VA)UH in, PAN HI,3P

Woi Dsvehpmuel , Rl"_

Office d the Vioe PridentDeveopment Economics

The World BankMarch 1989WPS 47

Backgwud Par for th 1980 Wodd D.vbpm.nt Report

Considerations forthe Development of Tax Policy

When Capital is Internationally Mobile

Robert F. Conrad

For tax policy to encourage maximum investment of capital(both foreign and domestic) it is necessary to take into accountthe potential mobility of capital across international borders.Economic analysis of investment incentives should thereforeincorporate the effects of variables such as source rules, nexusrules, attribution rules, foreign tax credits, and so on, in additionto traditional variables such as legal tax rates and the revenueimplications of the distribution of the tax base.

e Pdicy. Pla, ad Resarch Cmpltex diu PPR WaskingPapewtodiasaninate the findingr of work ir ptnp and tong the xchang of ideus am8k taff and 11 others intadin devolpnment ie. These ppear cany the ae o

the authwi, reflect only ther views. ad shnuld be uad and cted acordingly. The findings, intApretations, nd concluries am theauthors' own. Tey should not be atiibuted to the Wodd Bank. its Boad of Direct. its managmnt. or any ofitms aember onntdm.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Poo, Ph-- aidh

To encourage investment and savings, policy- policy that increases foreign investments in amakers cannot ignore capital mobility even in capital importing country by X percent is poorlysituations where domestic nationals do not designed if it increases the flow of domestic in-invest abroad and foreign investors do not invest vestments abroad by a larger percentage.domesticaily. The potential for capital to moveacross intemational boundaries creates an International capital mobility provides bothopportunity cost for investment in a particular costs and opportunides for developing tax policycountry and throughout the world. In determin- within a country. Since investors tmat taxes as aing marginal effective tax rates it is necessary in cost of doing business, each country's tax priceaddition to traditional considerations, such as tax should reflect its opportunity cost of investmentrates and the distribution of the tax base, to (either foreign or domestic). These tax pricesincorporate the following factors: will differ between countries. Uniformity of

taxes across countries can therefore distort rather* Source rules (the basis for taxation). than improve investment. As long as there is

reasonable competition among the suppliers of* Nexus rules (which defie who must file capital, tax competition among govemments

and pay income taxes). may make distribution within the system moreefficient. In such a context international coop-

* Attribution rules (about accounting meth- eration may not be the best method for theods). develoment of tax policy for factors that are

internationally mobile.* The scope of bilateral accommodation be-

tween countries. Equity across countries, however defined,should be measured by how the net benefits of

None of these factors i.' supetior economi- capital investment (including tax revenues) arecally to the others as a basis for determining tax distributed - not by how the tax base is distrib-policy. If tax policy is to encourage intema- uted. In particular, tax treaties should not betional capital flows, explicit tradeoffs may have evaluated solely on revenue potential nor shouldto be made between increased tax revenues and they be canceled unilaterally. Instead theyincentives to invest. should be evaluated on pragmatic grounds in

terms of their effects on investor confidence andIn addition, tax policy should be evaluated their administrative costs.

with respect to net, not gross, capital flows. Tax

This is a background paper for the 1988 World Development ReporL Copies areavailable free from the World Bank, 1818 H Street NW, Washington DC 20433.Please contact Lupita Mattheisen, mom S13-067, extension 33757.

The PPR Working Paper Series disseminates the fidings of work under way in the Bank's Policy, Planning, and ResearchComplex. An objective of the series is to get these findings out quickly, even if presentations are less than fuly polished.The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank.

Produced at the PPR Dissemination Center

Considerations for the Development of Tax PolicyWhen Capital is Internationally Mobile

byRobert F. Conrad

Table of Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . 11.1 The Imp3rtance of International Capital Flows

and Taxation . . . . . . . . . . . . . . .2. Motives for Foreign Investment . . . . . . . . . . . . . . 4

2.1 Portfolio Investments .. . . . . . . . . . . . . . 52.2 Direct Investments . . . . . . . . . . . . . . 6

2.2.1 Horizontal International Investments. . . . . 62.2.2 Vertical Direct Investment . . . . . . . . . 7

2.3 Government Induced Motivations for/againstForeign Investment . . . . . . . . . . . . . . . . . 8

2.4 Summary. . . . . . .. . . . . . . . . . . . . . . 83. Income Taxation in an International Environment. . . . . . 9

3.1 Components of Tax Base and Definitions in anInternational Environment. . . . . . . . . . . . . . 10

3.2 Jurisdictional Basis to Tax. . . . . . . . . . . . . 103.3 Minimum Connection . . . .. . . . 113.4 Attribution Rules. . . . . . . . . . . . . . . . . . 123.5 International Coordination . . . . . . . . . . . . . 14

4. Incentives and Consequences. . . . . . . . . . . . . . . . 154.1 Traditional Economic Incentives. . . . . . . . . . . 154.2 Incentives Created by Administrative and Legal

Concepts . . . . . . . . . . . . . . . . . . . . . . 165. Comment and Perspective for Tax Policy Developing in

LDCs . . . . . . . . . . . . . . . . . . . . . . . . 185.1 Lack of Coordination and Tax Competition . . . . . . 205.2 Discrimination . . . . . . . . . . . . . . . . . . . 205.3 Tax Policy Implications for Developing Economies . . 215.4 Options for Domestic Tax Policy in LDCs. . . . . . . 22

6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . 26

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . 30Tables .. . . . . . . . . . . . .. .. . . . . . . . . . 35References . . . . . . . . . . . . . . . . . . . . . . . . 41

*Associate Professor of Public Policy, Duke University, rurham, NorthCarolina. Zmarak Shalizi provided many helpful comments on previousdrafts. Appreciation is also expressed to Bela Balassa for his help-ful comments. Jo Beth Mertens provdied valuable research assistance.

1 Introduction

The decrease in the relative prices of transportation and communicationshave been responsible, In part, for the growth in the international flow of goodsand services. It is no longer unusua; for a resident of Singapore to phone thelocal office of a US stock broker to purchase equity in a US firm or bonds in aUK firm. In turn, the firms whose shares or debt are purchased by aSingaporean may have Investments in numerous countries, accounts maintainedin different currencies, and financing from bank and insurance companies InSingapore. US residents may make depoqits n Canadiar. banks (a loan to thebank) which in turn may make loans to locail or foreign firms doing business inCanada or to firms in Brazil. Citizens of developed economies become employeesof companies owned by tbe government of Zambia or offer short-term consultingservices In Malawi either through private firms or through Internationalorganizations such as the World Bank.

The fact that goods, services and factors of production have the potentialto move across relatively fixed international boundaries raises difficulties forthe rational development of tax policy both within and between countries. Agovernment using principals of traditional optimal Income taxation, may findthat tax revenues decrease because factors move to other countries which havedistorted systems but lower effective tax rates (either total, marginal oraverage). This paper contains a review of the justification(s) for internationalfactor mobility, a review of current perspectives on the income tax treatment ofcapital, and an alternative way of viewing the problem(s) of international taxcoordination and competition. Income taxes will be the primary subject ofanalysis. Such emphasis does not imply that income taxes are the mostImportant aspect of international/local tax coordination or that income taxswitches are the most effective means of attracting (controlling) investment.Income taxes may be neither.' However, there is now substantial debate overthe appropriate use of income tax policy in an international environment.P

1.1 The Importance of International Capital Flows and Taxation

Changes in international capital flows can have numerous effects, includingbalance of payments effects, employment gains and losses, and tax revenueconsequences to government. Foreign investment and international tradebetween related parties has also become increasingly important. For instance, Ithas been estimated that 36 to 45% of US imports and exports move between

1. Governments employ a host of methods to attract or deter both domestic andforeign investment including trade taxes, licensing, quotas and otherrestrictions. See Guisinger ( 1985).

2. See Musgrave (1987) for one perspective.

members of related partles.' The proportion may be higher for countries whoseexports are natural resource based and who allow foreign Investment in thissector, e.g. Cameroon. Indonesia, Papua New Guinea, and Jamaica. Internationalintrafrlm trade Is also significant in developed economies such as Canada anddeveloping economies such as Korea.

Intrafirm trade of goods and services may benefit the current accountbalance In years when exports are significant. In turn these gains may be setby profit remittances in subsequent years, other things equal. IntrafirmInternational trade may respond differently or at a different rate to changes innominal or real exchange rates relative to true arms-length transactions. Suchdifferentials may complement or offset policy Initiatives by government. CapitQlInflows (outflows) may be sufficient to change an economy's real exchange ratedepending on the composition of investment and the rate at which Investments(remittances) are made.4 Thus, governments coiacerned about terms of trade andthe balance of payments may have to incorporate intrafirm trade effects intopolicy planning.

Employment effects of International capital movements have beenrecognized for some time, and governments have created numerous programs toattract such investment. For Instance, the "maquiladora" program in Mexico isclaimed to have induced 722 "sister" plants of foreign investors which employover two hundred thousand workers and produce electronic components, textiles,drugs and other goods.5 US firms are responsible for over half the people(35,000) employed In the electronics industry In Malaysia. Th se examples andthe numerous incentives offered by almost all developing e; ies (Guisinger1985) bear witness to the fact that countries are aware of tential impactof foreign Investment.

International capital flows may have a significant impact on governmentrevenues. To the extent that foreign investment Increases intrafirm or arms-length trade, export and import taxes may be affected. In addition, incometaxes froin foreign investors may be significant. In 1983 over 70% of totalincome taxes, including oil related income taxes, in Indonesia were collectedfrsm foreign investors, while foreign investors accounted for almost 50% of non-oil related corporate income taxes. 6 Preliminary evidence suggests that asignificant amount of total business income taxes are collected from foreigninvestors in Malawi which Implies that tax revenue from foreign investments can

3. Little (1986).

4. Such effects can be significant. For instance, Harberger (1986) suggestsimposing a tax on capital imports to offset an externality created by changesin capital inflows in Chile.

5. Mongelluzo (1986) This program is designed for both exports and employmentgains since products must be largely exported to qualify for the program.

6. Conrad (1986).

-2-

be uignlfIcanto,n for small agricultural based economies.? This should not bea surprise. In a developing economy, tax collections will generally besignificant in modern manufacturing relative to traditional sectors, and businessIncome taxes will generally be greater than personal taxes.0 Thus, to theextent that foreign investment is concentrated in the modern sector, theproportion of business related Income taxes paid by foreign investors should besignificant.

Finally, countries are aware of the potential effect that interjuriedictionalvariation in taxation has on both domestic and international investment withineach country. Tax sparing provisions have become more common in tax treatiesbetween the capital exporters and importers.' The effect of such provisions isto preserve the tax incentives for foreign Investors which would be nullified inother circumstances. In addition, countries are increasir.gly aware of what hasbeen labelled "tax induced capital flight", where tax incentives or low levels oftaxation create an incentive for domestic nationals in one country to Invest inanother.' 0 The recent controversy about the effect of US tax rules on "capitalflight" from Latin America Is one example of this phenomenon." Under US taxrules non-residents are not subject to US tax on Interest from deposits held InUS banks." Latin American countries, many of which use the source principal(see below), claim that this exemption has induced firms and individuals to

7. This statement is based on a sample of income tax returns collected as partof the Malawi tax reform effort.

8. This is true for a variety of reasons including the adoption of modernbookkeeping techniques in the modern sector, the relative ease of tracingtransactions, the low level of personal income and the relative small numberof taxpayers in the modern sector.

9. Tax sparing is a method where the home country of a foreign investors allowsa credi for taxes computed without incentives. This allows the foreigncountry to provide effective incentives for foreign investments. In effect,the home country allows a credit for foreign taxes which are never paid.The United States is an exception to this trend since the United States doesnot allow tax sparing provisions in any of its treaties.

10. H. David Rosenbloom has suggested to me that "capital flight" is largely apejorative term void of any meaningful content. What one country sees as"flight" is seen as increased investment in another. Whether such outcomesare the result of an efficiently operating market and or a cost may be oneof perspective.

11. See McLure (1987) for further development and analysis. Also seeKarzon(1983) for a detailed development of international tax evasion.

12. Under prior US law such income was defined to be non-US source. In 1986,such income was defined to be US source but was then explicitly exemptedfrom taxation.

-3-

Invest in the US at the expense of further capital tormation and tax revenuesIn these countries.1

An implication of the preceding discussion is that no country can ignorethe potential for taxation to affect capital formatk.n within its boundaries andno countrY can ignore the potential effects of Income taxes Imposed by othercountries on domest!c investment and revenue. The next sections are designedto examine the motives for foreign investment, to provide an outline of taxprovisions which are relevant for international investment and to provide ageneral framework for how international tax considerations may be incorporatedin developing tax design for a particular country.

