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Of company taxation on foreign direct investment, the effect of

Author: YuanXinLi
Tutor: MaGuoQiang
School: Dongbei University of Finance
Course: Finance
Keywords: corporation tax FDI effect tax rate tax incitement
CLC: F832.6
Type: PhD thesis
Year: 2007
Downloads: 643
Quote: 3
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Abstract


With the development of economic globalization, the competition of absorbing foreign direct investment (FDI) is more and more fierce in the world, and the scale of FDI becomes unprecedented. During the course of absorbing FDI, both developed and developing countries use incitement including tax measures to attract FDI, besides eliminating barriers which block the flow of international capital. Corporation income tax (usually called enterprise income tax in China, which will be called corporation tax for short) influences the profit of international company, so it plays a special role in attracting FDI, and corporation tax incitement has been an important measure for a country to absorb international capital, especially FDI.The amount of FDI has increased annually since China’s reform and opening to the outside world, and it has been the first three largest in recent years of the world. The flow of FDI accelerates the fund accumulation, push forward technology progress, promote the adjustment of industrial structure, and create lots of work chance in China. A popular view in China is that the corporation tax policy has played certain role in absorbing FDI. However, the exact role of corporation tax in attracting FDI, what kind of effect did factors of corporation tax have on FDI, especially the structural effect of corporation tax have not get enough attention. It is significant for the improvement of China’s tax policy system to analyze and evaluate the effectiveness of corporation tax on FDI. In addition, during the course of emerging the "two laws" into one, it is important to analyze and judge the alteration of FDI after the new law is carried out through analyzing of the effect of corporation tax on FDI.My dissertation begins with the general theory of FDI, provides the theory framework for host country to absorb FDI on the base of FDI theory, analyze the tax factor and non-tax factor to influence the flow of FDI, and gets the result that corporation tax is the most important tax to influence FDI. On the basis of the above theory, I analyze the relationship between corporation tax and FDI, and examine the relevant factors of corporation tax. After that, the effect of corporation tax is focused, the influence of corporation on the amount and structure of FDI was discussed from aspects of tax obligation, tax rate, tax incitement and tax harmonization administration, and the influence of factors in new corporation tax after emerging the "two laws" on the flow orientation of FDI in China was forecasted and analyzed.There are 7 chapters in this dissertation.Chapter 1. Introduction. The background and significance of dissertation composition are explained, relevant documents are reviewed, research scope, method and structure of the dissertation are introduced, and creation and defect are provided in this chapter.Chapter 2. Basic theory of FDI. FDI has developed rapidly since 1960s. Economists in the world focused on it and formed various schools of thought. Among them, monopoly advantage theory, international product life period theory, marginal industry expansion theory and international production compromise theory are important in explain and analyze FDI theory. By analyzing the action of host country to absorb FDI, we can find the purpose of host country is to get advantage, and the condition to attract foreign funds is that the host country has got some certain advantage. FDI developed rapidly after World War II and manifested many new characteristics. The period of absorbing FDI in China can be divided into three stages, and each stage has different characteristics. The distribution of FDI is not even, which is influenced by many factors. For one country, the contribution of non-tax factors and tax factor are changeable according to the stage of a country’s economy. Tax factor is one of the important factors to influence FDI, but it is not golden rules to keep FDI.Chapter 3. Basic factors of corporation tax and its relationship with FDI. Whether corporation tax is levied or not is a hot issue, however, it has been a popular tax in the world. The 21st century has seen the main features of corporation tax-low tax rate and less preference. The factors of corporation make it play role, and the tax subject, tax object, tax rate and tax reference all influence the flow orientation of FDI. From the perspective of host country, the influence of corporation tax on FDI is realized by three variables: tax return of foreign investor realized in host country; total after tax return of capital in host country; tax rate on host country capital owned by foreigners compared with tax rate on domestic capital owned by host country investor.Chapter 4. The influence of corporation tax obligation on FDI. According to international practice, tax obligation is decided upon whether there exists a link between tax jurisdiction and tax subject or tax objective. Owing to different countries choose different jurisdictions, the tax obligation of foreign investors can be divided into limited and unlimited obligation. For FDI, foreign company faces the choice between branch and sub-company wherever it enters host country by green land or by purchasing. From the perspective of tax obligation, branch company dose not have the position of independent legal person, which makes it only carry limited tax obligation. Sub-company has the position of resident, which makes it carry unlimited tax obligation. Analysis shows that a country of limited tax obligation will absorb more FDI than a country of unlimited tax obligation. Different taxes are levied in different period of China, which makes the tax burden of different taxpayers different, and thus the floe of FDI.Chapter 5. The influence of corporation tax rate on FDI. As a factor of tax burden, tax rate have great effect on FDI. The analysis on influence of corporation tax rate on the scale of FDI in developed and developing countries indicates that both legal tax rate and real tax rate influence the scale of FDI, and the alteration of tax rate and the change of FDI are negatively related. The empirical study of China shows giving different forms of foreign company different tax policy of tax rate had great influence on the form of FDI. The analysis of the influence of tax rate on the choice of area of FDI indicates that tax rate of host country has great effect on the area choice of FDI. Flow of FDI in China’s provinces negatively related with the real tax rate of foreign enterprise income tax. On this base, I forecast the alteration of FDI under the lower tax rate of new enterprise income tax. Not considering other factors, FDI of China will increase after the 25% percent of enterprise income tax rate is adopted.Chapter 6. Influence of incitement of corporation tax on FDI. Based on study of objective of incitement policy of corporation tax, the relationship between forms of incitement and FDI, and the effectiveness of incitement policy on FDI, I empirically focus on the influence of incitement of corporation tax on the scale of FDI, industrial distribution and structure of source, and discuss the benefit-cost of FDI corporation incitement. In the case study of China, I find the tax incitement policy and the amount of investment in China are positively related, and the over preference for foreign funds owing to super citizen status is the main reason of rapid increase in tax heaven. The policy of tax incitement of China has played an active role in absorbing FDI, but we should not ignore its negative effect. The benefit-cost analysis of FDI corporation tax indicates that long period and large scale of tax preference not only pay great direct tax cost and large indirect cost, which has many shortcomings. At the end of this chapter, I reviewed the effect of tax incitement policy on foreign invested company in China sine the reform and open to the outside world, and analysis the possible effect of the adjustment of tax preference policy in the new tax law on flow of FDI, industrial distribution and structure of source country.Chapter 7.The influence of harmonization and anti-tax avoidance administration of corporation tax on FDI. Indeed, the taxable activity of FDI always relates to both the output country and input country of capital. The income of foreign investor should pay tax not only to host county, but also to the mother country, which unavoidably leads to international double taxation. The capital-output country usually takes some measures to harmonize according to international practice to reduce double taxation. Methods of tax exemption, deduction and credit by capital-output country contribute to the flow of FDI for capital-input country. The different attitudes and measures of different countries on anti-tax avoidance have different effect on FDI. I analyze how to improve the quality of harmonization and administration of corporation tax in absorbing foreign funds

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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