Issues in the Taxation of Income from Foreign Portfolio and Direct Investment

Abstract

Abstract Since the Neumark Committee reported in 1963, there has been an unresolved debate about harmonizing the taxation of corporate income in what is now the European Union (EU). A central issue has been the importance of, and the perceived need for harmonization of, the statutory corporation tax rate and the definition of the corporation tax base. Closely related to this is the relationship between taxation at the level of the company and at the level of the shareholder, especially where the company and the shareholder are resident in different countries. This chapter aims to shed light on these issues, both for the collective welfare of a group of countries such as the EU and for the welfare of an individual country. The main theme of the chapter is that, in identifying the ‘optimal1 taxation of international investment flows, using corporate and personal taxes, it is useful to make a distinction between portfolio and direct investment. The definition of these two forms of investment is usually in terms of the degree of control maintained by the investor over the investment activity. In this chapter, however, I assume that, in practice, this definition can be mirrored by the distinction between individual investors (or financial intermediaries) who undertake portfolio investment and are subject to personal taxes, and companies funded by such investors that undertake direct investment and are subject to corporation taxes.