The Effective Tax Burden on Domestic and Cross-Border Investments in the Asia-Pacific Region

Abstract

The intention of the quantitative analysis is to reveal the incentives of the tax systems in the Asia-Pacific region, India, and Russia with regard to location decisions, investment strategies and financing options for subsidiaries. The commonly accepted methodology of Devereux and Griffith (See Devereux and Griffith (1999) and Schreiber et al. (2002)) can provide reliable information on this issue and is therefore relied on in this study. This approach is a so-called forward-looking approach, calculating the tax burden on a hypothetical investment project of a company. Based on the approach of Devereux and Griffith, the European Commission carried out comprehensive surveys on the comparison of effective tax burdens in the EU (See Devereux et al. (2008) and European Commission (2001)). The model applied in this study on the Asia-Pacific region, India, and Russia is the same as the one used by the European Commission.¹ An important strength of this methodology is the possibility of modelling the most relevant provisions of tax regimes in a systematic way. The model of Devereux and Griffith is explicitly conceived to compute the effective tax burden not only on marginal investments (effective marginal tax rate – EMTR) but also on highly profitable investments (effective average tax rate – EATR). Since location decisions for subsidiaries of multinational investors are usually made for highly profitable investments, the EATR constitutes the relevant measure in the context of this study.² When computing the EATR, the most important regulations of the tax regimes in the Asia-Pacific region, India, and Russia are accounted for. Besides the regulations which determine the local tax burden borne in the potential locations of the subsidiary, territory specific withholding taxes on profit repatriation and methods for avoiding international double taxation in the investor’s home territory are accounted for in the calculations. The following section briefly outlines the underlying assumptions on investment and financing strategies and the tax provisions covered by the model.