The Disappearing Tax Base: Is Foreign Direct Investment (FDI) Eroding Corporate Income Taxes?

IMF Working Papers, October 1, 2000

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The paper analyzes the link between FDI, corporate taxation, and corporate tax revenues.
Strong evidence that FDI inflows and outflows are affected by tax regimes in host and home countries.
FDI flows, in turn, affect the corporate tax base.
Simulations of European Union (EU) harmonization (isolating the revenue effect of FDI on the tax base from direct effects through the rate harmonization) suggest that:
- high tax countries would gain revenue from harmonization;
- low tax countries would lose revenue from harmonization;
- these effects may be substantial.
Results also suggest that EU tax harmonization would significantly affect the net FDI position of some countries.

EU harmonization simulations isolate two channels:
- revenue effect of FDI on the tax base; and
- direct effects through rate harmonization.
Net outcomes from harmonization are heterogeneous across countries:
- high tax countries: projected revenue gains;
- low tax countries: projected revenue losses.
Net FDI positions of some countries would be significantly affected under harmonization scenarios.

Focus areas identified: Balance of payments, Corporate income tax, Corporate taxes, Foreign direct investment, Revenue administration, Tax harmonization, Taxes.
Keywords and analytical elements: Corporate income tax, Corporate taxation, Corporate taxes, equations following, FDI flow, FDI inflow, FDI outflow, foreign direct investment, Global, net FDI position, OECD countries, outflow component, revenue elasticity, revenues, simulations, Tax harmonization, WP.