2 Motives for Foreign Investment

International flows of factors and outputs, capital in particular, vary andcan be conducted in numerous forms; e.g. corporations, banks. individuals,partnerships both domestic and non-domestic."4 The following definitions will beused in this paper to provide a consistent framework:

Portfolio: Investment[sl made by an economic agent [firm or Individuallwho does not exercise direct control over operations.Portfolio investments can be in either debt or equity form.

Direct: Equity investments made by an economic agent whoexercises substantial or complete control over operations.

The distinction between portfolio and direct Investment is sometimesclouded.15 Legal definitions of control may be arbitrary and may vary betweencountries.' 6 Nevertheless these definitions will serve for present purposes.

13. McLure (1987) has noted that if the Latin American countries employed theresident principal the consequences would be thp same since theadministrative difficulties of findlng the tax base and collecting the tax aresignificant.

14. This section contains only a brief summary. More extensive discussions canbe found in Caves (1982), Bergston, Horst and Moran (1979) and Kopits(1976)

16. For instance, a corporation which owns 26% of the equity of a firm may nothave direct control but may be able to exercise substantial operationalcontrol via use of technology, patents and management services. See Smithand Wells (1976). Banks which make loans to foreign firms may exercisecontrol over investment and operations should the firm find itself infinancial difficulty.

16. Under US Law a "subsidiary" is defined to be a corporation for which theone agent owns 10% or more of the equity of a firm, while under Japaneselaw the minimum stock ownership is 26%.

-4 -

2.1 Portfolio Investments

Portfolio investments, either equity or debt, are a common means forcapital to flow between countries. The basic economic motivation for this typeof investment Is straight forward: maximization of risk adjusted returns from aportfolio of assets. Identical assets: e.g. oil wells, in two different countriesmay not have the same risk structure because of differexnces in markets orgovernment policy within and between the jurisdictions. Risks may be countryspecific as well as Industry or market specific. 17 Returns from similar assets maybe positively related acro3s jurisd 't ns, but the relationship is not perfect,making diversification via internats 4l capital flows a potential strategy forrisk averse investors. 16 The optioni . ' any Investor to purchase shares or makeloans in a country other than his coAntry of residence offers the potential forgreater returns and/or greater diversification, given returns relative torestricting investments to a single country."'

A second related motivation for portfolio Investments is to capture changesin exchange rates. That 15, Investors may invest In particular countries tohedge or to speculate in potential changes In relative exchange rates. Portfolioinvestments may be in the form of non-interest bearing deposits of foreignexchange, or in equity or debt instruments denominated In a foreign currencywhere the investor has the opportunity to earn a return from investments inaddition to returns from changes in relative exchange rates.

Most portfolio investments are made by firms and banks. That is,individual investors do not directly participate in international portfolioinvestments to a significant degree. Rather, individual investors participate viaequity or debt in firms which funnel individual savings to various parts of theworld.20 Firms and banks may have a comparative advantage in evaluating andinvesting in foreign markets. Also, transaction costs of foreign portfolioinvestments may be higher than similar domestic Investments because ofcurrency exchange cost, administrative costs of holding assets in more than one

___________

17. See Lessard (1982) for attempts to measure country specific risks. It Is nowcommon for banks and large corporations to employ experts in country riskanalysis.

18. For instance, oil wells in Indonesia and Ecuador made be subject to thesame International price risks, but the exchange rate risks of the twocountries could be quite different.

19. Whether investors wish to invest in another country is a different issue.Clearly, an investor is no worse-off with the option to invest in a foreigncountry than she would be with a prohibition on international flows offactors.

20. Exceptions to this general statement are apparent. Muuh "capital flight" Indeveloping countries may be in the form of individual diversification.

- 5-

country, etc. These costs may make fims and banks efficient Intermediaries forthe International transfer of capital.n

2.2 Direct Investments

Direct Investments are generally made by "multinational corporations"(hereafter MNC). Direct investment Involves substantial control over operationsand use of returns from the foreign Investment. In addition, direct Investmentoften involves some type of non-market trade (e.g. either goods or services)between the domestic ftirm and the foreign operation. Direct investmentsgenerally take one of two forms. Foreign subsidiaries are "separate' legalentities and are generally resident In the country where the Investment ismade." Direct Investment may aiso be made through an unincorporated branchwhere the Investment is an extension of the operations of the foreign firm.2The decision to form a forc1gn subsidJary rather than a branch is a function ofsegregating risks (if a foreign subsidiary becomes bankrupt then the parent isliable only for the total equity Investment), organization convenience, andgovernment policy (e.g. tax effects and foreign Investment laws). Regardless ofthe organizational method, foreign Investment is economically speaking, amultiplant operation which might be multiple output as well. Two general typesof multiplant operations have been Identified: horizontal and vertical.H

2.2.1 Horizontal International Investments

Horizontal International investments are replications, to various degrees, ofoperations by firms; e.g. beverage plants In various countries held by the samefirm. This type of investment is justified by greater use of Intangible assets,scale economies, and economies of scope. A firm may hold a patent, a brandname, or some production process which may exhibit the characteristics of apublic good. If thes-s processes were generally known then the firm would lo:eits comparative advantage In a pariAcular product. Thus, firms may engage in

21. Portfolio diversification on the part of frms has been subject to criticism onthe grounds that well diversified individual Investors can change theirpersonal portfolios in response to changes in firm policy. It is argued thatfirm (or bank) managers should not attempt to diversify for stockholders andtreat investments in a risk neutral manner. This criticism breaks down inthe presence of comparative advantage and transaction costs. In thesesituations, investors may self-select firms which offer portfolios In accordwith their own preferences and these individuals may do so at lower totaland marginal cost.

22. Dual resldent corporations are also common.

23. Branches have been common in natural resource projects and in some typesof banking.

24. The discussion which follows is based extensively on Caves (1982).

-6-

direct foreign Investment to use thl knowledge while maintaining control overthe intvrnal public good. These lnternal public goods may create scaleeconomlea and economies of scope which enable profitable foreign investment.3

The decision to engage In direct foreign Investment relative to export orto engage in licensing agreements may depend on many non-government policyparameters. Transport cost of exports relative to local production Is clearly afactor. There may also be decreasing returns to scale after some point for anyparticular plant. Thus, expansion Into foreign markets may be cheaper with twoplants of optimal size relative to one In the home country which would havehigher marginal cost. Licensing may be arranged when property rights are wellestablished and/or the owner of the patent or technique is not concerned aboutreputation effects regarding others' use of a particular process. When qualitycontrol is Important and firms are concerned about access to confidentialintormation, direct investment may be the preferred alternative.

2.2.2 Vertical Direct Investment

Natural resource projects are the traditional example of vertical directforeign Investment. Integrated petroleum producers operate In many countrieswith operations which vary from exploration to distribution. However, verticaldirect Investment In natural resource projects must be the result of anothermotivation or economic process since it Is possible for there to be separateproduction, exploration and distrtbution firms. One justification for the verticaldirect Investment is related to "transactional" gains. According to Caves (1982)."The vertically integrated firm internalizes the market for an intermediateproduct, just as the horizontal MNC Internalizes markets for intangible assets."Complete contracts between Independent parties are impossible to write andadminister In the presence of uncertainty. 2 ' Thus, firms may find It in theirinterest to control sources of supply via integration if the costs of suchint-rnal operations are lower than the risk adjusted costs of entering contracts.

Natural resource projects are not the only example of vertical directinvestment. Firms may design production techniques for various lntermediateproducts to take advantage of wage differentials across countries. Computercomponents are often produced in relative low %age countries and used toproduce computers In high wage countries. Such policies may enable the nrm tooperate an integrated operation where costs of producing the final product are aminimum.

25. See Rollinson (19886) for the development of a model where internal publicgoods have International investment effects.

28. See Williamson (1971) for further discussion of the Internal organization offirms.

-7-

2.8 Government Induced Motivations for/against Foreign Investment

Government policy (or Intergovernmental policy) may affect the pattern offoreign Investment. A standard example is the use of Import tariffs or quantityrestrictions to foster domestic production. For Instance, Indonesia has an Importban of assembled automobiles. This policy has created a number of IndonesianInvestments by foreign firms In auto assembly.27 Other governmernt policies alsoaffect the motivation for or against foreign Investment. These policyInstruments include: policy regarding access to foreign exchange andremittances, "Incentives" such as cash grants, perfomrnance requirements,restrictions (or Inducements) regarding foreign Investment In particular sectors,and Income taxes. Examples include domestic ownership requirements oIparticipation (e.g. Indonesia), access to government financing (e.g. shale oil InCanada), export licensing rules and duty drawback systems (e.g. Malawi),subsidized prices for inputs (e.g. electricity).0

Income tax policy has often been used as an Incentive for or a:-ainstpartivular investments. These Incentives have included tax holidays -.Indc esla under prior law), export incentive schemes where lnvestori allowedadditional income tax deductions or credits for exports (e.g. Malawi), lower(higi0r) rates for particular industries (e.g. Zambia), and accelerateddepreciption (sometimes negotiated on a case by case basis).

2.4 Summary

The types of and motivations for foreign Investment discussed above areextensions of standard economic models of domestic investment. That Is,domestic firms may engage In multiplant operations, either horizontally orvertically, a single government can discriminate for or against certaininvestments, and investors can create diversified portfolios of various assets.The true distinguishing feature of foreign Investment of any form is that factorsmove across international boundaries. This may be obvious but it has importantconsequences for investment and the role of public policy, tax policy inparticular. First, international boundaries may artificially create differentmarkets for the same product which would not be present in their absence.These boundaries and the different cultural and political distinctions theyreflect may increase the cost of investment for foreigners relative to domesticnationals who know the language, the traditions, and the policies of thecountry. However, domestic Investors may not have access to brand names,patents, and other factors which create a cost advantage for the foreigninvestor. Such differences imply that the supply elasticity of investment funds

27. It has been estimated that the f ilue added of Indonesian assembly Isnegative when valued at world prices since the import cost of the kits usedto assemble the car is greater than the cost of a complete imported car.

28. For a complete description of the nature of non-tax Incentives see Guisinger(1985)

-8-

or the elasticity of demand tor investments within a particular cour tV may bediffe.-ent for foreign Investors relative to domestic Investors.

Second, government may be able to Identify Investment according toownership (domestic - foreign) which It may use In the development of policy.That is, government may use the ownership of factors by nation of origin as atool in developing policy and to discriminate for or against foreign relative todomestic owners. The tact that governments use this distinction is clearlyobvious, and in the International taxation field has created calls forcoordination and other policies to limit government use of this information.However, the need for coordination and limits on government use of informationto discriminate may not be completely justified. Economic discrimination doesnot necessarily imply ineMciencies either within a particular country orglobally. In addiOon, discrimination based on reasonable economic criteria mayhave desirabli dib.ribution consequences. If foreign investors are "wealthier"than domestic Investors and foreign investors' demand for investment in aparticular country is relatively inelastic, then higher taxes on the foreigninvestor could have both desirable eMfcency and equity consequences. 29

3 Income Taxation In an International Environment

Traditional public nnance has concentrated on two aspects of tax policy:the rate(s) and the computation of taxable income relative to real economicincome.30 More complexity and more degrees of freedom are Introduced whenfactors are free to move internationally. Some of these issues are discussed Inthis section. 31

29. Furthermore, governments constantly discriminate, in an economic sense, Intheir use of tax policy. Non-neutral depreciation methods, progressive ratestructures, credits for particular activities, and the double taxation ofcorporate income are common examples of such discrimination. Discriminationis also inevitable in a second best world and where distributionalconsiderations may enter. Whether discrimination for or against foreigninvestment is any worse than the types cited in this note is an empiricaland/or a normative question. However, from an economic perspective theissue is whether governments, Individually or collectively, can use additionalinformation to create efficient policies which coincide with distributionalobjectives.

30. A description and analysis of these economic incentives is beyond the scopeof this paper. Tax incentives in essentially closed economies has beenstudied extensively. For instance, see Atkinson and Stiglitz (1980), Boadwayand W31dinsen (1984) and the particular studies cited in these books.

31. A number of studies contain an analysis of taxation in an internationalenvir .-ment including: Boskin and Gale (1986), Bovenberg (1986), Caves(1982,. Dieter (1982), Dutton (1986), Hartman (1984, 1986), Horst (1978),Kopits (1976a,b. 1980, 1981). and Mutti and Grubert (1985, 1987).

- 9-

3.1 Components of Tax Base and Definitions In an International Environment

Government must determine a minimum of four factors In addition to therate(s) and the computation of the base to determine taxes due within aparticular jurisdiction: the jurisdictional basis to tax, a determination of aminimum presence below which an economic activity Is not taxable, attributionrules for the base, and the degree of coordination with other countries viaexplicit tax rules or treaties.

