INTERNATIONAL TAX TRENDS AND COMPETITION: TAX SENSITIVITY OF U.S. FOREIGN INVESTMENT ABROAD (UNITED STATES)

The purpose of this study are to test the effectiveness of tax policy in attracting foreign direct investment and to examine the differences in tax policies between developing and developed country groups. The study finds that developed countries generally have higher effective tax rates and are more competitive in their tax policies, which tend to converge toward a group norm. Developing countries have lower average effective tax rates, less competition in their tax policies and tend toward divergent tax behavior--i.e. they tend to drift further apart from one another in terms of their tax policies. The study also finds that the tax sensitivity of U.S. foreign direct investment (FDI) is significantly greater within the developed country group than within the developing country group. In addition, the research explores the tax sensitivity of different sources of FDI. The study shows theoretically and empirically that FDI consisting of retained earnings and fresh investment respond differently to tax policy. These findings have implications for tax planning in general and tax arbitrage in particular.