Part 1 - AL-Tax

International Taxation Handbookrelationship and interdependence between the financial sector and tax procedures(Gordon and Li, 2005), tax planning (Desai, 2005), the repatriating policy ofincome for the host country (Desai et al., 2002), and tax effects on dividends (Poterbaand Summers, 1984).There is evidence that the design of national tax policy influences the level ofinvestment, especially in the case of direct investment (Desai et al., 2002; Simmons,2003). This supports the idea that many governments maintain low corporate taxrates to encourage investment. Desai et al. (2002) analyzed the impact of indirecttaxation on foreign direct investment in developing countries.Aizenman and Jinjarak (2006) addressed panel regressions and controllingstructural factors, and concluded that trade openness and financial integrationhave a positive relationship with ‘hard to collect’ taxes (i.e. VAT, income tax, andsales taxes) and a negative relationship with ‘easy to collect’ taxes (tariffs andseigniorage). Effective tax rates can vary considerably from country to country.In developing countries, however, tax rules between segments of companiesfrequently vary as well. Many firms use legal tax avoidance methods, others findthemselves facing very high liabilities.Gordon and Li (2005) argued that the optimized use of the financial sectorcould be the reason for this difference. They note that when firms generate apaper trail, they facilitate tax enforcement. The authors further discussed theimpact of domestic tax revenue in developing countries on multinational companies.They concluded that if multinational companies sell goods produced bydomestic taxable firms, the tax effect will depend on the relative taxes paid bythe multinationals vis-à-vis the domestic firms. In this situation, for example,multinationals would pay lower taxes. Additionally, restrictions to entry of foreignfirms are common in sectors dominated by domestic firms. Should untaxedfirms dominate the economy or sectors, the entry of multinationals would increasetaxes.Tax planning is another tax regulation approach, whereby legal tax avoidanceby firms is seen as a transfer of value from the state to shareholders (Desai, 2005).Desai (2005) and Desai et al. (2004) concluded that governance should be animportant determinant of the valuation of corporate tax savings. In strong governanceinstitutions, the net effect on value should be greater and tax avoidance willbe more difficult to measure.Altshuler et al. (1995) argued that multinationals have an incentive to repatriatemore profits from a subsidiary when the tax cost is temporarily relativelylower than normal. They will have an incentive to retain more profits when thetax cost of repatriation is higher than normal.326