3.2 Jurisdictional Basis to Tax

The jurisdictional basis to tax may be either "residence" or 'source" or acombination of the two.32 axation based on country of residence Implies thatall economic activities carried or, by a legal (or tax) resident of a particular,.ountry will be subject to tax. If the residence principal were used exclusivelythen a government would tax all income of residents regardless of the locationof the activity and non-residents who carry on economic activity in the countrywould be exempt from local taxation. T iis would Imply that foreign Investmentcarried out by a non-resident firm would be taxed only In the country ofresidence and not in the country where the activity Is located.

A second basis of taxation i_ the source principal. Under this principaleconomic activities carried on within a particular country would be subject toincome taxation regardless of residence. If this principal were consistentlyapplied by all countries then income "sourced' in a particular country would betaxed only once In the country where the income is attributed.33

Most developed countries tax both on residence and source. For instance,the United States taxes the "world-wide" income of US citizens and residents,while taxing only "US source" income of non-residences. France generally taxesthe domestic income of residents and non-residents, but may exempt the "foreignsource" income of either. Developing countries also vary with respect to theuse of source and residence principals. For Instance, Malawi employed thesource principal exclusively until 1987 and Indt;nesla employs both the sourceand residence principals. 3 '

If countries vary with respect to the jurisdictional basis of taxation, asthey do, then there exists the potential for so-called "over-Lhpping" (double) or

32. Taxes may also be based on the destination principal. Destination principaltaxes include import and export taxes. The use of the destination principalin the income tax area is limited. It Is sometimes used In formularymethods such as the three factor formula used by some states In the UnitedStates. See Conrad (1985, 1988b).

33. See below for a discussion of attribution rules.

34. See Table 2 for a comparison of different sources of variation.

- 10 -

under-lapping taxation In the absence of International coordination. ForInstance, a resident of a country which taxed exclusively on the sourceprincipal could invest In a country which exclusively employed the residenceprincipal and escape taxation all together." Alternatively, a citizen of thecountry which taxed exclusively on residence would be taxed twice on theincome from any activities undertaken in the source country. Whether such aresult Is "fair" is a legal issue which may be completely separate from theeconomic issues of equity and efficiency. For instance, if the person who wastaxed twice was a discriminating monopolist and the person not taxed at all wasperfectly competitive operating with zero economic profit then no efficiencyconsequences would result from this pattern of taxation if the combinedeffective tax rate on the discriminating monopolist was 100% of economic incomein both countries. Alternatively the person subject to potential double taxationcould be placed at a competitive disadvantage relative to the person not taxedat all. Depending on the particular facts and circumstances, lack ofinternational coordination with respect to the Jurisdictional basis to tax cancreate economic incentives for the flow of goods and factors.

Positive economic analysis has little or nothing to offer with respect tothe appropriate Jurisdictional basis for taxation. From an economic perspective,income is attributable to people and not to places or things." Normativeeconomics may also have little to say with respect to the appropriatejurisdictional basis. From a normative perspective the Issue may be thedistribution of the tax burden between individuals or perhaps countries.Whether source is preferred to residence will depend on the resultingdistribution of tax burdens within and between individuals and countries, andnot on the abstract principals per se.

3.3 Minimum Connection

Nexus rules define the conditions under which a potential taxpayerbecomes liable for filing and paying income taxes. For instance, many countriesgrant personal exemptions which enable low income persons to escape taxation.In the international environment nexus rules determine when an activity of aneconomic agent is sufficient to make that agent taxable in a particularjurisdiction. Concepts generally applied in this area are location of services(e.g. labor services by a IJK resident for the Government of Malawi performedin Malawi may be subject to tax in Malawi while labor services for the

35. The same result would hold for a worker of the source country working inthe residence country.

36. The residence principal might be preferred on this basis but the justificationIs tenuous at best.

- 11 -

Government of Malawi performed in the UK are not subject to Malawi tax"), andthe concept of "permanent establishment" for business enterprise."

The presence of nexus rules and variation across countries in theirapplication gives factor owners a second degree of freedom with respect to taxregime choice; i.e. factor owners may be able to decide whether to be subjectto taxation in one or more countries simultaneously. This decision will bebased on the combined effective tax rate of the activity under each alternativetax regime.3" Government may also use nexus rules to discriminate in favor of(against) foreign Investors: e.g. a country could establish a high threshold forminimum connection and effectively exempt foreign investors from tax whilerequiring all domestic residents to file and to pay income tax.

Nexus rules have been a source of controversy between capital exportingand importing countries. Some capital importing countries have sought acomprehensive low standard for determining minimum connection, while somecapital exporting countries (and the agents they represent) have sought morerestrictive nexus reules for capital Importing countries via treaties. 40 Theincentives of capital importing countries are clear: the low cost ofadministration (usually assumed) relative to collections Is sufficient to inducecapital importing countries to expand the tax net for foreign investors as wideas possible.

3.4 Attribution Rules

A country which applied the residence principal on a world wide basisexclusively would have to develop attribution rules solely on the basis of thelegal owner of the income.41 Countries which employ the source principal mustattribute the income to particular political jurisdictions. The traditionalstandard has employed separate accounting where each permanent establishment

37. Note that the UK resident might be subject to income tax in the UK on thetotal income, both Malawi and UK source

38. Permanent establishment is a legal concept relative to the source principaland is based on the so-called "force of attraction theory" where there is apresumed level of economic activity sufficient for the firm to attracteconomic income to a particular location.

39. That is, the optimal regime choice will be determined by a discretecomparison of the after tax returns from being taxed In one countryexclusively or in both.

40. Concerns regarding comprehensive and expanded nexus rules are reflected inmodel tax treaties such as the UN Model Treaty.

41. The attribution of income between residents of a particular country may notbe as transparent as it appears when applied in the corporate tax area.For instance, if separate corporate reporting of two related domesticcorporations were required then inter firm allocations may be required.

- 12 -

(or group) in a particular country is treated under the arms-length standard.That is. an attempt is made to compute income for related parties withInternational investments as if they were separate businesses doing businessexclusively In each country. Under separate accounting, f.o.b. prices of outputsare used to attribute revenues to the location of production or distribution andc.l.f. pricing of inputs are used to attribute factor coSts.'2

The use of separate accounting may be difficult to administer, and thistechnique has been subject to some debate.43 The difficulties with separateaccounting involve the ability to determine arms-length prices for goods andservices traded between related parties. Arms-length prices may not be knownand/or could be different across firms because of different valuations ofidentical goods and services due to variation in risk preferences or differencesin willingness to pay. Attribution of items such as interest expense, corporateoverhead, research and development, and the pricing of intermediate outputs areexamples of the difficulties of separate accounting.

Related to these examples are the technological phenomena of economies ofscale and scope. Attribution of the economic income (positive or negative) fromthese technological advantages using separate accounting may be difficult orimpossible to establish. The difficulty of attributing income (even within thefirm) combined with variation in other aspects of income tax law acrosscountries have given rise to transfer pricing problems. Transfer pricing Is alegitimate concern of government, but transfer pricing must be placed inperspective for two reasons.

First, there will always be an Incentive to under report income, regardlessof the method of attribution. Investors will always have an Incentive to underreport income if the probability of strict enforcement Is low. No method ofattribution will solve this problem.

42. The use of f.o.b. and c.i.f. prices may themselves be arbitrary definitions ofincome attribution. It is clear that firms desiring to determine economicperformance of profit centers would use such pricing. However, there is noeconomic reason to use such rules for tax purposes. Attribution rules wherethe destination principal is used to attribute revenues and f.o.b. prices areused to attribute costs would work just as well from an efficiencyperspective if all other aspects of the income tax laws of all countries werethe same and neutral. The distribution of the tax revenue may be differentbut the distribution of investment might not change.

43. Alternatives to separate accounting include specific allocation (i.e. theallocation of particular components to specific locations; e.g. Interest IncomeIs allocated to location of commercial domicile), and formulary apportionmentused by some states in the United States. Formulary apportionmentattributes total income of a "unitary business" (another vague concept)based on one or more ratios. For instance, a formula could consist, in part,of the ratio of sales attributed to Zaire to total world wide sales. Thisfraction would be multiplied by total income to compute income attributableto Zaire.

- 13 -

Second, the economic Incentive to transfer price arises In the firstinstance because of variation in other aspects of the tax laws within andbetween countries and not because of the detects of separate accounting. If anInvestor's objective is to maximize after tax profits of combined operations,transfer pricing is of little value if a dollar reduction in taxes in Columbiaresults In a dollar increase In taxes somewhere else. Thus, the difficultiescreated by separate accounting may not create marginal incentives in a worldwith equal marginal effective rates. 44

3.5 International Coordination

International coordination (or lack thereof) for a single country may taketwo forms: 1. domestic definitions and administration, and 2. development of anexplicit treaty network. Domestic definitions relate to the computation of thebase, the rates, and the presence of accommodation for income taxes paid toother countries. A country can coordinate Its policies with internationalpractice by using internationally accepted norms (if present) for nexus rules,attril ktion, and computation of the base. If a country employs the sourceprir..&pal exclusively (and the system can be administered) then these policiesmay be sufficient to ensure international tax coordination. This is true sinceany foreign investment of domestic nationals will not be taxed by the countryof residence limiting the potential for overlapping taxation.

If a country employs the residence principal or a combination of residenceand source then that country may have to address the problem of overlappingtaxation with respect to the potential investments within its boundaries andinvestments of its residents orerseas. International standards have evolvedwhich enable the "country of source" to tax the income of all economic activitywithin its borders (both resident and non-resident). This implies that acountry may not have to develop specific rules for foreign investment within thecountry (attribution rule exempted), but government might have to address theproblems of the foreign source income of its residents. Such recognition underinternational convention can come for domestic tax purposes in the form of adeduction or a credit for income taxes paid to foreign governments, orgovernment may exempt foreign source Income completely from the domestic base.

Tax treaty development is a second method for international coordination.This coordination is bilateral in nature and affords the opportunity for acountry to coordinate tax policy with major (or potential) trading partners. Ingeneral, tax treaties override the statutory law. This implies that items suchas withholding tax rates and certain definitions can be included in a treaty.Treaties also include provisions for the tax status of government personnel,students, etc. operating in the foreign country. Finally, treaties generally

44. The problem of distributing the tax revenues remains. However, this isprecisely the pcint. From rn economic perspective separate accounting isone method, among many, of distributing revenue between jurisdictions.Thus to the extent that one method is superior to another must bedetermined on revenue distributional criteria and not on the distribution ofthe base.

- 14 -

contain exchange of Information agreements which enable tax authorities torequest information relating to particular tax payers and competent authorityprovisions which provide a means for the settlement of disputes.

4 Incentives and Consequences

4.1 Traditional Economic Incentives

The fact that income taxes vary across jurisdictions is hardly surprising.Some standard indicators of lnterjurisdictional differences are presented inTables 1-3. As shown, business income taxes vary across countries withrespect to rates (Table 1), computation of the base (Table 2). special incentivessuch as cash grants (Table 2), and principles employed to determine the basisfor taxation (Table 3). If these and other sources of variation combine tocreate non-neutral tax wedges both within and between countries thenallocative Incentives for factor flows are created. 4' These Incentives can affectthe levtl of savings and investment within and between sectors as well aswithin and between countries. Capital-labor ratios, real wage differentials(after accounting for immigration restrictions), and risk exposure can differbetween countries as a result. Some of these Incentives are outlined below.

Positive effective domestic capital tax rates Increase the cost of capital tofirms and decrease the returns to domestic savers. Other things equal suchwedges may lower the capital stock withln a particular jurisdiction. If theeconomy is closed then the decrease in the capital stock is accomplished via a

46. The analysis presented below Is descriptive. For more analytical treatmentsof allocative Incentives see Fullerton and King (1985) who examineIntersectoral incentives and Conrad (1985, 1988b) who examines incentivescreated by interjurisdictional non-neutralities. The conditional clause Inthe text should be emphasized for two reasons. First, it is possible, thoughunlikely, that all the non-neutralities cancel out leaving a neutral system(Conrad 1985, 1988b). For Instance, non-neutral depreciation In one countrycould be offset by attribution rules in that or another country. Thedistribution of the revenues between jurisdictions may be different relativeto a transparently neutral system but the allocation of capital may be thesame. Second, to the extent that "tax competition" between jurisdictions isefficient then allocative incentives may be a minimum. Such effects maynot be apparent in a comparison of tax laws since non-neutralities may benegotiated away on a case by case basis. For instance, the US state ofKentucky has reportedly granted (US)125 million in concessions to attract aforeign assembly plant from Toyota. If (US) 125 million is sufficient to putToyota in a zero tax (in present value terms) position then the investmentcould be neutral. It could be argued that foreign investors should paypositive taxes because of the benefits received by the jurisdiction (e.g.public services). Powever, income related charges are ability to pay taxesand thus by definition have little or no relationship to benefits received.Thus, a country which desires to recoup the cost of public service deliveryshould impose user charges, etc. where possible.

