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International Taxation of Equity Returns

International Taxation of Equity Returns. An imbroglio of tax laws and the MacDougall Model. Distinction between debt returns and equity returns. In most tax structures taxes are levied only on returns on equity. Therefore: Debt financing is favorable in high-tax environments

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International Taxation of Equity Returns

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  1. International Taxation of Equity Returns An imbroglio of tax laws and the MacDougall Model

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

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

  4. Home Government Tax Policies • Policy considerations • Treatment of foreign income and foreign taxes paid • Exemption • Tax crediting • Deduction • Double tax • Taxation timing

  5. Assessment of International Tax Policy and Management The dichotomy of interest between host and home countries

  6. Fundamentals • Maximize profits by avoiding taxes • Equity taxed by host • Debt taxed by home

  7. The MacDougall Model of International Capital Flows • Fixed supply of capital (k) • Downward sloping marginal product of capital (MPK) • Real interest rate • GDP

  8. r R* A B r C MPK D R(1-t) R* MPK(1-t) MPK* O O* K” K’ K Maximum Global Capital Welfare • Tax Neutrality • Capital export neutrality violation Taxes Collected Loss of World Welfare

  9. The Worldwide Principle • Capital export neutrality corrected r R* Total Home Taxes r A B R* MPK D C R(1-t) R*(1-t) MPK(1-t) MPK* MPK*(1-t) O O* K’ K

  10. r R* A B r C MPK D R(1-t) R* MPK(1-t) MPK* O O* K” K’ K Capital Import Neutrality • Import neutrality holds

  11. Capital Import Neutrality • Import neutrality does not hold r R* r A B R* MPK D C R*(1-t) MPK(1-t) MPK* MPK*(1-t) O O* K’ K” K

  12. Evident Points • Dependence of neutrality • One or the other • Neutrality perfect system

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