The Effect Of Preferential Tax Regimes On Foreign Direct Investment

Recently, the topic of preferential tax regimes is becoming concerned across countries because of their effects on Foreign Direct Investment (FDI). Since some preferential tax regimes are harmful tax competitions, OECD took a series of measures on restricting these regimes when they aimed at eliminating harmful tax competitions from 1996. Moreover, in 2008, Chinese tax regime is entering into a new era called "two-tax merger", which means incorporation of two sets of corporate income tax regimes. All of these make the study of the effect of preferential tax regimes on FDI meaningful.Due to no literature concerned about preferential tax regimes theory in China, this paper first reviews the latest development of preferential tax regimes theory. Basing on this review, this study then sets up a model of preferential tax regimes with asymmetric countries. In contrast with original model, this thesis extends this asymmetric model and gets a different result, which can be explained by later symmetric model. After verifying this different result, this paper takes newest empirical research to bolster assumptions and results from previous models.In conclusion, this study buttresses that "two-tax merger" has its own foundation from theory and empirical study. Whether to give FDI preferential tax treatment depends on the nature of the industry that FDI belongs to. If anti-discrimination effect dominates in this industry, government should give this sort of FDI long-term preferential tax regimes according to neighbor countries; if anti-dumping effect dominates, then government should give this kind of FDI short-term preferential tax regimes or just the same tax regimes like other industries.