Tax factors affecting FDI allocation in the EU post-socialist states

ABSTRACT

The aim of the paper is to reveal the parameters of tax systems – in both the investor and the recipient state – that influence FDI allocation in post-socialist EU countries and cross-border flows of selected types of payments. Our results confirm that investors from EU countries strive to take advantage of both tax rate differences and aggressive tax planning strategies. Regression model estimates show that the investor’s national tax system is of key importance if it allows for the non-taxation of interest income, application of lower rates to royalties and use of special purpose entities. Moreover, the size of FDI is relatively strongly linked to the amount of payments for advisory services and royalties which are often used for aggressive tax planning. The estimated elasticity of FDI to the tax rate is around 1.1 and 1.9 for statutory and effective rates, respectively.

KEYWORDS:

• FDI
• base erosion
• profit shifting
• cross-border payments
• corporate taxation
• aggressive tax planning

Acknowledgments

The present study is an output of a research project Fair corporate taxation: Measurement of the impact of the corporate profit shifting on the budget of the Czech Republic registered by the Czech Science Foundation under the registration number 18-14082S, and a research project of institutional support at Faculty of Finance and Accounting at the University of Economics, Prague IP 100040.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Czech Science Foundation [18-14082S]; University of Economics, Prague (CZ), Faculty of Finance and Accounting [IP 100040].