Taxation of Domestic Dividend Income and Foreign Investment Holdings

14 Pages Posted: 5 Nov 2013 Last revised: 6 Dec 2016

See all articles by Anil V. Mishra

Anil V. Mishra

Western Sydney University

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Date Written: January 4, 2014

Abstract

This paper highlights the role of dividend imputation in influencing cross-border equity flows. We account for the dividend imputation scheme employed by various countries at different periods of time. In this paper it is argued that the heavier is domestic taxation of domestic dividend income, the more attractive is foreign investment to domestic agents. Dividend imputation eliminates the double taxation of domestic income, reduces the effective tax rate on domestic investment and makes investment in foreign securities less attractive. A fall of 10% in effective tax rate on domestic dividend income reduces foreign equity investment by about 5%. Domestic investors who are paid dividends under a dividend imputation system receive a credit for the tax paid at the company level and this reduces the effective tax rate. Cross-border equity investment is increased if tax credit rises for taxes paid overseas. Empirical analysis is based on bilateral investments among 23 mature economies over 2001–2011.

Keywords: Foreign equity investment, Domestic dividend taxes, Dividend imputation schemes, Franking ratio

JEL Classification: F21, F30, G15

Suggested Citation

Mishra, Anil V. and Ratti, Ronald A., Taxation of Domestic Dividend Income and Foreign Investment Holdings (January 4, 2014). International Review of Economics & Finance, Vol. 31, 2014, Available at SSRN: https://ssrn.com/abstract=2350095 or http://dx.doi.org/10.2139/ssrn.2350095

Anil V. Mishra (Contact Author)

Western Sydney University ( email )

Locked Bag 1797
Penrith, NSW 1797
Australia
+61-2-9685 9230 (Phone)

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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