- 15 -

decrease In aggregate savings following the fall in net-of-tax returns assuminga positive savings elasticity. If the economy is open the fall in the domesticcapital stock may result from a reallocation of International portfolios of bothdomestic and foreign investors. Domestic investors will now invest outside thecountry while foreign investors will invest in their home or some other foreigncountry until net of tax returns are equalized. Thus, savings by domesticnationals, as opposed to domestic investment made by domestic nationals, neednot fall when the economy is open. Rather, domestic nationals may respond toIncreased domestic taxes by reallocating a fixed quantity of savings towardforeign investment.

Differential taxation across sectors within the domestic economy can createallocative effects across sectors given a particular level of total Investment andsavings. For instance, many developing countries offer significant investmentincentives in modern manufacturing (e.g. Malawi offers an investment allowancerestricted to the modern sector manufacturing). Such investments can increasemanufacturing investment relative to other sectors for which the economy has acomparative advantage (e.g. agriculture). 4

The incentive for debt finance is a third type of incentive created byapplication of t,.Lditional income tax approaches. The cost of debt may bededi Atible at the corporate level while firms are generally not allowed adedu tion for the cost of equity. Thus, there Is an incentive for firms toincrease their debt-asset ratios. This incentive can contribute to an increase Inan open economy's level of external debt. If marginal financing Is biasedtoward debt by a tax wedge then firms might seek external loans relative toeither domestic or external equity which might increase the economy's exposureto various shocks.4'

4.2 Incentives Created by Administrative and Legal Concepts

Differential incentives are also created by variation in administration andlegal rules. The factors discussed in the last section (e.g. nexus rules, etc.)can complement or offset more traditional tax incentives. For instance,administrative policies could affect the degree of discrimination between foreign

46. Traditional agriculture, including large estates which are taxable, may sufferbecause land is generally not depreciable. Diversification of an economy'sasset base may be a legitimate concern of government. However, the issueis whether differential taxation is the cost effective means of obtainingsuch diversification.

47. It could be argued that external equity can increase an open economy'sexternal obligations in a general sense. However, the difference lies in theobligation to repay. For instance, if an economy suffers from an adverseexternal shock which decreases profitability, foreign equity holders do nothave to be repaid while holders of external debt will demand payment on acurrent basis, if possible. Thus, external debt, as opposed to equity, canimpose short term. and perhaps long term, adjustments necessary toaccommodate lenders.

- 16 -

and domestic Investors. Developing countries have been accused of practicessuch as stricter audits and enforcement of foreign relative to domesticinvestors.4

Legal rulings and administration In one country can also complement oroffset policy In another. For instance, differences in attribution rules maycreate situations where income is characterized inconsistently. Other differencesinclude transfer pricing rules, definitions of debt, dividends, etc., source rulesfor particular transactiona (e.g. loans), and treatment of foreign exchange gainsand losses. Such inconsistent treatment can create situations where theeffective tax rate differs from traditional economic measures. The extent towhich traditional economic measures over or under estimate the true effectiverate will depend on the particular facts and circumstances of the investormaking generalizations difficult. For Instance, inconsistently administeredtransfer prices (including transport) can change both the total taxes paid by aMNC and the distribution of the revenue.

The presence of factor mobility combined with variation in tax rulesIncreases the administrative and enforcement efforts of government. Transferpricing and thin capitalization are two obvious examples of the problemsencountered. Such diMculties have been one factor in the call for moreInternational cooperation. There has been the perception that internationalconvention may favor capital exporting countries; e.g. lcwer withholding taxrates, strict definitions of nexus. etc. Attribution rules and administrationemployed by capital exporting countries can be complex and perhaps cannot beadministered by the tax administrations in most developed countries. 49 Thesecosts are offset to a degree by the International convention which generallyallows the country of "source" the right to tax the income first with thecountry of "residence" recognizing this right via a deduction or credit forforeign income taxes paid if the home country taxes worldwide income or by anexemption If the capital exporter employs the source principal. Developingcountries have recognized this advantage via attempts to incorporate taxsparing into various treaties.

The Incentive for cooperation both bilaterally and worldwide has beencounterbalanced by the self-interest of various governments and the interestgroups they represent. Competition for foreign investment has led todevelopment of incentive packages for particular investors which clearlydiscriminate. Capital exporting countries have also been under pressure todecrease the Incentives to invest abroad. For example, legislation such asSubpart F in the US and tax haven rules have been attempts to restrict theadvantages offered by the foreign tax credit for particular sectors andinvestments.

In summary, traditional types of incentives such as variation indepreciation rules, rates, etc. combined with variation in source and otherlegal/administrative concepts make the analysis of the net incentive to invest

48. In countries where this author has worked, it is common for foreignInvestors to claim that they are "easy targets" for the tax administration.

49. The UN Model Treaty is one example of efforts to address these issues.

- 17 -

domestically rather than abroad difficult. This complexity has also increasedthe degrees of freedom which both Investors and governments have inmanipulating Income and or attracting (or otherwise discriminating against andin favor of) particular investors either foreign or domestic. The benefits ofinternational cooperation are tempered by the self-interest of each government.All of these factors combine to increase the complexity of capital taxationwithin and between countries with a corresponding increase in administrativecost and effort.

5 Comment and Perspective for Tax Policy Developing in LDC's

The situation implied by the discussion in previous sections raises anumber of issues for the development of rational tax policy within a particularcountry and to the degree of international coordination. A discussion of thesetwo issues is contained in this section. The implications for development of taxrules in an LDC may depend on the extent to which international cooperation iseither necessary or desirable. For that reason the issue of internationalcooperation will be discussed first.

5.1 Lack of Coordination and Tax Competition

Three consequences resulting from lack of uniformity and internationalcoordination are capital reallocations, the potential for double or less than fulltaxation, and tax competition between countries. These three consequences areinterrelated. The effective tax rates by investor, by country will determine theextent to which capital is reallocated across borders. Thus, double and lessthan full taxation may affect the amount of capital investment within andbetween countries (e.g. the recent claims by Latin American governments aboutthe effects of exempt interest for deposits in US banks held by non-residents).In addition, tax competition can affect the revenues collected, both within andbetween countries. Thus, tax competition or coordination can affect the taxwedge.

Tax competition between countries has been claimed to be inefficient5,resulting in higher tax burdens on domestic factors, revenue losses, and otherinefficiencies. These effects may be offset or complimented by internationalrules such as tax credits, tax sparing, inconsistent attribution rules, andmeasures of the base. Increased uniformity and consistent treatment has beenadvocated as the preferred path for the resolution for these problems.

Three points should be noted with respect to the benefits of internationaluniformity. First, "tax competition" may not be inefficient. From an economicperspective it is unusual to hear claims for the efficiency of private marketsand then to hear claims of destructive economic competition between countries.Unless some market failure is relevant at the margin then there is no reason to

50. See Musgrave (1987) for one perspective of the potential costs of taxcompetition.

- 18 -

conclude a priori that tax competition is necessarily bad. That is, trom both anefficiency and equity perspective the net benefits (gains less all losses) of taxcompetition may be higher relative to coordination and less than completeuniformity. Tax competition and lack of uniformity may be the preferreduolution as factor mobllity Increases. Competition between countries may place.oounds on the level of effective taxation. In addition competition, combinedwith the potential for discrimination, can enable countries to determine whetherparticular investments or investors can bear more tax. Site specific rents andother factors may be present which enable countries to collect a greater shareof revenue from particular investments. This would not be the case Ifuniformity were present. That is, lack of uniformity and competitionsimultaneously restrict and increase the ability of particular governments.Taxes cannot be too high in a competitive environment or investment will fall.However, government is allowed to develop policies more consistent with custom,preferences, objectives, and administrative constraints in such an environment.

Second, competition may force governments to evaluate policy based ontrue costs and not relative to some standard which may be either arbitrary orin the interest of other parties. International tax conventions were developedfor capital exporting countries and at a time when few countries had substantialeconomic power. The rules developed at that time in that situation may not beappropriate for small developing countries seeking to attract investment which issocially profitable. In addition, the world economic situation is changing andwill continue to change in the direction of greater factor mobility, absentcontrols, where traditional capital exporters may not be the major source ofinvestment funds. 6 ' Thus, competition in the tax area may be more appropriatein a situation where the economic influence of a few capital exporters isdeclining with respect to the determination of the world price of capital.

Third, coordination, unless uniform and complete, may make the problems ofoverlapping taxation and capital misallocation worse.n2 Coordination withrespect to source rules, attribution rules, and even with respect to thecomputation of the base does not completely restrict government from creatingoffsetting incentivee. Governments can always give cash or other incentives aswell as use indirect and trade tax policy to offset revenue losses or loss ofcontrol over particular policy instruments. To the extent that such instruments

51. For Instance, the United States has become a net capital importer.Regardless of the underlying cause (deficits, terms of trade effects, capitalflight from unstable economies, etc.) this fact may indicate that the US maybe more open to trade than in the past. Increased openness by majorcapital exporters necessarily implies less control over international factormovements and interest rates. Tax competition in this case may be moreappropriate than coordination, where parties losing economic control may beable to influence the development of harmonized rules.

62. Since any contemplated practical tax on capital Is distortionary, taxcoordination and competition must be evaluated in a second best context.Thus, even a completely uniform capital tax system adopted by the entireworld can be less efficient and less equitable relative tax competition.

- 19 -

are less than perfect substitutes for Income tax policy, the welfare effects ofthe distortions could increase."

6.2 Discrimination

Uniformity and coordination may affect the ability of government todiscriminate for or against particular Investors or sectors (e.g. foreign relativeto domestic). Tax treaties and other efforts at coordination have been attemptsto limit the amount of discrimination In certain areas. However, efficiency andperhaps equity considerations Indicate that discrimination may be appropriate.For Instance, optimal tax theory in a closed economy Is based on the ability ofgovernment to behave like a monopolist and discriminate relative to thecompensated own and cross price elasticities of demand. Thus appropriate useof discrimination may Increase revenues, welfare, and depending on thedistributional objectives, equity.04 It was stated in Section I that factormobility across borders may provide useful linformation for the design of taxpolicy. If the elasticity of supply (or demand) for Investments to differentbetween foreign and domestic Investors then this lnformation might beproductively employed.

Three Issues arise with respect to the ability to effectively discriminate.First, discrimination may be costly. Recent tax reform efforts In de"'elopingcountries (e.g. Indonesia and Malawi) have noted the high cost of negotiatinginvestment packages and taxes on an Investor specific basis. However, If thesocial benefits are greater than the cost there Is no economic justification fortheir elimination. 55 Second, capital exporting countries, the United States inparticular, have been strong In their opposition to discrimination in the Incometax area. 56 This opposition may represent the self-interest of capital exporters

53. These comments imply that notions such as overlapping taxation may not beas much of a problem as they might appear. From an economic perspective,the issue is the combined effective tax rate, not how many tlimes the sameincome is taxed. Investors would clearly prefer to be taxed twice on thesame real economic Income and pay $5.00 In tax than to be taxed once andpay $10. {See Conrad(1985) for situations where this can occur.) Ifcompetition leads to more equality of effective tax rates between countriesthen the additional efficiency cost of sectoral or interjurisdictionalmisallocations are reduced. (The welfare cost of a capital tax could still bepositive.) Issues of overlapping taxation and equity are then related to thedistribution of the tax revenue between countries and not the distributionof the tax base or the number of times the same base is taxed.

54. See Atkinson and Stiglitz (1980) for cases where distribution and equity areenhanced or offset by discriminatory eMcient second best taxes.

65. Political considerations and the potential for bribery, etc. may be sufficientjustification for the elimination of such negotiations.

56. For instance, US rules disallow a foreign tax credit on so-called "sop-up"taxes by foreign governments.

- 20 -

with respect to the preservation of their revenue base in addition to concernsabout fairness. Third, tax competition could reduce discrimination relative touniformity and coordination. The ability of countries to discriminate againstparticular sectors or Investors Is limited by competitive pressure from othergovernments In attracting the same type of investments. In summary, Increasedcoordination and uniformity may not be the best method nor even result indesirable outcomes for the problems related to the taxation of Internationalcapital flows.

6.3 Tax Policy Implications for Developlng Economies

A developing economy faces numerous constraints in the construction ofcapital tax policy Including: the distortions introduced by capital taxation inother countries, capital mobility, administrative abilities, and administrativeresources. In general, a country would like to attract investment on thecountry's terms, simultaneously accruing both taxes and the other economicbenefits of an increase in the domestic capital stock. However, trade-offs mayexist and governments must determine whether incentives in favor of or againstparticular investments are worth the economic cost relative to budgetary andother constraints.

