Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries

26 Pages Posted: 28 Oct 2013

See all articles by Thornton Matheson

Thornton Matheson

The Urban Institute; International Monetary Fund (IMF)

Victoria J. Perry

International Monetary Fund (IMF)

Chandara Veung

International Monetary Fund (IMF)

Date Written: October 2013

Abstract

Global investment patterns mean that effective taxation of foreign investors is of increasing importance to the economies of lower income countries. It is thus of considerable concern that the historical framework for cross-border income tax arrangements is not always well suited to allow low-income countries (LICs) effectively to generate tax revenues from profits on foreign direct investment (FDI). Several aspects of this framework contribute to the problem. This paper discusses, in particular, the likely effect of a shift by major economies from the system of worldwide corporate taxation toward a territorial system on the volume, distribution, and financing of FDI, focusing on LICs. It then empirically analyzes bilateral outbound FDI data for the UK for 2002–10 to determine whether the move to territoriality made corporations more sensitive to host country statutory tax rates. Supporting evidence for this hypothesis is found for FDI financed from new equity.

Keywords: Corporate taxes, United Kingdom, Japan, Foreign direct investment, Developing countries, Low-income developing countries, Tax revenues, international corporate income tax, international taxation, worldwide taxation, territorial taxation

JEL Classification: H25

Suggested Citation

Matheson, Thornton and Perry, Victoria J. and Veung, Chandara, Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries (October 2013). IMF Working Paper No. 13/205, Available at SSRN: https://ssrn.com/abstract=2346255

Thornton Matheson

The Urban Institute ( email )

2100 M Street, NW
Washington, DC 20037
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Victoria J. Perry

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Chandara Veung

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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