The governments of many developing countries seek to attract inbound foreign direct investment (FDI) through the use of tax incentives for multinational corporations (MNCs). The effectiveness of these tax incentives depends crucially on MNCs¡¯ residence country tax regime, especially where the residence country imposes worldwide taxation on foreign income. Tax sparing provisions are included in many bilateral tax treaties to prevent host country tax incentives being nullified by residence country taxation. We analyse the impact of tax sparing provisions using panel data on bilateral FDI stocks from 23 OECD countries in 113 developing and transition economies over the period 2002-2012 (with 8189 observations on 1103 country pairs), coding tax sparing provisions in all bilateral tax treaties among these countries. We find that tax sparing agreements are associated with a 30 percent increase in bilateral FDI stocks. The estimated effect is concentrated in the year that tax sparing comes into force and the subsequent years, with no effects in prior years, and is thus consistent with a causal interpretation. Four countries - Norway in 2004, and the U.K., Japan, and New Zealand in 2009 - enacted tax reforms that moved them from worldwide to territorial taxation, potentially changing the value of their preexisting tax sparing agreements. However, there is no detectable effect of these reforms on bilateral FDI in tax sparing countries, relative to nonsparing countries. These results are consistent with tax sparing being an important determinant of FDI in developing countries for MNCs from both worldwide and territorial home countries

This article critically examines recent proposals for a destination-based, cash-flow corporate tax (DCT) as an option for international tax reform. I identify a range of exegetical issues the clarification of which would advance the evaluation of DCT proposals. These include whether DCT proponents have stated relevant and sufficient normative criteria for comparing the current international tax system with reform alternatives, as well as the relationship of the DCT to individual taxation. Moreover, I argue that (i) three versions of the DCT proposal should be distinguished; (ii) it may be misleading to label the most plausible versions of DCT as a tax on corporate profits; (iii) the proposals give rise to concerns about trade distortions; and (iv) an overly abstract approach to corporate losses have prevented DCT proponents from elaborating crucial institutional design issues. I then offer a fundamental critique of the DCT project. DCT proponents tend to be skeptical about residence-based taxation of individuals. Yet they aim to introduce information about individuals qua final consumers into the design of the corporate tax. This is ironic, because individual residency and the location of individuals as consumers are mostly the same. Moreover, market structures and the legal and regulatory apparatus built upon them are more likely to transmit information about individuals as residents than as final consumers. Thus if corporate income is to be taxed by reference to a relatively immobile factor, considering shareholder residence is an at least equally, and probably more, promising approach.