A developing economy should take into account the following considerationsin order to develop a reasonable tax policy:

1. Most countries cannot individually affect the international opportunitycost of capital either for foreign investors or domestic nationals. Achange in relative world returns over which the country has no controlcan change the relative incentive to invest in its jurisdiction.

2. The International cost of capital may not be uniform. The risk adjustedopportunity cost of investment may differ by the residence of theinvestor and/or the current tax situation of the investor.

3. Governments should be concerned about the intersectoral effects oftaxation as well as the ownership and size of the aggregate capital stock.To the extent that differential tax wedges are created between sectorswhich are inconsistent with the diversification objectives of the economy,efficiency and distributional objectives are hampered.

Flexibility and accommodation are also by these constraints. However,accommodation to international standards should be made only when it is in theself-interest of the country to do so. Finally, neutral internal taxation doesnot necessarily imply efficient taxation. It the effective tax rate Is uniformlyhigh then capital will have an incentive to move out of the country.Alternatively, uniformly low domestic effective taxes can be offset in part bydistortions in the tax law of other countries or by revenue transfers to homecountries if the neutral tax is imposed on foreign investors via the foreign taxcredit.

- 21 -

6.4 Options for Domestic Tax Pol'cy In LDC's

A simple model for capital taxation Is presented in this section. Nounique uniform tax system for all countries Is Implied by the preceding analysis.Thus this model is intended to serve as a framework for analysis rather than asa proposal. The model contains four elements: cash-flow taxes at the businesslevel, uniform withholding taxes on all distributions, adoption of the residenceprincipal, and tax treaties. Tax treaties may be optional depending on theparticular circumstances. It should be emphasized that a combination of cash-flow and withholding taxes on distributions can be consistent with eitherconsumption or comprehensive income tax principals. (See below.)

Cash Flow Taxation at the Business Level

Cash flow taxation at the business level includes the following elements:

- Immediate expensing of all assets

- No deduction for Interest payments

- No tax Incentives

- Treatment of all accounts on purely a cash basis

A number of administrative difficulties are eliminated by this type ofbusiness taxation. First, ad hoc or point estimates of real economicdepreciation are not necessary since all assets are Immediately expensed.Second, the bias toward debt finance is eliminated since interest is notdeductible. Third, the system is automatically indexed 'or inflation. Fourth,capital gains are automatically Included in the system since asset sales arepositive cash flows and thus are included in the base. The last two factorshave two benefits for a developing economy. There is no need to make anyadjustment for foreign exchange gains or losses. In addition, separatecomputations and schedules for capital gains and losses are not necessary. 57

Cash flow business taxes are generally easier to administer thantraditional income taxes, but difficulties remain. For instance, transfer pricesfor Inputs and products would still have to be deterr.iined; however thincapitalization rules, etc. would not be necessary. In addition, from an economicperspective a cash-flow tax is a tax on economic rent and not a tax on thereturn to invested capital. Thus countries could suffer both a revenue loss and

57. Capital gains taxation is particularly difficult to administer in developingcountries. In addition, countries which exempt certain capital gains (e.g.Malawi) risk revenue losses by having otherwise ordinary income artifticallyrecharacterized as capital gains as well as the revenue losses from theabsence of the tax in the first instance.

- 22 -

additional oeonotlc inefficiencies due to the lack of capital taxation. Thiscost can be offset, In part, by the second component of the proposed system.

Un4ivereal ythholdint

The second component Is the application of universal withholding on allpayments made by the business sector. Withholding would be Imposed ondistributions of dividends, Interest, royalties, directors' fees, and other corporatedistributions In addition to wages IndeDendent of the residence of thereciDient." Many countries impose withholding on wages, and this proposalwould merely expand withholding to all corporate distributions.

The fact that withholding is lmposed on all distributions would eliminatethe need for border withholding taxes on non-residents which Is now common.This would eliminate the need to determine the residence of the recipientsbefore application of tax. In addition, to the extent that withholding taxespaid by non-residents Is eligible for foreign tax credits, the 'ost governmentmay preserve some revenue with no additional allocative incentives."

The treatment of withholding taxes at the domestic Individual level will bedetermined by the overall policy objectives of government. If governmentdesires to have no taxation on capital then dividends and Interest would not beIncluded In personal Income, and the withholding tax would be claimed as acredit (with provision for refund) for non-capital income taxes. This wouldensure that no ta --s on capital would be paid. Alternatively, withholding taxInclusive corporate iistributions could be included at the personal level and acredit claimed for tne withholding taxes paid. In this case, capital Income istaxed at the individual level with the withholding tax serving as aprepayment. 6' Thus, cash flow taxation at the corporate level cum withholding

58. The additional distortions could arise because there is no theoreticalsuperiority of one particular type of taxation in a second best world. Givenrever.ue constraints, the absence of a capital tax will Increase the taxes onother factors. This increased taxation could reduce welfare relative tocapital and labor taxation with lower rates.

59. To the extent that the personal income tax is part of an overall tax system,uniform withholding of wages would be desirable. This would enablegovernment to collect taxes from a smaller number of taxpayers and woulddecrease the incentive to recharacterize corporate distributions.

60. In theory, a host government could collect 100% of the tax payments onforeign source income which accrues to the home government. In practice,such efforts would involve Investor by investor discrimination based onresident and tax position. It is doubtful that such a policy could beImplemented given anti-discrimination policies of most capital investors.

61. Capital gains at the personal level would still be difficult to administer,unless government moved to consumption taxation. The difficulty arises inpart because of the general lack of accounting for inflation in the basis fora capital gain.

- 23 -

taxes can be Instruments of either consumption or comprehensive incometaxation systems.

If cash-flow taxes are Imposed at the corporate level then there is non_ed to gro8isu crporate distributions for the tax paid at the corDorate level.If there are zero economic profits then a gross-up would be redundant since thepresent value of taxes are zero. Alternatively, if the present value of taxes ispositive then the government is getting a share of any economic rent and thereis no need to impute rent to the individual level.62

Residence PrinciDal

Consideration should be given to taxing domestic nationals on theirworldwide income and taxing non-residents based on source. Two justificationsare offered for adopting the residence principal; one symbolic and one practical.Taxing domestic nationals on worldwide Income may not be administrativelyfeasible for some countries. 6 3 However, administrative difficulties should notforce government to provide a signal to domestic nationals that they shouldinvest in other countries.' 4 Exclusive use of the source principal is in effectstating that government Is indifferent between investing at home or in someother country where taxes are lower.6 5 Second. to the extent that the taxadmilnistration can obtain information, some taxes can be collected. Thepractical issue here is revenue collections relative to the cost."

Tax Treaties

Tax treaties can be viewed as a form of bi-lateral discrimination.Treaties can override certain general provisions of tax law including withholdingrates and certain definitions such as source. To the extent that tax treatiesare in the interest of the developing economy a treaty network should beconsidered. However, the following points should be noted with respect totreaties:

62. To the extent that investors accrue rent this system would not be totallyneutral as long as the rent tax was less than 100%. Some rent will stillflow through to the individual level and the overall return net of tax wouldstill be higher relative to an investment with zero rent. The extent towhich this is a problem will depend on the size of real economic income andthe efficiency of the markets in each country.

63. McLure (1987) discusses the difficulties with residence principal taxation Ina developing country.

64. H. David Rosenbloom noted this type of effect to me.

65. There may be a risk of double taxation unless the country allows a foreigntax credit.

66. The symbolic value of the principal may be important enough to warrantsome expenditure of resources on administration.

- 24 -

1. A treaty network may not be needed it effeetlve tax rates, definitions,and administration are comparable to international standards.

2. A developing economy should not enter into treaties with the expectationof significant revenue gains.

3. Exchange of Information terms usually benenit the capital exportingcountry,67

4. Tax sparing may be included in a treaty and its inclusion may have someeconomic effect. However, all parties must realize that tax sparing is atype of foreign aid for which the developing country might pay either byincreased dependence on one country for its source of funds or bygranting other concessions in the tax treaty or other agreements.

6. There is symbolic value to tax treaties. Competent authority provisionsare signals to international investors that the country is serious aboutthe desire to attract international Investment and to abide byinternationally established norms.

6. In the context of the current framework the following points deservenute:

- Tax sparing may not be an issue since there are no directInvestment incentives in the system."

- The developing country can discriminate by treaty with respect toitems such as withholding rates. Withholding rates are generallypart of a treaty. This implies that withholding rates can varyacross investors depending on the country of residence in a treatycontext. In effect, a developing country can use withholding ratesas a form of "sop-up" tax. 69 The ability to take full advantage of

67. Exceptions do occur, but in general the capital exporter will seekinformation regarding its residents investing In the developing country.

68. Abolition of tax incentives can be perceived as a loss of an Instrument forattracting foreign capital. However, as long as investors make decisionsrelative to net of tax, risk adjusted returns then it is the effective taxrate that matters not the incentives. Purthermore, the efficiency cost ofparticular incentives can be high and thus It may be possible for countriesto move to a more neutral system with lower effective tax rates for allinvestors while preserving revenues.

69. Legally speaking this may not be the case since withholding taxes aredefined to be a tax paid by the foreign firm on behalf of the non-resident.However, economically speaking, to the extent that foreign invtestment iscontrolled by non-residents both corporate and withholding taxes are paidby the non-resident. Thus, the ability to adjust withholding rates bycountry offers the opportunity for the developing country to adjust marginaleffective rates by country of residence.

- 26 -

this benefit is offset by the ability of nrms to "treaty shop" whichmay Incur a revenue loss for the country."0

A pragmatic approach to treaties is Indicated by these points. A countrywith few or no treaties must weigh the benefits against the signifcant cost ofnegotiating and administering a treaty. Developing countries with existingtreaties should not unilaterally cancel them, however, because of the adverseperceptions such moves generate. 7 ' For these reasons, treaty developmentshould be based on the particular circumstances and goals of the country.

6 Summary

Several issues have been discussed in the preceding sections.

Tax Switches in an International Environment are More Numerous

Four factors (nexus rules, jurisdictional basis to tax, attribution rules, andthe degree of International coordination) were discussed in Section 2. Thesefactors increase the degrees of freedom available to a government in developingtax policy relative to more traditional components of tax policy (e.g. rates anddefinition of the base). From a positive economic perspective, these factorsshould be included In the analysis of tax policy to examine how each factorInteracts to determine the net incentives for investment and savings."

More Constraints are Present

The increase in the choice set for government tax policy is not free.Additional constraints are imposed as well. First government will be constrainedby the ability of capital to move across international borders in response tochanges in tax policy. That is, investors have an increase in the number ofdegrees of freedom as well. Economic agents can only respond to changes in taxpolicy by changing the supply of factors in a closed economy (e.g. savings can

70. If transactions costs were low then it is possible for the effective tax ratefor foreign investment to be the lowest withholding treaty rate plus thecorporate tax rate, absent control by the other party to the treaty. SeeRosenbloom (1984) and Kozon (1983) for further development.

71. When Nigeria canceled its treaties, it was generally agreed that the countrywas not prepared to develop reasonable alternatives. The cancellationgenerated significant negative publicity for Nigeria and to date the countryhas been unable to complete a new treaty network.

72. See McLure (1987), Mieskowski (1986), Gordon and Smith (1986) and Conrad(1985, 1988a) for some initial development of how the factors discussed inSection 2 interact with more traditional tax switches. No comprehensiveanalysis of the Interaction between all components has been done to datewhich includes both Incentives to investment domestically and acrossjurisdictions. However, the works cited here can be considered a foundationfor subsequent work.

- 26 -

change In response to net rates of return). When factors can move acrossboundaries economic agents can change both the quantity and the location ofInvestment. Furthermore changes in location are not necessarily a one waystreet from capital exportsrs to capital Importers. Tax policy can affect thedecisions of residents of capital importers to invest outside as well as theincentive for foreigners to invest within the borders of a developing economy.Thus domestic tax policy, given policy in other countries, can be a factor in thedecision for domestic investors to become international Itivestors. This impliesthat government should be concerned with a policy with regard to "net" asopposed to gross capital flows. Issues of dependence on foreign investment andthe desire for ownership of domestic investment by domestic nationals may belegitimate political or policy concerns. However, government needs tounderstand how each policy instrument combines to create incentives to invest,In general, and how these incentives are realized In particular investmentsbefore polican be successfully Implemented.

