Corporate Taxation and International Investment Flows

The analysis in the preceding sections has focused on describing the tax burden faced by different types of foreign investment in the Asia-Pacific Region. In this section, we discuss the interaction between corporate tax burdens and actual foreign direct investment flows. In recent decades, governments across the world have become increasingly concerned about the impact of taxes on international investment flows. High tax countries fear that the tax burden on corporate investment may lead to a relocation of economic activity to countries with lower taxes. Some countries have actively pursued a low lax strategy with the objective to attract investment from other countries. In Europe, the significant decline in corporate income tax rates, which occurred during the last two decades, is widely seen as reflecting the forces of corporate tax competition. In East Asia, governments are at least as concerned about attracting foreign direct investment as governments in other regions.

The location of foreign direct investment depends on a large number of factors. Next to taxes, these include the proximity to clients or suppliers, the availability of key inputs like qualified employees or financial services, regulations, political stability of a country and many more. But the particular importance of taxes is due to the fact that taxes can be changed relatively easily and quickly whereas other important factors like e.g. proximity to markets or the availability of qualified employees can either not be changed at all or only in the long term.

In this section, we raise two related questions: Firstly, do we observe a process towards corporate income tax cuts as one would expect if territories compete for foreign direct investment? Secondly, is there a significant impact of taxes or tax incentives on foreign direct investment flows and if so, how large is this impact? Mainly for reasons of comparability and data availability, we focus on the following group of ten East Asian territories: China, India, Indonesia, Hong Kong, South Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan.

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