May 28, 2002

Taxation and foreign direct investment: A synthesis of empirical research

During the last decade, European countries have reduced company tax rates. Indeed, whereas the mean corporate income tax rate in the EU was 38% in 1990, it dropped to 33% in 2000 (Gorter en De Mooij, 2001).

Although the average tax burden on companies has been rather stable during this period, some EU governments have recently launched proposals to also reduce it. To illustrate, Germany, Ireland and Portugal have recently reduced their taxes while the Netherlands, Italy and France are discussing proposals for tax reform and relief. These proposals are motivated by the growing internationalisation of businesses and the increasing mobility of capital. Indeed, by reducing tax rates, European countries aim to improve their investment climate for foreign companies.

This paper reviews the empirical literature on the impact of company taxes on the allocation of foreign direct investment.