A second constraint faced by government is the ability of othergovernments to change their tax policies. Policy changes made by othergovernments may be a benefit or a cost to a particular economy. That is, taxcompetition places a clear constraint on a government's ability to actunilaterally with respect to changes in tax policy. However, policy changes Inother countries can provide incentives (or even subsidies) for investors to movecapital to one's own country via changes in rates, base computations, and otherrules.

Income Tax Policy Should Placed in Context

Income tax policy is only one tool in government's toolbox for reachingparticular objectives. The effectiveness of income tax policy will be determinedby how this instrument is used in the context of overall policy implementation.For instance, trade tax policy, pricing policy, exchange rate policy and othertools affect how investors will respond to income tax initiatives. Income taxpolicy can be offsetting (e.g. trade barriers to induce foreign investmentcombined with high Income taxes can create offsetting incentives) orcomplimentary (e.g. accelerated depreciation with subsidized prices).

This implies that income tax policy should be used when It is the mosteffective (or can be combined with other instruments to be the most effective)tool to reach a particular objective. Thus, income tax policy cannot and shouldnot be evaluated in isolation.

International Coordination maY be Neither Necessary or Desirable

The call for international coordination in international taxation appears tobe based on notions of interjurisdictional equity and destructive tax competition.Equity considerations may be a legitimate concern, but interjurisdictional equitymay be more appropriately applied to the distribution of the revenues from thetaxation of capital and not to the distribution of the base. This implies thatunless all aspects of capital income taxation, including rates, etc., are somehowuniform then there is no necessary correlation between the attribution of the

- 27 -

base and the distribution of the revenues." Even equity with respect to thedistribution of the base does not necessarily Imply utiform tax treatment. Forinstance, real economic depriciation may vary across countries (i.e. the realdepreciation of a truck may be higher In Malawi than In the US). Thus, inorder to have an "equitable" distribution of the base then the computation ofthe base must necessarily be non-uniform. Thus, untformity of attributionrules, nexus rules, etc. must be placed in the context of overall policy.

The negative connotations of tax competition must be weighed againstcompetition's potential benefits. The information gained by the competitiveprocess enables countries to learn where it can and cannot be flexible.Investors examine other factors in addition to taxation in determininginvestments. Thus, competition between countries can aid in learning thecomparative advantages of a particular location and enable a country to Identifysite specinc rents and other factors which may Increase both revenues and therate of growth.

Investors treat taxes as a cost of doing business and competition betweencountries may aid in making this cost as low as possible. That is. eachcountry's tax price will reflect the opportunity cost of investment (eitherforeign or domestic). There Is no reason to believe that these tax prices arethe same across countries, given the variety of factors (location, education,cultural differences, initial stocks, etc.) which influence the reservation price(both total and marginal) of investment. Thus, uniformity (in effect monopolypower) may distort rather than enhance investment. As long as theinternational capital market (the suppliers of capital) Is reasonably competitive,then competition by governments may enhance both the distribution andefficiency of the system.

In summary, the potential for capital to move across internationalboundaries may be one of the most important factors in tax policy design.74Thus, tax policy development (and tax reform efforts) should incorporate thisfactor in order to be successful. Successful incorporation of international factorflows requires both evaluation and flexibility. A government must evaluate theopportunity cost of investment in terms of both development objectives andrevenue constraints. This implies that explicit trade-offs may have to be madebetween revenues and incentives to invest. Where trade-offs are small or non-existent (site specific rents, etc.) then government should be In position to takefull advantage of them.

Flexibility is necessary because exogenous changes in world prices(including interest rates) and policy changes in other countries can affect both

73. For example, countries can have identical attribution rules but different taxrates.

74. The current stock of foreign investment within a country or the stock ofinvestment held by domestic nationals in foreign countries is not anindicator of the influence of international capital markets on the incentivefor investors to respond to changes in policy since the potential for changealways exists.

- 28 -

incentives to Invest and revenues in a partieular country. This Implies that theopportunity cost of Investment, In general, or in specific sectors may change,and tax policy should be flexible enough to respond to these changes. Finally.flexibility requires a clear determination of a country's objectives. Theevaluation of tax treaties, foreign Investment agreements, and general policymust be made relative to the development policies and constraints of aparticular economy. In this context flexibility will enable a country to respondto changing conditions with informed self interest.

- 29 -

Appendix

Recent Changes in U.S. Law Relating to

Foreign Source ln ime

In 1986 the U.S. Congress passed a comprehensive tax reform act. Thechanges in the rates, restrictions on tax shelters, and changes in depreciationrules are commonly known. However, a significant part of the law directlyaddressed foreign source income, both foreign income of U.S. taxpayers and U.S.income of foreign taxpayers. This appendix contains a brief description of someof the major provisions.

The appendix is Intended to be descriptive. The issues are complex andthe U.S. law generally reflects the complexity by numerous definitions, examples,limitations, etc. Since the purpose of the appendix is to provide an overviewand description, much detail is not Included. Further examination of the Issuescan be found in numerous sources Including: General ExDlanat on of the TaxReform Act of 1986.1

1 Changes Affecting U.S. Taxpayers' Foreign Income

Outline of General Foreifn Tax Credit Rules

Under U.S. Law, a person Is allowed a credit for "Income, war profits andexcess profits taxes paid to a foreign country or U.S. possessions" (p. 862). Thecredit is allowed on direct operations (i.e. branches), passive income (e.g.portfolio income) and for dividends received from a foreign subsidiary. Thecredit of "dividends" is called a "deemed paid credit" since the payor of theforeign tax Is generally the subsidiary (a separate person) and thus the taxcredit is In effect a flow through credit or a type of integrated corporate tax.

1. Page references found In this appendix all refer to this document.

2. Under an integrated system, the shareholder would gross-up corporatedistributions for taxes paid at the corporate level and receive a credit forthese taxes In the computation of net taxes due. The deemed paid creditworks In exactly the same way, except that the taxes subject to credit arepaid to another government. Editorially speaking, it is Interesting that whilethe motivation for the deemed paid credit is to offset double taxation withrespect to foreign income, the principal has not been applied to domesticdouble taxation at the corporate level by those who advocate the classicalsystem of income taxation.

- 30 -

A foreign "levy may be credited If the levy is equivalent to wan lncomotax In the U.S. sense, whatever the foreign government that imposes It (thelevy) may call it" (p. 862). Regulations Issued by the U.S. Treasury containcriteria for a levy to qualify for a potential credit. in general, the levy shouldbe designed to tax the "net gain" of the taxpayer, should be a mandatorypayment, should not be a payment for a specific benefit (e.g. rights to extractnatural resources), and should not be conditioned on the availability of theforeign tax credit (i.e. so called "soak-up" taxes.)

The foreign tax credit is available only for "foreign source income". ThatIs, the credit cannot be applied to total Income since It may be possible for ataxpayer to receive a credit for income which has no connection with theparticular country In question.3 Thus a method to limit the credit Is necessary.The method employed in the U.S. is the "overall limitation".' This methodrequires the taxpayer to bundle all foreign taxes and foreign source Income(with some exceptions) Into one computation.

Seyarate Limitations for Certain TYDes of Income

The 1986 Act created separate limitations for "passive Income, financialservices income, and shipping income".$ Separate limitations by type of Incomelimit the ability of taxpayers to use the overall limitation to "average" taxrates by country and by type of income. The Income subject to the newlimitations Is sometimes subjected to high taxes In foreign countries whichcreates a potential excess foreign tax credit. However, the ability to averagethis income with income from low tax jurisdictions enabled taxpayers to useexcess credits to offset credit dencits from the low tax jurisdictions. Thus, theresidual tax paid to the U.S. on forelgn source income under the overalllimitation could be small (or non-existent). The separate limitations restrictthe ability of taxpayers to engage in such averaging.

Changes In Source Rules

The 1986 Act contained a new definition of source for the sale of personalproperty. Under the new law: "Income derived by U.S. residents from the saleof personal property, tangible or Intangible Is generally sourced In the UnitedStates. Similarly, income derived by a nonresident of the Un:ted States from thesale of personal property, tangible or Intangible Is generally treated as foreignsource" (p. 919). Under prior law the "source" of the sale of such property was"the location where the sale occurred". The change was made because of the

___________

3. According to the authors of the General Explanation: "Permitting the foreigntax credit to reduce U.S. tax on U.S. Income would in effect cede to foreigncountries the primary right to tax income earned in the United States" (p.854).

4. There are two general methods of computing the limitation; the overall andthe per country. Under the per country limitation, a tax credit is computedon a country by country basis.

6. In general passive income includes dividends, interest, annuities and certainrents and royalties.

- 31 -

relative ease with which the location of sale could be manipulated (e.g. the saleof common stock). Thus. U.S. persons could manipulate the location of sale toavoid U.S. tax and pay little or no tax to a foreign country. Similarly.investments in the U.S. made by non-residents In the U.S. could be manipulatedvia the old source rule. The new rules do not apply to royalties and to Incomewith "divided source" (i.e. goods produced in one country for sale in another.)6

Cha_ge in Allocation Rules for Certain ExDenses

Interest expenses, research and development expenses, and other suchexpenses general arise in one country with benefits (or costs) accruing tooperations in other countries. Interest expenses are difficult to characterizesince money is fungible (i.e. a taxpayer can borrow money from a U.S. bank anduse proceeds to finance operations in other countries). Under the 1986 Act, allinterest expenses are to be allocated via formula using assets as the base.That is, interest expense attributable to country X will equal the ratio of ataxpayer's assets in country X to total assets times total interest expense. Inaddition, Interest allocations will be done by the entire affiliated group ignoringinteraffiliate debt. Rules for other expenses (e.g. expenses which are notdirectly allocable) are handled under the same general principles. An exceptionis research and development. A two year moratorium on allocations wascontained in the 1986 Act. Thus for two years all research and developmentexpenses conducted In the U.S. will be allowed as a deduction for U.S. purposes.The potential rules for allocations are difficult in this area and thus two yearswere deemed necessary to study the entire issue.

Further Restrictions on the Benefits of Deferral

U.S. law generally allows deferral of U.S. tax on the income of foreignsubsidiaries. This means that U.S. tax is not computed and payable untildividends, etc. are actually remitted (or deemed remitted) to the U.S. Someincome can be manipulated with respect to source, and this combined with thebenefits of deferral creates an incentive for firms to operate certain activitiesin foreign countries in order to avoid or to reduce U.S. tax. Congress hadrecognized this problem for some time and had created a special classification ofincome called "Subpart F" income. Income classifled as Subpart F income wouldno longer have access to the benefits of deferral.

The 1986 Act expanded the definitions and narrowed the exemptions ofSubpart F to include more kinds of income, thus reducing further the benefits ofdeferral. There are new "look through" rules for payments to related parties,and income no longer subject to deferral include: "net gains on sales ofproperty which does not include active income, net commodities gains, and netforeign currency gains" of foreign personal holding companies (p. 973).

Foreign Currency Gains and Losses

Prior to 1986 there was no statutory law with respect to the treatment ofgains or losses arising from changes in the relative value of currencies. Rather,

6. Under U.S. law "divided source" income is generally divided via formula usinga 50-50 rule.

- 32 -

the Issue was addressed by a series of court cases. Thus under prior law therewere no explicit rules tor the currency employed by a taxpayer in recordingbooks of account and transactions. This gave substantial discretion totaxpayers and had adverse consequences for the U.S. Treasury. Substantialuncertainty regarding the tax consequences of certain transactions was alsopresent because of the absence of clear rules.

The 1986 Act provides a comprehensive set of standards for foreigncurrency transactions for the first time (Subpart J). Books of account or otherinformation are now required to be made in the "functional currency" of thetaxpayer. That is, the currency used to conduct most transactions is defined asthe single currency for all books of account.? Thus, exchange gains and losseswill be recognized on a transaction by transaction basis and only to the extentto which the transaction Is conducted In a "non-functional currency". * Specialrules are developed for such items as hedging transactions. The "source" of thegain or loss will generally be the residence of the taxpayer. Thus, the sourceof an exchange gain or loss from a French loan denominated in Francs will bethe U.S. If the taxpayer is a U.S. resident.

2 Changes Affecting Foreign Taxpayers in the United States

Lmposition of Branch Tax

For the first time the United States has imposed a branch profits tax of30% of the "dividend equivalent amount" on foreign corporations operating inthe U.S. in non-subsidiary form. Under prior law a tax was imposed onbranches only if a substantial amount of the foreign corporation's income wasU.S. source. This implied that in effect foreign corporations operating in severalcountries were exempt from withholding taxes. This change brings the taxtreatment of foreign branches In line with the withholding tax on dividends, etc.Imposed on foreign distributions.

Tax on Income or Gain from Prior Year

Under U.S. law, foreign taxpayers are taxed on their U.S. source incomeeffectively connected to a U.S. trade or business. Under prior law it waspossible for a foreigner to avoid this tax via changing the timing and the typeof transaction (e.g. an installment sale of a business). The 1986 Act nowrequires foreigners to pay tax on such transactions.

