InternationalTxnLecture

InternationalTxnLecture - International Taxation Worldwide...

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1 International Taxation Worldwide v. territorial systems Locational and ownership distortions CEN v. CON International tax arbitrage and corporate inversions Treatment of income from foreign subsidiaries Repatriation taxes; Subpart F Taxes and firms’ repatriation decisions
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2 Worldwide v. Territorial Systems How should governments tax income earned by their resident individuals and corporations in foreign countries? Worldwide taxation (e.g. US): foreign income is taxed Territorial taxation (e.g. most other countries): foreign income is exempt
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3 Worldwide v. Territorial Systems How should governments tax income earned by their resident individuals and corporations in foreign countries? Worldwide taxation (e.g. US): foreign income is taxed → possibility of “double taxation” Territorial taxation (e.g. most other countries): foreign income is exempt
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4 Worldwide v. Territorial Systems How should governments tax income earned by their resident individuals and corporations in foreign countries? Worldwide taxation (e.g. US): foreign income is taxed → tax credit for tax paid to foreign govts Territorial taxation (e.g. most other countries): foreign income is exempt
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5 Foreign Tax Credit (FTC) e.g. Suppose a US firm invests in Canada and generates $100 of income Assume: Canada’s tax rate = 25% The firm pays $25 to Canada US tax rate = 35% The firm owes $35 to the US, but receives a $25 credit for the tax paid to Canada FTC is limited to the amount of US tax owed
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6 Principles of International Taxation Why do firms invest overseas? Traditionally thought to be a means of transferring savings across countries (from places where capital is abundant to those where it is scarce) Capital Export Neutrality (CEN): a firm should face the same tax rate, regardless of where it invests → worldwide taxation achieves this . . . But . . .
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8 Most FDI into the US consists of acquisitions of existing assets
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10 Most US FDI is in affluent countries Moreover, for most of these countries there are large FDI flows in both directions
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11 Principles of International Taxation Why do firms invest overseas? Ownership, location, internalization (OLI) Capital Ownership Neutrality (CON): all investors in a given country should face the same tax rate, regardless of their origin → territorial taxation achieves this
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12 Locational v. Ownership Distortions CEN focuses on distortions to the location of investment CON focuses on distortions to ownership patterns e.g. Assume 3 countries: US: worldwide 35% tax rate Brazil: territorial 20% tax rate Netherlands: territorial 35% tax rate
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13 Locational v. Ownership Distortions Suppose a Dutch firm is choosing between Investing in the Netherlands → 35% tax rate Investing in Brazil → 20% tax rate → locational distortion
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14 Locational v. Ownership Distortions Consider a Brazilian firm that requires foreign capital If acquired by a US firm, pretax profits would = 100 If acquired by a Dutch firm, pretax profits would = 85
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InternationalTxnLecture - International Taxation Worldwide...

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