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The Taxation of Foreign Profits: a Unified View

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  • Devereux, Michael
  • Lockwood, Ben
  • Fuest, Clemens
Abstract
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, notably (i) when a profit-shifting motive is present; (ii) to some extent, when a corporate income tax is in place. The introduction of tax administration costs into the model can explain the empirical trend towards use of the exemption regime.

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  • Devereux, Michael & Lockwood, Ben & Fuest, Clemens, 2015. "The Taxation of Foreign Profits: a Unified View," CEPR Discussion Papers 10512, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10512
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    Cited by:

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    2. Devereux, Michael P. & Fuest, Clemens & Lockwood, Ben, 2015. "The taxation of foreign profits: A unified view," Journal of Public Economics, Elsevier, vol. 125(C), pages 83-97.
    3. Zadia M. Feliciano & Andrew Green, 2017. "US Multinationals in Puerto Rico and the Repeal of Section 936 Tax Exemption for U.S. Corporations," NBER Working Papers 23681, National Bureau of Economic Research, Inc.
    4. Margaret K. McKeehan & George R. Zodrow, 2019. "Balancing Act: Weighing the Factors Affecting the Taxation of Capital Income in a Small Open Economy," World Scientific Book Chapters, in: George R Zodrow (ed.), TAXATION IN THEORY AND PRACTICE Selected Essays of George R. Zodrow, chapter 12, pages 347-396, World Scientific Publishing Co. Pte. Ltd..
    5. Dominika Langenmayr & Li Liu, 2020. "Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK," CESifo Working Paper Series 8047, CESifo.
    6. Langenmayr, Dominika & Liu, Li, 2023. "Home or away? Profit shifting with territorial taxation," Journal of Public Economics, Elsevier, vol. 217(C).
    7. Alonso Movilla, Natalia & Zwolinski, Peggy & Dewulf, Jo & Mathieux, Fabrice, 2016. "A method for manual disassembly analysis to support the ecodesign of electronic displays," Resources, Conservation & Recycling, Elsevier, vol. 114(C), pages 42-58.
    8. Todtenhaupt, Maximilian & Voget, Johannes, 2021. "International taxation and productivity effects of M&As," Journal of International Economics, Elsevier, vol. 131(C).
    9. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo.
    10. Julio López Laborda & Jorge Onrubia, 2019. "Los retos de la fiscalidad societaria en la era de la economía digital: el estado de la cuestión," Policy Papers 2019-04, FEDEA.
    11. Pascal Saint-Amans & Clemens Fuest & Joachim Englisch & Deborah Schanz & Andreas Oestreicher & Nadine Riedel & Pola Schneemelcher & Wolfgang Schön & Luzius Cavelti & Christian Jaag, 2020. "Die OECD-Vorschläge zur Reform der Unternehmensteuer – ein Plan mit unerwünschten Nebenwirkungen?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 73(03), pages 03-32, March.
    12. Nikos Tsakiris & Panos Hatzipanayotou & Michael S. Michael, 2024. "Strategic capital taxation, tradable emission permits and global pollution," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 276-296, February.
    13. Ms. Li Liu, 2018. "Where Does Multinational Investment Go with Territorial Taxation? Evidence from the UK," IMF Working Papers 2018/007, International Monetary Fund.
    14. David Weisbach, 2014. "The use of neutralities in international tax policy," Working Papers 1414, Oxford University Centre for Business Taxation.

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    Keywords

    Corporate taxation; Multinational firms; Repatriation;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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