Limitation on Tax Exemption for Foreig Governments

In general, investments in stocks, bonds and other types of assetportfolios by foreign governments are exempt from U.S. tax. However, underprior law it was possible for nationalized irms of foreign governments to

___________

7. The U.S. dollar Is always an option for the taxpayer.

8. By definition, transactions in a functional currency cannot create exchangerate gains or losses.

- 33 -

operate in tho U.S. effectively ftre of tax. The new law places strictlimitations on the types of investments made In the U.S. by foreign goverrmentswhich are exempt from U.S. tax. Investments which do not qualify will besubject to full U.S. taxation.

Restrictions on Transfer Prices for ImDorts

Importers are no longer able to charge a transfer price for imports incomputing Income taxes in excess of the value declared for customs purposes.Under prior law, non-arms-length transfer prices could be charged In excess ofcustoms value for income tax purposes.

- 34 -

Table I

TAX Rates on Corporate Direct Investment Income in Host Countries January 1. 1987

(in percent of taxable Income or remittance)

Statutorv Income Tax Rates

National Tax RatesRetained Dlstrib. Withholdinf Rates

Host Country income ing. Dividends Interest Royalties

Industrial Countries

Austria 66 10 nil nilBlgiuim 43 16 16 nilCanada 60.5 16 16 10Denmark 60 16 nil nilFrance 46 261 16 nil 6Cermany. Fed. Rep. 60 16 nil nilItaly 36 16 6 10Japan 43.3 10 10 10Luxembourg 38 7.6 nil nilNetherlands 42 16 nil nilNorway State 27.8

municipal 23 16 nil nilSweden 52 16 nil nilSwitzerland 36United Kingdom 35 6 nil nilUnited States 34 1i nil nil

Other Developed Countries

Australia 49 15 10 10Greece 44 42 nil nilIreland 40:60 nil nil nilNew Zealand 48 16 10 10South Africa 60 33.33 16 10 nilSpain 36 20 20 20

Other Western HemisDhere

Argentina 33 17.5 16.75 27Brazil 36 26 25 26Chile 10 40 40 40Colombia 32 30 30 nilCosta Rica 60 16 10 20Dominican Republic 60 20.6 20.6 20.6

1. or reduced tax treaty rate

- 35 -

Ecuador 20 40 40 nil 40El Salvador 3s 22 22 22Guatemala 42 12.6 10 26Honduras 40 15 6 10Jamaica 46 16 12.6 10Mexico 35 66 21 21.42Netherlands

Antilles 43 nil nil nilPanama 60 10 CR CRPeru 36 16.4 46 46Puerto Rico 22 25 29 29Trinidad and

Tobago 46 25 16 16Uruguay 30 30 nil 30Venezuela 60 20 36 36

Middle East

Kuwait 66Saudi Arabia 40

Other Asia

China 40 10 10 7-10Hong Kong 18.6 nil 17 nilIndia 66 26 26 30Indonesia 36 20 20 20Korea 33 16 12 15Malaysia 40 nil 20 16Pakistan 30 (inc) 8.75 30-45 nil

25(sup tax)Philippines 35 26 15 26Singapore 33 nil 33 33Taiwan 26 36 20 20Thailand 36 20 26 26

Other Africa

Kenya 62.6 16 12.5 20Liberia 60 16 15 30Morocco 48 16 10 10Nigeria 40 16 16 16Zambia 46 20 nil nilZimbabwe

Rhodesia 62.876 20 10 20

- 36 -

Table !!DEPRECIATION RULES S

SPECIALDEPRECIATION SPECIAL INDUSTRIES.

METHODS RULES CREDITS EXEMPTIONS GRANTSCOUNTRYEcuador SL Yes No Yes NoEl Salvador SL,DB No No No NoGuatemala SL No No Yes NoHonduras SL No No Yes NoJamaica DB Yes No No NoMexico SL Yes Yes Yes NoNetherlands-

Antilles SL,DB Yes No Yes NoPanama SL,DB,SD No NO Yes NoPeru SL Yes No Yes NoPuerto Rico SL Yes No Yes NoTrinidad &

Tobago SL,ACC Yes No Yes NoUraguay SL Yes No Yes NoVenezuela SL No Yes Yes NoSaudi Arabia SL No No Yes YesChina SL Yes No Yes NoHong Kong SL Yes No No NoTaiwan SL.DB Yes Yes Yes NoIndia WDV No No Yes NoIndonesia WDV.SL No No No NoKorea DDB,SL No Yes Yes NoMalaysia SL No Yes Yes NoPakistan DB No Yes Yes. NoPhilippines SL No No Yes NoSingapore SL Yes No Yes NoThailand SL No No Yes NoTaiwan SL,DB Yes Yes Yes NoKenya DB Yes No Yes NoLiberia SL No No Yes NoMorocco SL Yes No Yes NoNigeria SL No No Yes NoZambia SL Yes No Yes NoZimbabwe -

Rhodesia SL,DB Yes No Yes No

Austria SL Yes No Yes NoBelgium SL,DDB Yes No Yes NoCanada DB Yes No Yes YesDenmark DB Yes No Yes No

1. SL=straight line, DB=declining balance, DDB=double declining balnce.ACC=accelerated. WDV=written down value, ACRS= accelerated cost recoverysystem, IME=immediate expensing, SD=sum of year's digits

- 37 -

France SL,DB Yes No Yes YesWest Germany SL.DB No Yes Yes NoItaly SL No Yes Yes YesJapan SL,DB Yes No Yes NoLuxembourg SL.DB Yes Yes Yes YesNetherlands SL.DB No No Yes NoNorway DB No No Yes NoSweden Book Yes No Yes NoSwitzerland SL.DB Yes Yes No No

United Kingdom DB Yes No Yes YesUnited States ACRS No Yes Yes No

Australia SL,DB Yes No Yes YesGreece SL Yes No {es NoIreland IME Yes No Yes YesNew Zealand DB Yes Yes Yes NoSouth Africa DB,SL Yes No Yes YesSpain SL No Yes Yes No

Argentina SL Yes No Yes NoBrazil SL Yes No Yes NoChile SL Yes No Yes NoColombia SL No Yes Yes NoCosta Rica SL.SD No No Yes NoDominican Rep. SL Yes No Yes No

- 38 -

Table III

SOURCE RULES FOR CORPORATIONS

COUNTRY RULE TREATMENT

Ecuador Source,interest and dividends CreditEl Salvador SourceGuatemala SourceHonduras Residence NoneJamaica Residence Treaty,DeductionMexico Residence CreditNetherlands-Antilles Residence TreatyPanama SourcePeru Residence CreditPeurto Rico Residence. Source CreditTrinidad & Tobago Residence CreditUruguay SourceVenezuela Source,with except;ionsSaudi Arabia SourceChina SourceHong Kong SourceTiawan Residence CreditIndia Residence.Source TreatyIndonesia Residence CreditKorea Residence.Source CreditMa6laysia Source.foreign Income received CreditPakistan Residence CreditPhilippines Residence,Source CreditSingapore Residence CreditThailand Residence,SourceTaiwan Residence,Source CreditKenya Residence Credit.DeductionLiberia SourceMorocco Source,except dividendsNigeria Residence.Source CreditZambia ResidenceZimbabwe Source,except interest CreditAustria ResidenceBelgium Residence Credit.TreatyCanada Residence,Source CreditDenmark Residence CreditFrance SourceGermany.Rep. Residence Credlt,DeductionItaly Residence,Source CreditJapan Residence CreditLuxembourg Residence Credit,TreatyNetherlands Residence Credit,DeductionNorway Residence TreatySweden Residence.Source CreditSwitzerland Residence CreditUnited Kingdom Residence CreditUnited States Residence CreditAustralia Residence.Source Credit

_ 19, _

Greece Resldence CreditIreland Residence CreditNew Zealand Residence CreditSouth Africa Source TreatySpain Residence Treaty.DeductionArgentina SourceBrazil SourceChile Residence NoneColombia ResidenceCosta Rica SourceDominican Rep. Source

- 40 -

Atkinson, Anthony B. and Joseph E. Stiglitz. (1980). Lectures In PublicEconomics. New York: McGraw-Hill.

Belli, R. David. (1986) "U.S. Multinational Companies: Operations in 1983."Survey of Current Business. 1-1986, pp. 23-36.

Bergsten, C. Fred, Thomas Horst and Theodore H. Moran. AmericanMultinationals and American Interests Washington: Brookings. 1978.

Biehl. Dieter. (1982) "Towards a General Theory of Taxing InternationalTransactions - A Taxonomy of International Taxation Principles." Public FianceXXXVII:2, pp. 189-205.

Boskin. Michael J. and William G. Gale. (1986) "New Results on the Effectsof Tax Policy on the International Location of Investment." NBER Working Paper# 1862, March.

Bovenberg, A. Lans. (1986) "Capital Income Taxation in Growing OpenEconomies." Journal of Public Economlcs, 31, pp. 347-376.

Caves, Richard E. (1982) Multinational EnterDrise and Economic Analysis.New York and London: Cambridge University Press.

Collins, M. H. (1985) "The Policy and Practice of the United Kingdom inthe Tax Treatment of Transfer Pricing." International Bureau of FiscalDocumentation-Bulletin, (August/September), pp. 364-362.

Conrad, Robert F. (1986) "Essays on the Indonesian Tax Reform." CPDDiscussion Paper No. 1936-8. World Bank.

Conrad, Robert F. (1985) "Separate Accounting and FormularyApportionment: What Can Positive Economics Say." Energy Jouirnal, 291-309.

Conrad, Robert F. (1988a) "Corporate Tax Revenues in Malawi". InternalMemorandum of Malawi Tax Reform. (in process)

Conrad, Robert F. (1988b) "InterJurisdictional Attribution Rules: AnEconomic Analysis". (under revision).

Das, Satya P. (1986) "Optimal Taxation of Foreign Capital when ItsMovements are Sluggish." Journal of International Economics, 21 , pp. 351-360.

Dunning, John H., "The Determinants of International Production," OxfordEconomic PaDers In J H Dunning (ed.) Economic Analysis and the MultinationalEnterDrise. London: Allen and Unwin, 1974. pp 47-88.

Dutton, John. (1986) "Optimal Taxes on Foreign Investment in anOverlapping Generation Model." Public Fiance _Qarter1, 14:3, (July), pp.289-311.

Feinberg. Mordecai S. (1977) "U.S. Position on Income Tax Treaties withDeveloping Countries." U. S. Treasury Memorandum May 13.

- 41 -

Feldstein, U and C. Horioka. 1980. "Domestic Savings and InternationalCapital Flows" Economic Journal, 90, 314-328.'

Finch, Johnny C. (1984) 'The Apportionment of Multistate andMultinational Corporate Income for Tax Purposes." International Bureau of FiscalDocumentation-Bulletin, pp. 51-69.

Findlay, Christopher C. (1986) "Optimal Taxation of International IncomeFlows." The Economic Record, 62:177, (June), pp.208-214.

Fullerton. Don and Meryvn A. King. (1984). The Taxation of Income FromCaDital. Chicago: University of Chicago Press.

Gann, Pam. "The Concept of an Independent Treaty Foreign Tax Credit. 38Tax Law Review, 1, 1982.

Goldsbrough, David. (1985) "Foreign Direct Investment In DevelopingCountries: Trends, Policy Issues and Prospects." Finance and DevelpRo.ent.(March), pp. 31-34.

Gordon, Roger and John D. Wilson. (1986) "An Examination ofMultiJurisdictional Corporate Income Taxation ;Under Formula Apportionment."Econometrica 1357-1373.

Goulder, L.H., J.B. Shoven and J. Whalley, (1983) "Domestic Tax Policy andthe Foreign Sector, In: M. Feldstein (ed.), Simulation Methods ln Tax PolicyAnalysis. Chicago: University of Chicago Press.

Govind, Har. (1984) "India: Taxation of Foreign Companies."International Bureau of Fiscal Documentation-Bulletin, pp. 536-542.

Grossman, Gene M. and Assaf Razin. "International Capital MovementsUnder Uncertainty." Journal of Political Economy, 92, 2 (April 1984), pp.286-306.

Guisinger, Stephen. (1985) "Host Country Policies to Attract and ControlForeign Investment." Paper Frepared for the Overseas Development CouncilConference on Foreign Investment and Third World Development. GeorgetownUniversity, (October 22).

Hamada, K. (1966) "Strategic Aspects of Taxation on Foreign InvestmentIncome," %LarterW Journal of Eonomic 80031 361-376.

Hartman, David G. "Tax Policy and Foreign Direct Investment In theUnited States." National Tax Journal, XXXVII, pp. 466-487.

