SFB 303 Discussion Paper No. A - 361

Author: Janeba, Eckhard
Title: Corporate Income Tax Competition, Double Taxation Treaties, and Foreign Direct Investment
Abstract: In the presence of international capital mobility corporate income taxation and the rules how taxes paid in the host country are treated at home influence foreign direct investment. First, it is shown that a certain configuration of tax rules and tax rates can lead to a reversal of capital flows compared to a free-trade situation. Moreover, it is argued that taxation sharply restricts cross-hauling. In the second part of the paper, the decision on the tax rule and the corporate tax rate is endogenized as outcome in a non-cooperative game. All tax rules lead to the same inefficient outcome. Therefore, for each tax rule we analyze the conditions for Pareto- improving tax cooperation if the government's possibility to pay compensations is restricted to the corporate income tax revenues.
Creation-Date: December 1991
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