Domestic Tax Rate Research Articles

Overseas production or domestic production? Impacts of tax disparity and market difference

Overseas and domestic production are two commonly employed strategies for multinational firms (MNFs) to manage their global production operations. Recent tax-cutting initiatives have made domestic production an attractive option for MNFs. We aim to investigate whether such initiatives can effectively induce MNFs to produce domestically, especially when they cater to both domestic and foreign markets. In this study, we develop a game-theoretical model that considers an MNF with two subsidiaries - a production subsidiary and a retail subsidiary - located in different markets, and a third-party seller that resells the MNF's product in the domestic market. We take into account two important differences between the two markets, namely the tax disparity and the market potential difference. Our analysis reveals that a higher foreign market potential can strengthen the MNF's tax-saving incentive under the domestic production strategy. We find that a relatively lower domestic tax rate may not induce the MNF's domestic production even if the foreign market potential is low. On the other hand, when the domestic channel competition is intense, a higher domestic tax rate may still incentivize the MNF to produce domestically. These results depend on the tradeoffs among the tax-saving benefit, the third-party seller's free-riding, and the channel competition. We caution that promoting domestic production through a low tax rate may harm domestic consumer surplus, highlighting the need for policymakers to carefully consider the impact of tax policies on consumers.

Multinationals' profits in China: Impact of tax avoidance

Based on proprietary and hand-collected source country information on foreign-owned firms in China, this paper empirically explores the effect of the tax avoidance of multinational firms on the profit rate of foreign-owned firms. Foreign firms in China previously benefited from various preferential tax policies and had a lower effective tax rate compared to domestic firms. The results show that the increase in the difference between the statutory maximum tax rate in the parent country and the domestic tax rate will increase foreign firms' pretax profit margin. This effect is more pronounced for younger firms and wholly foreign-owned firms. Further tests indicate that the transfer pricing in export and import activity of foreign firms is an important channel for multinational firms to shift profits. In year 2008, the implementation of the new Enterprise Income Tax Law has unified the corporate tax rate for both domestic and foreign firms at 25 percent. The tax reform reduces the profit margin of foreign firms, especially those with larger tax rate differentials. This paper explains multinational firms' profit performance from the novel perspective of tax avoidance.

IMPLICATIONS OF GOVERNMENT LEGAL SUBJECT STATUS AS ONE OF THE CAUSES OF TAX DISPUTES ON PRODUCTION SHARING CONTRACTS FOR THE OIL AND GAS INDUSTRY IN INDONESIA

<em>Supreme Court Decision Number 2424/B/PK/Pjk/2020 states that the PSC (Production Sharing Contract) is a Government to Business ("G to B") agreement that applies domestic taxes. Therefore, in tax disputes over Branch Profit Tax (BPT) between a Permanent Establishment Taxpayer (BUT) and the Director-General of Taxes, the Supreme Court's decision uses a 20% domestic tax rate instead of 10% in accordance with the Tax Treaty. This study elaborates how the Government's position in the production sharing contract with the private sector or PE is related to Indonesian and international tax law. The main issues raised are the Government's position as a legal subject in the PSC agreement and the process associated with regulating BPT in international taxation. This is a library study with the juridical-normative approach method. The results showed that the Government acts as a subject of civil law in the PSC agreement. However, in the PSC contract, the relationship between the state and the private sector or PE (BUT) in natural resource management must be carried out using a public relationship by giving concessions or permits full of state control and power. For instance, the Indonesian tax law does not apply when there is a tax treaty. The Taxation Law in Indonesia cannot unilaterally interpret taxes on BPT based on Indonesian domestic provisions.</em>

Tax Motivated Payout Financing

Many firms, even those that are cash rich, routinely engage in costly borrowing and, more rarely, equity issuance in order to finance their payouts. A reported motive for this payout-financing behavior is the sheltering of corporate income tax. We present a model of a firm that maximizes its after-tax cash flow through jointly selecting the amount of its profits to recognize in a foreign tax haven and the amount of new capital it raises. The firm is subject to fixed payouts as well as a constraint on raising new capital. Consistent with U.S. tax law, the firm cannot use foreign-recognized earnings to finance payouts without triggering domestic taxation. The model shows that under certain benign conditions it may be optimal to raise external capital to meet payouts rather than using internally-generated cash flow. Consistent with this shelter-finance-payout strategy, we find that sticky-dividend firms that have more foreign earnings subject to repatriation taxes use more debt to finance their ordinary dividends. In addition, sticky-dividend firms that are tax aggressive use more debt to finance their ordinary dividends. Finally, sticky-dividend firms that are tax aggressive use more debt to finance their ordinary dividends if their domestic tax rate (cost of borrowing) is high (low).

