1. International Taxation of Equity Returns An imbroglio of tax laws and the MacDougall Model

2. Distinction between debt returns and equity returns In most tax structures taxes are levied only on returns on equity. Therefore: –Debt financing is favorable in high-tax environments –Equity financing is favorable in low-tax environments

3. Host Government Tax Policies FIRST!!! Host country takes first crack –Investor direct rate of return Foreign rate of return * (1-foreign tax rate) Withholding Taxes –Penalty for parent paying

4. Home Government Tax Policies Policy considerations –Treatment of foreign income and foreign taxes paid Exemption Tax crediting Deduction Double tax –Taxation timing

5. Assessment of International Tax Policy and Management The dichotomy of interest between host and home countries

6. Fundamentals Maximize profits by avoiding taxes Equity taxed by host Debt taxed by home

7. The MacDougall Model of International Capital Flows Fixed supply of capital (k) Downward sloping marginal product of capital (MPK) Real interest rate GDP

8. Maximum Global Capital Welfare Tax Neutrality –Capital export neutrality violation OO* r r R(1-t) K”K’K R* MPK MPK(1-t) MPK* R* B C D A Taxes Collecte d Loss of World Welfare

9. The Worldwide Principle –Capital export neutrality corrected OO* r r R(1-t) K’K R* MPK MPK(1-t) MPK* R* B CD A MPK*(1-t) R*(1-t) Total Home Taxes

10. Capital Import Neutrality –Import neutrality holds OO* r r R(1-t) K”K’K R* MPK MPK(1-t) MPK* R* B C D A

11. Capital Import Neutrality –Import neutrality does not hold OO* r r K’K R* MPK MPK(1-t) MPK* R* B CD A MPK*(1-t) R*(1-t) K”

12. Evident Points Dependence of neutrality One or the other Neutrality perfect system