Effects of an Equalization Tax on Multinational Investments and Transfer Pricing

This paper analyzes effects of an equalization tax on the decisions of a multinational company. An equalization tax is an extra corporation tax on dividend distributions to ensure that the underlying profit of a dividend has borne a tax in the corporate sector equal to the imputation credit given to the shareholder. An equalization tax is shown to increase incentives for home-country real and financial investments and for transfer pricing to shift taxable income even from low-tax countries to high-tax home countries of parent companies. The current EU process of exchanging imputation systems and equalization tax for classical systems may thus have adverse tax revenue effects in the countries concerned.