OECD Workshop on effective corporate taxation Corporate taxation on FDI; 1991-001 Kwang-Yeol YOO, Korean Ministry of Finance July.4th, 006
Table of contents I. How to measure tax burden on FDI II. Tax burden indicators 3 III. Conceptual framework IV. Caveats V. Main findings VI. Other findings 4 7 8 1
I. How to measure tax burden on FDI : alternative measures Tax burden on FDI depends upon three elements 1 3 Domestic corporate taxation of home country (i) and host country (j) International Taxation of cross border income flows (dividend, interest etc) Interaction of tax system between home and host countries Alternative measures on FDI 1 Bilateral indicators : - EMTR (Effective Marginal Tax Rate), EATR (Effective Average Tax Rate) - ATR (Average Tax Rate) : use micro-level data Multilateral indicators : use macro data
II. Tax burden indicators (EMTR, EATR) Forwarding-looking indicators 1 Exploit various system features embodied in the corporate income tax codes - Tax base (allowances, incentives, inventory valuation), - Statutory tax rate - Country-pair tax treaties (withholding taxes on dividend, interest income) - Taxation of foreign-source income (credit vs. exemption system) Measures the differences between the pre-tax return and post-tax return 1 EMTR vs. EATR EMTR: relevant for marginal investment projects, ex) King and Fullerton (1984), OECD (1991) EATR: relevant for infra-marginal investment projects ex) Deveureux and Griffith (1999), European Commission (001) 3
III. Conceptual framework - Assumptions Parent company in home country (i) undertakes investment (manufacturing) in the host country (j) through a wholly-owned subsidiary A 5 percent of after-tax return (for EMTR) and a 0 percent of pre-tax return (for EATR) A uniform inflation rate of.5 percent 7 types of joint financing (see the next page) between the parent and subsidiary 3 types of assets are purchased Tax Data for 1996, 001 are used No possibility of carrying loss or unspent credits forward For each case, 30 by 9 effective tax rates are derived The simple average values of country-pair calculated ETRs are used for analysis See the details in Corporate taxation of foreign direct investment income: 1991-001 (OECD Economics Department Working Paper No. 365) 4
III. Conceptual frameworks - continued MNE j in host country j purchases 3 types of assets with 3 types of financing Financing Debt (j) Equity (j) Retained earning (j) MNE (ij) Assets Machinery & Equipment Building Inventories Intangible Assets Host Country Taxation 5
III. Conceptual frameworks - continued 7 types of financing are jointly available for MNE ij Parent (i) Debt (i) MNE (ij) Debt (j) Equity (i) Retained earning (i) Equity (j) Retained earning (j) 7 types in total Home Country Taxation & International Taxation 6
IV. Caveats 1 ETRs cannot capture tax planning by MNEs - Financial incentives to shift profits from one host country to another are large and confirmed by numerous studies (transfer pricing, thin capitalisation etc) ETRs cannot take into account tax incentives specific to certain underdeveloped regions or certain spending items 3 Economic assumptions are tailored to manufacturing - income from intangible assets (royalty payments) is not covered ETRs are likely to represent the upper bound of actual tax burden Sensitivity analysis confirms that changing parameters do not change qualitative results significantly 7
V. Main findings 1 Trend decline in the overall tax burden on cross-border activities Corporate tax reforms in many OECD countries Partial convergence due to bilateral or multilateral cooperation 0 0 30 40 50 (31.4) (6.6) (.8) 0 0 30 40 50 (37.0) (33.3) 1991 1996 001 1996 001 - Effective marginal tax rates on inward FDI - - Effective average tax rates on inward FDI - 8
V. Main findings - continued A large variation in the tax burden on inward & outward FDI remains 60 eatr Variation of the effective average tax rates on inward/outward FDI, 001 60 eatr 50 50 40 40 30 30 0 0 0 0 - AUS AUT BEL CAN CHE CZE DEU DNK ESP FIN FRA GBR GRC HUN IRL ISL ITA JPN KOR LUX MEX NLD NOR NZL POL PRT SVK SWE TUR USA - AUS AUT BEL CAN CHE CZE DEU DNK ESP FIN FRA GBR GRC HUN IRL ISL ITA JPN KOR LUX MEX NLD NOR NZL POL PRT SVK SWE TUR USA -EATR on inward FDI - -EATR on outward FDI - Host country taxation is more crucial than home country taxation 9
V. Main findings - continued 3 As of 001, the EATR on inward FDI was relatively high in Japan, Turkey, Canada, Iceland and the USA * High EATRs related with high withholding tax or high statutory tax rate Change in effective tax rates on inward FDI measured relative to the OECD average 0 1996 001 0 OECD average - BTL 사업을통한민자활용 -0 TUR JPN CAN ISL USA BEL DEU ITA NZL ESP AUT CZE LUX NOR MEX PRT FRA POL GRC NLD KOR AUS FIN GBR DNK HUN CHE SWE IRL -Change in EATR -
V. Main findings - continued 4 The EATR on outward FDI was relatively high in Turkey, Japan, New Zealand *High EATRs associated with the adoption of credit system or limited network of bilateral tax treaties Changes in effective tax rates on outward FDI measured relative to the OECD average 1996 001 5 OECD 0 average BTL 사업을통한민자활용 -5 - TUR JPN NZL ITA GRC USA AUS MEX CZE ISL KOR CAN PRT BEL NOR POL DEU HUN CHE AUT ESP FRA GBR IRL LUX DNK FIN SWE NLD -Change in EATR - 11
50 40 30 0 0 VI. Other findings 1 Tax systems in OECD countries in general tend to favor inward FDI financed by debt from the parent FDI in machinery is taxed lightly compared with other forms of FDI 60 Debt Equity Retained earning 50 40 30 0 BTL 사업을통한민자활용 0 AUS AUT BEL CAN CHE CZE DEU DNK ESP FIN FRA GBR GRC HUN IR L ISL IT A JPN KOR LUX MEX NLD NOR NZL POL PRT SVK SWE TUR USA 1 EATR AUS AUT BEL CAN CHE CZE DEU DNK ESP FIN FRA GBR GRC HUN IRL ISL ITA JPN KOR LUX MEX NLD NOR NZL POL PRT SVK SWE TUR EATR USA The EATRs by financing source, 001 The EATRs by the type of assts, 001 machinery building inventory
VI. Other findings - continued 3 A MNE from a credit-system countries faces higher ETRs on its outward investment than its counter-parts from exemption-system countries 50 The EATRs on outward FDI exemption vs. credit system countries, 001 0. EATR std.dev 40 0.15 EATR/Std.dev 30 0 0.1 BTL 사업을통한민자활용 0.05 0 0 AUS BEL FIN DNK CHE exemption system HUN NLD Average CZE GRC ISL KOR NOR credit system POL USA 13