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 ISSN 0047-2727.

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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
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:	Date Event May 2015 Published 6 March 2015 Available 16 February 2015 Accepted
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
Date of first compliant deposit:	26 January 2017
Date of first compliant Open Access:	6 March 2017
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
Grant number:	Grant "Business, Tax and Welfare", RES-060-25-0033
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