Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries
IMF Working Papers, October 3, 2013
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- Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries
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Bibliographic details
- Authors: Thornton Matheson, Victoria J Perry, Chandara Veung
- Published: October 3, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484329764.001
Summary of scope and concern
- Global investment patterns increase the importance of effective taxation of foreign investors for lower income countries (LICs).
- The historical framework for cross-border income tax arrangements is not always well suited to allow LICs effectively to generate tax revenues from profits on foreign direct investment (FDI).
- Several aspects of this framework contribute to the problem.
- The paper discusses the likely effect of a shift by major economies from worldwide corporate taxation toward a territorial system on the volume, distribution, and financing of FDI, with a focus on LICs.
Empirical analysis
- Data analyzed: bilateral outbound FDI data for the UK for 2002–10.
- Research question: whether the move to territoriality made corporations more sensitive to host-country statutory tax rates.
- Key empirical finding: supporting evidence for the hypothesis is found for FDI financed from new equity.
Key findings and implications
- Shift from worldwide to territorial taxation by major economies likely affects:
- Volume of FDI.
- Distribution of FDI across countries.
- Financing of FDI (notably equity-financed FDI).
- Implication for LICs: potential difficulty in effectively generating tax revenues from profits on FDI under the existing historical cross-border tax framework.
Subjects and keywords covered
- Subjects: Balance of payments, Corporate income tax, Foreign direct investment, Income, Labor, National accounts, Taxes, Wages, Withholding tax
- Keywords: CIT, CIT rate, CIT reduction, Corporate income tax, country shift, equilibrium rate, FDI flow, Foreign direct investment, foreign direct investment in developing countries, Global, high-CIT rate, host country rate, Income, income effect, international corporate income tax, international taxation, investing country, OECD country, rate, tax rate, territorial taxation, territoriality dummy, unweighted OECD CIT average, Wages, Withholding tax, worldwide taxation, WP