Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108777
Authors: 
Devereux, Michael P.
Fuest, Clemens
Lockwood, Benjamin
Year of Publication: 
2015
Series/Report no.: 
CESifo Working Paper 5231
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.
Subjects: 
corporate taxation
multinational firms
repatriation
JEL: 
H25
F23
Document Type: 
Working Paper

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