INVESTMENT INCENTIVES AND INTERNATIONAL TAX PARADOXES

A multinational firm undertakes investments in a high tax country and a low tax country. It is shown that the imposition of taxes affects in vestments between the two countries by increasing or decreasing the re ntal rate of capital relative to the pre-tax situation and relative to each other. The analysis demonstrates, contrary to popular belief, th at when the value of the firm is maximized to its owner, taxation may change the cost of capital in favor of the country with the least gene rous tax system. In particular, when the source principle applies to i nterest income, international tax paradoxes are likely to occur.