Template-Type: ReDIF-Paper 1.0
Title: Foreign Direct Investment under Oligopoly: Profit Shifting of Profit Capturing?
Author-Name: Eckhard Janeba 

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Classification-JEL: F23, H20, H87, L13
Keywords: Foreign Direct Investment, Corporate Taxation, Profit Shifting, Imperfect Competition
Abstract: In this paper a model of taxation of foreign source corporate income is 
 developed, when the output market is not competitive. Profit shifting 
 policies, similar to those in the new trade literature, are also present in 
 the case of foreign direct investment (FDI). There are, however, important 
 differences to the new trade theory since in case of FDI (i) corporate 
 taxation and double taxation relief are the policy instruments rather than 
 output/revenue taxes, (ii) countries are not symmetric in the sensee that 
 the host country has the first right to tax the multinational's profit and 
 the home country reacts to this by providing double taxation relief, and 
 (iii) output but not corporate taxation is specific to strategic 
 industries. It is argued that (a) variants of a tax credit are analogous to 
 export subsidies, (b) when the home country operates a tax credit system the 
 host country's incentive to capture profits by raising its tax is bounded 
 under imperfect competition, (c) the home country should imitate the host 
 policy wehen the host country offers a tax holiday, and (d) in the presence 
 of non-competitive sectors double taxation relief is a good instrument to 
 target strategic industries.
Series: Sonderforschungsbereich 303, University of Bonn, Germany

Length: 16 pages
Creation-Date: 1993-11
Revision-Date: 
Handle: RePEc:bon:bonsfa:420