The Relationship between Tax Burden and Foreign Direct Investment Inflows: A Review of Empirical Literature

Abstract

This study reviews literature on the relationship between tax burden and foreign direct investments (FDI) inflows across the world. Various empirical research have found contradicting outcomes of the relationship between tax burden and FDI inflows. This study aims to establish the dominant relationship between tax burden and FDI inflows. Taxation components such as tax system, tax types, tax rates, tax base, tax structures affect the amount of tax revenues collected hence the tax burden. Therefore, in this study, tax burden was represented by itself and taxation components. The research found literature has two divergent relationships between tax burden and FDI inflows: negative and none. However, the relationships largely depended on the taxation components and country or economic region under study. The research findings demonstrate that world over there is no universal consensus on the relationship between tax burden and FDI inflows. Therefore, tax competition theory, which proposes that there is inverse relationship between tax burden and FDI inflows may not be applicable universally. The research implication is that the paper has demonstrated that inverse relationship between tax burden and FDI inflows is not universal. There is need to establish the relationship between tax burden and FDI inflows in any specific country or economic region. Countries that rely on the presumptive inverse relationship between tax burden and FDI inflows to shape their tax policy to attract FDI inflows should rely on empirical research findings undertaken in the country or economic region. The research recommends empirical studies on the relationships between tax burden and/or taxation components, and FDI inflows in specific countries and economic regions.

Keywords: FDI inflows, Tax Burden, Taxation

Article Review Status: Published

Pages: 67-77 (Download PDF)

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