The impact of policy diffusion on optimal emission taxes

We incorporate the process of policy diffusion (i.e., the uncoordinated dissemination of policies among countries) into a probabilistic two-country-model of strategic environmental policy. Contrary to the usual setting with simultaneous decision-making, we consider the impact of sequential decision-making: In the first step, the domestic government introduces an emission tax; in the second step, policy diffusion occurs with a certain probability; and in the third step, the firms decide on output quantities. Within this framework, we analyze how the prospect of policy diffusion, motivated by a higher damage parameter in the domestic country, influences the optimal domestic emission tax. We show that if the damage parameter in the foreign country is sufficiently high, policy diffusion will occur which leads to higher tax rates and higher welfare compared to the equilibrium resulting from simultaneous decision-making. Moreover, we show that an increase in the domestic tax rate also increases the probability that the foreign country adopts the tax policy.

The Growth Effects of Tax Rate in the OECD

The literature testing for aggregate impacts of taxes on long-run growth rates in the OECD has generally used tax rate measures constructed from macroeconomic aggregates such as tax revenues. These have a number of advantages but two major disadvantages: they are typically average, rather than marginal, rates, and are constructed from endogenous tax revenues. Theory predicts a number of responses to both and tax rates, but empirical analogues of the latter tend to be at the level. In addition though most OECD economies are best regarded as small open economies, previous macroeconomic tests of OECD tax-growth relationships have implicitly been based on closed-economy models, focusing on domestic tax rates. This paper explores the relevance of these two aspects – macro average versus micro marginal tax rates, and open economy dimensions – for test of tax-growth effects in OECD countries. We use annual panel data on a number of and tax rate measures and find: (i) statistically small and/or non-robust effects of macro-based tax rates on capital income and consumption but more evidence for labor income tax effects; (ii) statistically robust GDP growth effects of modest size from changes in income tax rates at both the personal and corporate levels; (iii) international tax competition, in which both domestic and foreign corporate tax rates play a role, is consistent with the data; (iv) tax effects on GDP growth appear to operate largely via impacts on factor productivity rather than factor accumulation.

Multinational Taxation and R&D Investments

ABSTRACTThis study examines the effects of taxation on the incentives of multinational firms to develop and use intellectual property. We model optimal investment and production decisions by firms that engage in a patent race by making R&D investments. We investigate how taxes affect the level and efficiency of R&D investments, and how these effects depend on whether the winner of the patent race uses it by either producing in the country in which the patent was developed (the domestic country) or in a foreign country. A higher domestic tax rate decreases investment in R&D if production occurs in the domestic country, but increases investment in R&D if production occurs in the foreign country. The present value of domestic tax revenues is strictly positive if production occurs in the domestic country, but is weakly negative if production occurs in the foreign country.

The Effect of Foreign Reinvestment and Financial Reporting Incentives on Cross‐Jurisdictional Income Shifting*

This paper investigates the influence of foreign reinvestment-related and financial reporting incentives on income shifting of U.S. multinational companies. While foreign and domestic policymakers are concerned with the effect of income shifting on dwindling tax revenues, to date no research has focused on the character of firms that are more aggressive income shifters. We provide insights on the role of cross-sectional variation in foreign reinvestment-related incentives and financial reporting incentives in income shifting; insights that are useful to policymakers, regulators, researchers and stakeholders. Using a comprehensive approach to estimate income shifting, we find evidence consistent with our argument that foreign reinvestment-related incentives affect a firm’s propensity to shift income when domestic tax rates exceed foreign tax rates, but not when foreign tax rates exceed domestic tax rates. We also find that firms with low foreign tax rates and incentives to manage income on their financial statements more actively shift income out of the U.S. than other firms. Finally, we estimate that firms with high reinvestment-related (financial reporting) incentives shift approximately $42 million ($43 million) of additional income per firm per year out of the U.S. relative to firms with low reinvestment-related (financial reporting) incentives.

The Effect of Foreign Reinvestment and Financial Reporting Incentives on Cross-Jurisdictional Income Shifting

This paper investigates the influence of foreign reinvestment-related and financial reporting incentives on income shifting of U.S. multinational companies. While foreign and domestic policymakers are concerned with the effect of income shifting on dwindling tax revenues, to date no research has focused on the character of firms that are more aggressive income shifters. We provide insights on the role of cross-sectional variation in foreign reinvestment-related incentives and financial reporting incentives in income shifting; insights that are useful to policymakers, regulators, researchers and stakeholders. Using a comprehensive approach to estimate income shifting, we find evidence consistent with our argument that foreign reinvestment-related incentives affect a firm’s propensity to shift income when domestic tax rates exceed foreign tax rates, but not when foreign tax rates exceed domestic tax rates. We also find that firms with low foreign tax rates and incentives to manage income on their financial statements more actively shift income out of the U.S. than other firms. Finally, we estimate that firms with high reinvestment-related (financial reporting) incentives shift approximately $42 million ($43 million) of additional income per firm per year out of the U.S. relative to firms with low reinvestment-related (financial reporting) incentives.

