International Taxation of Equity Returns

1
International Taxation of Equity Returns

• An imbroglio of tax laws
• and the
• MacDougall Model

2
Distinction between debt returns and equity
returns

• In most tax structures taxes are levied only on
  returns on equity. Therefore
• Debt financing is favorable in high-tax
  environments
• Equity financing is favorable in low-tax
  environments

3
Host Government Tax Policies

• FIRST!!! Host country takes first crack
• Investor direct rate of return
• Foreign rate of return (1-foreign tax rate)
• Withholding Taxes
• Penalty for parent paying

4
Home Government Tax Policies

• Policy considerations
• Treatment of foreign income and foreign taxes
  paid
• Exemption
• Tax crediting
• Deduction
• Double tax
• Taxation timing

5
Assessment of International Tax Policy and
Management

• The dichotomy of interest between host and home
  countries

6
Fundamentals

• Maximize profits by avoiding taxes
• Equity taxed by host
• Debt taxed by home

7
The MacDougall Model of International Capital
Flows

• Fixed supply of capital (k)
• Downward sloping marginal product of capital
  (MPK)
• Real interest rate
• GDP

8
Maximum Global Capital Welfare

• Tax Neutrality
• Capital export neutrality violation

Taxes Collected
Loss of World Welfare
9
The Worldwide Principle

• Capital export neutrality corrected

r
R
Total Home Taxes
r
A
B
R
MPK
C
D
R(1-t)
R(1-t)
MPK(1-t)
MPK
MPK(1-t)
O
O
K
K
10
Capital Import Neutrality

• Import neutrality holds

11
Capital Import Neutrality

• Import neutrality does not hold

r
R
r
A
B
R
MPK
C
D
R(1-t)
MPK(1-t)
MPK
MPK(1-t)
O
O
K
K
K
12
Evident Points

• Dependence of neutrality
• One or the other
• Neutrality perfect system