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Abstract - This paper considers the impact of international taxation on patterns of foreign direct investment and on the extent of international tax avoidance activity. Recent evidence indicates that taxation significantly influences the location of foreign direct investment, corporate borrowing, transfer pricing, dividend and royalty payments, and RSD performance. Reactions to worldwide tax rate differences, as well as to changes in international tax rules, provide important information concerning the extent to which taxpayers respond to incentives. The generally high degree of responsiveness in turn carries implications for the design of domestic as well as international tax policy.
INTRODUCTION
The evolution of American economic policy mirrors the increasing openness of the world economy Economic well-being in the United States is affected by the performance of foreign economies and the economic policies of foreign governments. Attention to foreign considerations is increasingly evident in the formulation of tax policy. Recent U.S. tax changes reflect the importance of global competition and devote considerable effort to revising provisions that concern the taxation of foreign income.1
The international dimensions of tax policy have for years been something of a sideline area for tax specialists. In part, this was due to the (perceived) complexity of the tax laws and regulations that apply to international transactions and, in part, due to quantitative unimportance of international transactions in the U.S. economy.
The purpose of this paper is to review the state of empirical evidence on the behavioral impact of international tax rules. Careful consideration of some of this literature is likely to dispel longstanding concerns over the unimportance and intractability of international tax provisions, while illustrating ways in which international and domestic tax policies can be coordinated. There are two noteworthy implications of recent empirical evidence. The first is the size and importance of the effects of international tax rules on behavior, particularly on the activities of multinational corporations. The second is the applicability of lessons learned from behavioral responses to international tax rules in designing domestic tax policy.
INTERNATIONAL TAXATION FOR BEGINNERS2
The taxation of international transactions differs from the taxation of domestic economic activity primarily due to the complications that stem from the taxation of the same income by multiple governments. In the absence of some kind of corrective mechanism, the...