is to assess how tax competition is affecting the structure of national tax systems and whether efforts at international coordination of tax policy are likely to affect the progression of such changes. Some observers claim that the world needs a WTO for taxes to establish international norms over the taxation of foreign income and the income of foreigners. Recent efforts within the European Union to identify harmful tax practices have not led to agreement to harmonize tax rates or even to define taxable income in similar ways. OECD initiatives to reduce tax competition from nonmembers have been attacked as hypocritical given the practices of the OECD's own members. Muttiinterprets these trends and identifies available policy options from national, regional, and worldwide perspectives.

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