Multinational Taxation and R&D Investments

This study examines the effects of taxation on the incentives of multinational firms to develop and use intellectual property. We model optimal investment and production decisions by firms that engage in a patent race by making R&D investments. We investigate how taxes affect the level and efficiency of R&D investments, and how these effects depend on whether the winner of the patent race uses it by producing in the country in which the patent was developed (the domestic country) or in a foreign country. A higher domestic tax rate decreases investment in R&D if production occurs in the domestic country, but increases investment in R&D if production occurs in the foreign country. The present value of domestic tax revenues is strictly positive if production occurs in the domestic country, but is weakly negative if production occurs in the foreign country.

Ideals of Egalitarianism and Sufficiency in Global Justice

It is well known that there are large differences in the per capita income levels of the world's states. While a few poor countries are catching up with the rich world, for some countries, the gaps are growing wider. Most of this global inequality isbetweencountries, notwithinthem. In other words, even if income were equalized within countries, a large part of the gap in average income levels between countries would remain.At the same time, the majority of movements in the wealthier countries for greater distributive equality have tended to focus on inequalities within their own borders: on issues such as raising minimum wages, changing the domestic tax rate, and ending national health disparities. This state-centric focus is frequently justified in moral terms. It is a familiar claim, for example, that we have special obligations to our own citizens and that these obligations are both weightier and more extensive than our obligations to strangers outside our borders.

Unilateral tax reform under the restricted origin principle

The paper analyzes the effects of general commodity taxation under the restricted origin principle when the union countries are small relative to the rest of the world and trade deflection can be controlled by tax authorities. A change in the tax rate of one union country leads to two fiscal externalities, an intra-union terms of trade effect and a change in national tax bases. While the direction of terms of trade effects depends on the specific trade pattern assumed the tax base effect is always negative for the country which raises the domestic tax rate. This suggests that a process of downward tax competition between union members can take place under the restricted origin principle.

Crossing the Border: Does Commodity Tax Evasion Reduce Welfare and Can Enforcement Improve It?

This paper compares discrete equilibria in which consumers do and do not evade commodity taxes by making cross-border purchases. When the government faces a revenue requirement, the comparison shows that border crossing reduces welfare if resources wasted by evasion exceed the benefit of consumption changes, where these changes reflect lower prices across the border and induced changes in domestic tax rates. Enforcement reduces welfare if administrative and uncertainty costs outweigh the benefits of consumption changes and the reduction in resource costs. The analysis shows that the welfare effect of evasion depends on how well designed the tax system is and how effective enforcement resources are in deterring border crossing.

Capital income taxation and international portfolio choice

Distortionary proportional capital income taxation is shown to cause both static effects via portfolio re-allocation and dynamic effects via changes in the value of a claim to future transfers as well as via perceived changes in the future investment opportunity set. The stochastic structure of returns to investment is important for understanding the consequences of a unilateral increase in the domestic tax rate. A government choosing optimal tax policy makes a tradeoff between the increase in the perceived value of future transfers and the distortion to portfolio allocation produced by taxation. With corporate taxation the optimal tax rate is positive.

Economic Policy and the Rise and Fall of Empires

* Confronted with a fragmented world-countless governments, currencies, legal systems, religions, armies, languages and customs-Alexander of Macedonia understood the enormous benefits of unification. In the years before his death in 323 B.C., he conquered his world, breaking down the barriers to communication and commerce. Caesar Augustus' Empire-wide tax census made it possible to lower the rates of those who had previously borne all the tax burden, ended the confiscation of the incomes and properties of the most visible citizens and generally encouraged the accumulation and spread of wealth that continued until the accession of Commodus in 180 A.D. The following 100 years of spending, taxes and monetary manipulation yielded chronic inflation, however, and led finally to Diocletian's decree of universal wage and price controls. After the Pax Romana ended the quest for a world government and a world economy did not resume until the American and French revolutions in the late 18th century. The latter was a blind, angry rebellion against the political leaders who had strangled the French economy with excessive taxation and government regulation. Unlike Alexander and Augustus, who had begun with conquest and brought reforms afterward, Napoleon began with internal reforms made possible by the revolution. He lowered domestic tax rates, stabilized the currency and reformed French (and eventually European) law with the Napoleonic Code. o

Uniform domestic tax rates, trade distortions and economic integration

This paper examines the argument that uniform indirect tax rates are necessary to remove trade distortions for participating countries in economic integration. In a simple goods mobile, factor immobile international trade model it is shown that uniformity of tax rates is not necessary with either a general origin or destination based tax. Under a restricted origin basis, absence of distortion is only possible if trade is bilaterally balanced, in which case uniform or nonuniform rates across countries serve equally well.