Corporate Tax Incentives for Foreign Direct Investment
OECD Tax Policy Studies No. 4
|Language||English; Aussi disponible en français|
Published by the Organization for Economic Co-operation and Development, 2001.
|This report examines the currently highly topical
issue of corporate tax incentives for foreign direct investment (FDI). The
ability to offer an internationally competitive tax system is increasingly seen
today as a determinative factor influencing FDI. With corporate income tax
identified as the component that impacts most directly on multinational
companies, much of the pressure for lowering host country tax burdens to
attract capital is focused upon this tax. At the same time, corporate taxation
plays an important withholding function, raising revenues on domestic-source
income that might otherwise escape the tax net. The desire to tax this income
while not discouraging foreign investors raises critical questions concerning
the sensitivity of FDI to taxation and the appropriate setting of various tax
provisions that determine the host country tax burden and influence investment
and financing behaviour.
This report considers various corporate tax measures to encourage FDI and a range of issues relevant to assessing their use. Given the central question of how much additional investment can be expected from tax relief and at what cost, the report summarizes recent empirical findings which show increasing sensitivity of FDI to host country tax burdens, consistent with trends towards increasing globalization of production.
Other findings are considered which highlight tax-planning opportunities created by certain approaches, leading to unintended revenue leakage.
The report emphasizes the need to assess possible host and home country tax interactions which can influence tax incentive results, and more generally the need to look beyond what conventional economic analysis might suggest.
While the report is intended primarily as a guide for policy makers in emerging market economies, it may serve as a reference document to tax policy analysts more generally.
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