Tax Policy Harmonization and FDI: An Empirical Assessment

Abstract

This study investigates the impact of tax policy harmonization on foreign direct investment and total investment shares of a country. The percentage of an absolute deviation of a country’s tax policy from a group average is used to measure the harmonization of three types of tax policies: corporate income taxes, consumption taxes, and import taxes. The measurement of harmonization is based on three categories: harmonization across all countries, harmonization within the same regional group, and harmonization within the same economic status group. Empirical findings indicate that more harmonization of a corporate income tax and import duty has positive impacts on those two types of investment shares. The impacts are found to be robust only in developed countries, whereas there is no evidence of the robust impact of harmonization within a developing country group or within the same regional group. Hence, the benefits of strengthening harmonization of tax policies are shown not to be the same for those developed and developing countries.