The financing and taxation of U.S. direct investment abroad

The author examines the financing of U.S. direct investment abroad. Using a theoretical model, he first examines how home country investors can use debt finance to reduce their host country tax liability and to reduce the capital investment distortion attributable to foreign taxes. Empirically, U.S. affiliates are shown to use leverage in high tax environments and in situations where the affiliates face high foreign wage bills relative to assets. This confirms the notion that leverage can be used to ward off host country tax and wage pressures on the firm. The author examines what characteristics of foreign direct investment determine the average host country tax rate paid. Generally, the taxation of foreign direct investment is positively related to the size of the wage bill. Host countries appear to charge lower taxes in cases where U.S. direct investor abroad pay high wage bills to labor within the host country. Certain trends emerge from the data: there is a relative shift of U.S. direct investment abroad toward the industrial countries; debt finance of direct investment is becoming more important in industrial countries and less important in developing countries; and the tax benefits that industrialand developing countries get from U.S. affiliates, as measured by average income and payroll taxes, are waning. The downward trend in tax rates suggests an increased international competition to attract foreign direct investment. The reduction in average tax rates on U.S. investment abroad and the relative shift toward investment in industrial countries suggests a tougher climate ahead for developing countries that wish to attract foreign direct investment. One strategy for attracting foreign investment would be to deepen the domestic financial market so a multinational can attract additional lending capital in the host country itself. Another approach is local equity participation in foreign direct investment to lessen the incentives for host countries to tax foreign investments highly.Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform,International Terrorism&Counterterrorism,Economic Theory&Research

Are there synergies between World Bank partial credit guarantees and private lending?

Since 1994, the World Bank has provided partial credit guarantees to private financiers of several large infrastructure projects in developing countries. A major objective of the partial guarantee program is to leverage Bank resources so as to provide developing countries with better private credit terms. A real test of the efficacy of World Bank partial credit guarantees is whether they also lower the interest rate and lengthen the effective maturity of the part of the credit not covered by the World Bank guarantee. On the basis of deals closed so far, the author finds no evidence that guarantees have affected nonguaranteed interest rates favorably, while the duration of the nonguaranteed credits remains relatively short.International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Strategic Debt Management,Financial Crisis Management&Restructuring,Banks&Banking Reform,Economic Theory&Research,Strategic Debt Management,Insurance&Risk Mitigation

How factors in creditor countries affect secondary market prices for developing country debt

Bank loans to many developing countries trade at a discount on the secondary market. These discounts are typically assumed to reflect only the repayment prospects of the borrower country. But the authors demonstrate that factors in the creditor countries have a major impact on secondary market prices. Their empirical investigation suggests a systematic relationship between secondary market prices and the size distribution of banks'portfolios. There is a strong negative correlation between discounts in the secondary market and U.S. banks'heavy exposure to developing country debt. It is estimated that every US$4 billion increase in a large bank's exposure to a country reduces the discount 10 to 15 cents on the dollar. The authors find that discounts and total bank capital are positively correlated over time : a US$8 billion increase in the capital of the largest U.S. banks increases discounts by nearly 25 cents on the dollar. They explain their results with a simulation model of a representative bank with minimum capital requirements, flat-rate deposit insurance, and limited liability. The bank's portfolio adjustment decision involves trading risky foreign loans in the secondary market or making short-term domestic loans. The model yields a negative relationship between the banks'exposure to developing countries and discounts in the secondary market.Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies,Financial Crisis Management&Restructuring

Bank Exposure, Capital and Secondary Market Discounts on the Developing Country Debt

Previous empirical studies of secondary market discounts for developing countries have ignored important creditor country factors. The empirical evidence in this paper indicates that, after controlling for repayment indicators of borrower countries, bank exposure and capital are important determinants of secondary market discounts: an increase in the exposure of large banks to a particular country leads to a decrease in the secondary market discounts on the debt of that country, while an increase in the capital of large banks leads to an increase in secondary market discounts. Among the repayment indicators of developing countries, only debt ratios are found to be significant determinants of the discounts. We suggest that the impacts of exposure and capital can be explained by the presence of deposit insurance. The evidence presented on the stock market pricing of lender banks supports this view.

Foreign Ownership and Corporate Income Taxation: An Empirical Evaluation

Economic integration in Europe has not led to a ‘race to the bottom’ regarding corporate income taxes. This paper documents trends in the foreign ownership of companies in Europe and it examines whether foreign ownership has exerted a positive influence on corporate income tax levels. Using company-level data, we document that the foreign ownership share in Europe stood at around 21.5 percent in the year 2000. The estimation suggests that a one percentage point increase in foreign ownership increases the average corporate income tax rate between a half and one percent. Further international economic integration is likely to lead to higher foreign ownership shares with a concomitant positive influence on corporate taxation levels.corporate taxation, foreign ownership

Deposit insurance and international bank deposits

This paper examines how international depositors respond to national deposit insurance policies. Countries with explicit deposit insurance are found to be relatively attractive to international non-bank depositors. Deposit schemes characterized by coinsurance, a private administration, and a low deposit insurance premium appear to be particularly favored by these depositors. The sensitivity of non-bank deposits to deposit insurance policies opens up the possibility of international regulatory competition in this area. The EU directive on deposit insurance imposes minimum standards on national deposit insurance policies. This directive, however, is silent on several important features of deposit insurance such as the level of the deposit insurance premium. Hence, it may not preclude regulatory competition in Europe.deposit insurance, international deposit

U.S. Commercial Banks and the Developing Country Debt Crisis

The major theme of this paper is that the commercial banks have weathered the debt crisis, while many debtor countries remain in economic paralysis or worse. There is a growing consensus that much of the LDC debt will not be fully serviced in the future, and that consensus is reflected in at least two ways: in the discounts observed in the secondary market prices for LDC debt, and in the discounts in the stock market pricing of banks with exposure in the LDCs.

U.S. Commercial Banks and the Developing-Country Debt Crisis

macroeconomics,commercial banks, developing countries, debt

The Taxation of Interest in Europe: A Minimum Withholding Tax?

This paper provides an analysis of the proposal for introducing a minimum withholding tax on interest in the EU. We present a model with three countries: a typical EU country, an 'inside' tax haven, and an 'outside' tax haven. In the initial non-cooperative solution, the former two countries impose withholding taxes on interest. We investigate what happens to welfare in these countries, if the 'inside' tax haven is forced to raise its withholding tax. From the model we proceed to a broader evaluation of the minimum withholding tax proposal.

Are banks too big to fail or too big to save ? International evidence from equity prices and CDS spreads

Deteriorating public finances around the world raise doubts about countries'abilities to bail out their largest banks. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank stock prices and credit default swap spreads. Overall, bank stock prices reflect a negative capitalization of government debt and they respond negatively to deficits. The authors present evidence that in 2008 systemically large banks saw a reduction in their market valuation in countries running large fiscal deficits. Furthermore, the change in bank credit default swap spreads in 2008 relative to 2007 reflects countries'deterioration of public deficits. The results of the analysis suggest that some systemically important banks can increase their value by downsizing or splitting up, as they have become too big to save, potentially reversing the trend to ever larger banks. The paper also documents that a smaller proportion of banks are systemically important -- relative to gross domestic product -- in 2008 than in the two previous years, which could reflect private incentives to downsize.Banks&Banking Reform,Debt Markets,Access to Finance,Bankruptcy and Resolution of Financial Distress,Economic Theory&Research