The Tax Sparing Provision In∞uence: A Credit versus Exempt Investors Analysis

This paper is concerned with the impact of tax sparing provisions on the location choices of multinational enterprises. Special attention is paid to the economic in∞uence of tax sparing because the OECD proposal to reconsider the inclusion of this provision in bilateral tax treaties is highly controversial. An empirical analysis is proposed in order to apprehend the efiects of tax sparing on both credit and exempt investors, since they do not beneflt from the same advantages provided by tax sparing. Using data from 54 developing countries over the 1990-2000, and distinguishing Japanese credit investors from French exempt investors, we flrst flnd that the asymmetrical sensitivity between exempt and credit investors relative to foreign corporate taxes is considerably reduced with tax measures accounting for tax sparing. Second, we flnd that tax sparing provisions have a favorable impact on the location choices of credit investors and have no in∞uence on the location choices of exempt investors. Third, the non-robust signiflcance of both a tax sparing adjusted efiective interest tax rate and efiective royalties tax rate tends to suggest that tax incentives on passive incomes are not really considered by both credit and exempt investors when making the decision of where to invest.