Tax-aided financial services companies and the cost of capital

Over the past two decades, the governments of several European countries have implemented special tax devices to attract the finance centres of multinational companies. This paper determines how the cost of capital for investments made by multinationals is affected by the tax regimes, bringing into play the Irish financial services company, the Belgian co-ordination centre, the Dutch finance company and the Luxemburg company coupled with a Swiss finance branch. It gives evidence that intermediation of a tax-aided services company in the financing scheme of a foreign subsidiary provides an important tax saving. However, the home and source countries\' tax regimes influence the hierarchy of the less heavily taxed treasury and finance centres. The methodology relies on the marginal effective tax rates theory and consists of an extension of Alworth’s (1988) model to include treasury centres.

Location, investment and regional policy: the contribution of the average effective tax rate theory

For decades, most industrialised countries have implemented some forms of fiscal and financial incentives to stimulate fixed capital formation. Tax cuts and capital grants are of great use in regional policy. Since these instruments mobilise huge amounts of public resources the issue of their efficiency is of particular interest for policymakers. The impact of taxation on investment income was traditionally apprehended through models measuring the effective tax rate on marginal investments. However recent literature, especially Devereux and Griffith (2002), showed the interest of resorting to an alternative tax measure – the effective average tax rate (EATR) - when firms face discrete investment choices that are expected to generate positive economic rent before tax. This effective average tax rate is defined by the difference between the net present value of the rent of the investment before and after taxes scaled by the net present value of the pre-tax income stream. In this sense, the effective average tax rate developed by Devereux and Griffith (2002) seems to be particularly relevant to shed a new light on the relative effectiveness of tax cuts and capital subsidy grants. In this paper we intend to compare the costs for public authorities to lower the corporate tax rate or to grant a capital subsidy. These public costs are directly affected by the variation of the after-tax revenue earned by the shareholder. The extent to which each policy must be implemented depends on the channel chosen by the government to stimulate investment. We pay attention to two of these channels: a reduction of the capital cost and a lowering of the EATR. Finally, in order to illustrate the relevance of our approach, we developed a numerical example for the Belgian case. JEL Classification: H25, H32 and R58

What Regional Policy to Make up for Regional Productivity Handicap?

Regional policies have long been implemented in most industrialized countries with the purpose of achieving a better balance of the spatial distribution of economic activity. What regional policy has to be implemented to make up for a regional productivity handicap - The a-spatial cost of capital expression is derived from the well-known neoclassical theory of investment. It can be extended in order to account for regional differences in productivity. By differentiating the "spatialized" cost of capital, it is possible to determine how important the economic policy must be for balancing productivity differences. The paper will introduce the method and give prominence to some of the main results

Interregional differences in taxes and population mobility

Belgium is a federal state where regional fiscal competences have been increasing. In particular, the regions are now able to increase or to lower the personal income tax burden of their residents via positive and negative surcharges. Should the regions adopt the possibilities opened by the Law, would it influence interregional mobility? It is not possible to assert directly this question. However, indirect evidence of the impact of fiscal disparities on mobility can be found by analysing the mobility between municipalities. Indeed, for long, the real estate income tax and the local surcharges on the federal personal income tax have not been uniform on the Belgian territory. We tried to quantify whether those tax differences generated population moves from the more expensive municipalities to the less expensive ones. The attractiveness of the municipalities measured by means of their intra Belgium migration balance has been explained by local wealth, employment rate, quality of the local administration, proximity to the coast, three indexes constructed by a factor analysis based on a satisfaction survey, housing prices and local taxation. Our estimations showed that local tax level has no significant impact on the local migration balance. Is this observation transposable at the regional level? On one side, the answer to this question depends on the level of disparities in tax rates that such a practice would introduce. On the other side, if disparities in regional tax were to appear, interregional mobility would be slowed down by the impact of the interregional cultural differences.