Hartman. David g. "Tax Policy and Foreign Direct Investment." Journal ofPublic Economics 26 pp. 107-121.

Hodes, Daniel A. and Laurence J. Mauer. (1986) "U.S. Tax Refom: CapitalRecovery and International Direct Investment." Business Economics, XXI. 1. pp.50-64.

- 42 -

Horst. Thomas "American Taxation of Multinational Firms," AM, (June1977) 67: 376-89.

Horst, Thomas, "The Overall vs. the Per Country Limitation on the USForeign Tax Credit", in US Treasury Department, Office of Tax Analysis, 1978ComDendium on Tax Research. Washington: GPO 1978. 213-38.

Horst. Thomas. "A Note on the Optimal Taxation of InternationalInvestment Income." QJE 94 (June 1980) 389-396.

Hufbauer, Gary "The Multinational Corporation and Direct Investment," inPeter B. Kenen (ed.) International Trade and Fiance: Frontiers for Research.Cambridge: Cambridge University Press, 1975.

International Chamber of Commerce. (1987) "Symposium on Consequencesfor International Business of the U. S. Tax Reform." International Bureau ofFiscal Documentation, (June), pp. 251-262.

Ishi, Hiromitsu. (1984) "International Tax Evasion and Avoidance inJapan." Hitotsubashi Journal of Economics, 26, (June), pp. 21-29.

Jacob. Priedhlem. (1984) "Unitary Approaches in International Taxation."International Bureau of Fiscal Documentation-Bulletin, pp. 99-120.

Joint Committee on Taxation. (1987) General Explantion of the Tax ReformAct of 1986. Washington, GPO

Karzon, Allaire Urban. (1983) "International Tax Evasion: Spawned in theUnited States and Nurtured by Secrecy Havens." Vanderbilt Journal ofTrananational Law, 16 (4), (Fall), pp. 757-882.

Kelly, Patrick L. (1984) "Transfer Price Adjustments and Double Taxation:A Sword of Damocles for Multinationals." International Bureau of FiscalDocumentation-Bulletin, pp. 448-450.

Kemp, M. C. (1962) "Foreign Investment and National Advantage",Economic Record, 38(811, 56-62.

Kemp, M.C. (1962) "The Benefits and Costs of Private Foreign Investment",Economic Record, 381811,108-110.

Kemp, M. C. "The Gains from International Trade and Investment: A Neo-Heckscher-Ohlin Approach." AER 56, 788-809 ,1966.

Kindleberger, Charles P. American Business Abroad: Six Lectures onDirect Investment. New Haven: Yale University Press, 1969.

Koning, H. E. (1984) "Unitary Taxation - A Foreign Government's View."International Bureau of Fiscal Documentation-Bulletin, pp. 295-297.

Kopits, George F. (1976) "Taxation and Multinational Firm Behavior: ACritical Survey" International Monetary Fund: FIscal Affairs Department(March).

- 43 -

Kopits. George F. (1981) "Fiseal Incentlves for Investment In IndustrialCountries." International Bureau of Fiscal Documentation-Bulletin. pp. 291-294.

Kopits, George F. (1980) "Effects of Tax Changes on Direct InvestmentAbroad." Chapter 7 of United States Taxation and DeveloDinX Countries editedby Robert Hellawell. New York: Columbia University Press.

Kopits. George F. (1976) "Intra-Firm Royalties Crossing Frontiers andTransfer Pricing Behavior." The Economic Journal, 86 (December), pp. 791-806.

Kwack. Sung. "A Model of US Direct Investment Abroad: A NeoclassicalApproach," Western Economic Journal (12-72) 10:376-83.

Ladenson. Mark L. "A Dynamic Balance Sheet Approach to American DirectForeign Investment," American Economic Review (Oct. 1972) 13:531-43.

Lipton, D. and J. Sachs, 1983, "Accumulation and growth in a Two-CountryModel". Journal of International Economics 15, 135-159.

Little, Jane Sneddon. (1986) "Intra-Firm Trade and U.S. Protectionism:Thoughts Based on a Small Survey." New England Economic Review(January/February). pp. 42-51.

MacDougall, G D A. "The benefits and Costs of Private Investment Abroad:A Theoretical Approach," Economic Record, 36 (73), 13-35.

Modi, Jitendra R. (1987) "Major Features of Corporate Profits Taxes inSelected Developing Countries." International Bureau of Fiscal Documentatlon(February), pp. 65-74.

McLure, Charles E., Jr. (1986). Economic Perspectives on State Taxation ofMultiJurisdictional Corporations. Arlington, Virginia: Tax Analysts.

McLure, Charles E., Jr. (1987) "U.S Tax Laws and Capital Flight fromLatin America." Unpublished.

Mieszkowski, Peter and George W. Zodrow. (1985) "The Incidence of aPartial State Corporate Income Tax." National Tax Journal, pp. 489-496.

Musgrave, Peggy B. United States Taxation of Foreign Investment IncomeCambridge: Harvard Law School, 1969.

Musgrave, Peggy B. "Exchange Rate Aspects in the Taxation of ForeignIncome," National Tax Journal 12-1975, 28:405-13.

Musgrave, Peggy B. (1987) "Coordination of Taxes on Capital Income inDeveloping Countries." World Bank: Provisional Papers in Public Economics#87-1. (January).

Mutti, John and Harry Grubert. (1985) "The Taxation of Capital Income inan Open Economy: The Importance of the Resident-Nonresident Tax Treatment."Journal of Public Economics 27, pp. 291-309.

- 44 -

Mutti, John and Harry Grubert. (1987) "The Impact of the Tax Reform Actof 1986 on Trade and Capital Flows." In Compendium of Tax Research: 1987.U.S. Treasury.

Ravenscroft, Donald R. Taxation and Foreign Currency, Cambridge:Harvard Law School. 1973.

Rollinson, Barbara L. (1986) Multinational Firms with Quasi-Public Inputs:ImplicatiQns and Qpportunities for Tax Policy. Unpublished PhD Thesis, DukeUniversity.

Rosenbloom, H. David. "Current Developments in Regard to Tax Treaties."Chapter 31 of 40th Annual New York University Institute.

Rosenbloom, H. David. (1983) "Tax Treaty Abuse: Policies and Issues."Law and Policy in International Business 15:763, pp. 763-831.

Ruffin, Roy J. (1985) "Taxing International Capital Movements In aGrowing World." Journal of International Economics, 18 pp. 261-279.

Seidman, Robert B. "Foreign Private Investors and the Host Country."Journal of World Trade Law, pp. 637-666.

Sibert. Anne C. (1985) "Capital Accumulation and Foreign InvestmentTaxation." Review of Economic Studies, LII, pp. 331-346.

Sinn, Hans-Werner (1988) "U.S. Tax Reform 1981 and 1986: Impact onInternational Capital Markets and Capital Flows." Presented at Meeting ofNational Tax Association May 16-17.

Smith, David N. and Louis T. Wells. (1975), NegotIatILn Third WorldMineral Agreements. Cambridge: Ballinger.

Stevens, Guy. "Capital Mobility and the International Firm", in FritzMachlup, Walter Salant and Lorle Tarhis (eds.) Internat'unal Mobility andMovement of gapital. New York: Columbia University Press. 1972.

Thomas, W. Scott. (1984). "New Definition of United States TaxResidency." International Bureau of Fiscal Documentation-Bulletin, p. 469.

United Nations. (1979) Manual for the Ne otiation of Bilateral Tax TreatiesBetween Developed and Developing Countries. New York: Department ofInternational Economic and Social Affairs

United Nations. (1980) United Natlons Model Double Taxation ConventionBetween Developed and Developlng Countries. New York: Department ofInternational Economic and Social Affairs

United Nations. (1Q80) "Tax Treaties Between Developed and DevelopingCountries." (Eighth Report). Department of International Economic and SoclalAffairs

United Nations. (1987) "International Co-operation in Tax Matters:Report of the Ad Hoc Group of Experts on International Co-operation In Tax

- 45 -

Matters on the Work of Its Third Meeting.* Department of InternationalEconomic and Social Affairs.

United Nations. (1976) "United States of America: Income Taxation ofPrivate Investments In Developing Countries." Department of Economic andSocial Affairs.

United Nations. (1985) "Trends and Issues In Foreign Direct Investmentand Related Flows: A Technical Paper." Center on Transnational Corporations.

United Nations. (1984) "International Co-operation In Tax Matters:Guidelines for International Co-operation Against Evasion and Avoidance ofTaxes (with Special Reference on Income, Profits. Capital and Capital Gains).Department of International Economic and Social Affairs.

United Nations. (1985) "Transnational Corporations and InternationalTrade: Selected Issues: A Technical Paper." Center on TransnationalCorporations.

United Nations. (1986) "National Legislation and Regulations Relating toTransnational Corporations." (Volume IV,V) Centre on TransnationalCorporations.

United Nations. (1983) "Transnational Corporations in World Development.(Third Survey). Centre on Transnational Corporations.

United Nations. (1980) "Tax Treaties Between Developed and DevelopingCountries (Eighth Report)." Department of International Economic and SocialAffairs.

United Nations. (1983) "National Legislation and Regulations Relating toTransnational Corporations." Centre on Transnational Corporations.

Vogel, Klaus. (1985) "Federal Republic of Germany: Taxation of ForeignIncome - Principals and Practice." International Bureau of FiscalDocumentation-Builetin, (January) pp. 4-14.

Wahl, Jenny Bourne. (1987) "Taxation of Foreign Exchange Gains andLosses." U.S. Department of the Treasury, Office of Tax Analysis OTA Paper#57 (October).

- 46 -

PPR WorkIna Paper SerIes

Title Author Data Contact

WPS25 Israel's Vocational Training Adrian Ziderman July 1966 W. Ketama

33651

WPS26 Changing Patterns In Vocational

Education John Middleton July 1988 W. Ketema

33651

WPS27 Family Background and Student

Achievement Marlalne E. Lockheed July 1988 R. Rinaldl

Bruce Fuller 33278

Ronald Nylrongo

WPS28 Temporary Windfalls and Compensation

Arrang ements Bela Balassa June 1968 N. Campbell

33769

WPS29 The Relative Effectiveness of

Single-Sex and Coeducational Schools

In Thailand E_anuwl Jimenez August 1906 T. Hawkins

Marlalne E. Lockheed 33678

WPS30 The Adding Up Problem Bela Calassa July 1968 N. Campbell33769

WPS31 Public Finance and Economic Development Bela ialassa August 1968 N. Campbell33769

WPS32 Municipal Development Funds and

Intermediaries Kenneth Davey July 1988 R. Blade-Charest33754

WPS33 Fiscal Policy In Commodity-

Exporting LOCs John Cuddington July 1988 R. Blade-Charest33754

WPS34 Fiscal Issues In Macroeconomic

Stabilization Lance Taylor September 1968 R. Blade-Charest33754

WPS35 Improving the Allocation and Manage-

ment of Public Spending Stephen Lister August 1988 R. Blade-Charest33754

WPS36 Means and Implications of Social

Security Finance in Developing

Countries Douglas J. Puffart August 1966 R. Blade-Charest33754

PPR Working Paper Series

Title Author Date Contact

WPS37 Black Market Promla, Exchange Rate

Unification and Inflation In

Sub-Saharan Africa Brian Pinto July 1968 R. Blade-Charest33754

WPS38 Intergovernmental Grants In

Developing Countries Larry Schroeder Septomber 1988 R. Blade-Charest33754

WPS39 Fiscal Policy In Low-income Africa Stephen A. O'Connell July 1988 R. Blade-Charest

33754

WPS40 Financial Deregulatlon and the

Globalization of Capital Markets Eugene L. V*rsluysen August 1968 R. Blade-Charest33754

WPS41 Urban Property Taxation In

Developing Countries William Dillinger August 1968 R. Blade-Charest33754

WPS42 Government Pay and Employment Policies

and Government Performance InDeveloping Economies David L. Lindnuer August 1968 R. Blade-Charest

33754

WPS43 Tax AdmlnIstration In Developing

Countries: Strategies and Tools

of Implementation Tax Administration

Division

WPS44 The Size and Growth of Government

Expenditures David L. Lindauer September 1988 R. Blade-Charest

33754

WPS45 State-Owned Enterprises and Public

Sector Deficits In Developing

Countries: A ComparativeStatistical Assessment Govindan Nair December 1988 L. Matthelsen

Anastasios Fllippides 33757

WPS46 The Management of Public Expenditures:

An Evolving Bank Approach Robert Lacey January 1989 L. Matthiesen

33757

WPS47 Considerations for the Development ofTax Policy When Capital Is Inter-nationally Mobile Robert F. Conrad March 1989 L. Matthelsen

33757