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The taxation of foreign profits : a unified view
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Devereux, Michael P., Fuest, Clemens and Lockwood, Ben (2015) The taxation of foreign profits : a unified view. Journal of Public Economics, 125 . pp. 83-97. doi:10.1016/j.jpubeco.2015.02.005
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Official URL: http://dx.doi.org/10.1016/j.jpubeco.2015.02.005
Abstract
This paper synthesizes and extends the literature on the taxation of foreign source income in a framework that covers both greenfield and acquisition investment, and a general constraint linking investment at home and abroad for the multinational by introducing a cost of adjustment for the mobile factor. Unless the cost of adjustment is zero, the domestic tax on foreign-source income should always be set to ensure the optimal allocation of the mobile factor between domestic and foreign assets and should follow the classical rules in the literature; national optimality requires the deduction rule, and global optimality requires the credit rule. Only in the zero-cost case does exemption become optimal. Allowances can be set so as to ensure that domestic and foreign asset purchases are undistorted by the tax system: this requires a cash-flow tax on domestic investment in the greenfield case, and a cross-border cash flow tax on foreign investment in both cases. These basic results extend to various extensions of the model, notably: (i) when a profit-shifting motive is present; and (ii) to some extent, when a corporate income tax is in place. The introduction of tax administration costs into the model can explain the empirical trend towards the use of the exemption regime.
| Item Type: | Journal Article | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance |
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| Divisions: | Faculty of Social Sciences > Economics | ||||||||
| Library of Congress Subject Headings (LCSH): | Corporations -- Taxation, Investments, Foreign -- Taxation, International business enterprises, Domestic international sales corporations | ||||||||
| Journal or Publication Title: | Journal of Public Economics | ||||||||
| Publisher: | Elsevier | ||||||||
| ISSN: | 0047-2727 | ||||||||
| Official Date: | May 2015 | ||||||||
| Dates: |
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| Date of first compliant deposit: | 26 January 2017 | ||||||||
| Volume: | 125 | ||||||||
| Page Range: | pp. 83-97 | ||||||||
| DOI: | 10.1016/j.jpubeco.2015.02.005 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| Funder: | Economic and Social Research Council (Great Britain) (ESRC) | ||||||||
| Grant number: | Grant "Business, Tax and Welfare", RES-060-25-0033 | ||||||||
| Adapted As: |
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