The taxation of foreign profits: a unified view

Devereux, Michael, Fuest, Clemens and Lockwood, Ben (2013) The taxation of foreign profits: a unified view. Centre for Business Taxation WP 13/03.

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This paper synthesizes and extends the literature on the taxation of foreign source income in a framework that covers both greenfield and acquisition investment, and a general constraint linking investment at home and abroad for the multinational by introducing a cost of adjustment for the mobile factor. Unless the cost of adjustment is zero, the domestic tax on foreign-source income should always be set to ensure the optimal allocation of the mobile factor between domestic and foreign assets and should follow the classical rules in the literature; national optimality requires the deduction rule, and global optimality requires the credit rule. Only in the zero-cost case does exemption become optimal. Allowances can be set so as to ensure that domestic and foreign asset purchases are undistorted by the tax system: this requires a cash-flow tax on domestic investment in the greenfield case, and a cross-border cash flow tax on foreign investment in both cases. These basic results extend to various extensions of the model.

Item Type: Other Working Paper
Keywords: corporate taxation; multinational firms; repatriation
Centre: Oxford University Centre for Business Taxation > CBT Working Papers
Date Deposited: 06 Aug 2013 10:19
Last Modified: 15 Oct 2015 02:18

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