Determinants of Tax Incentives and the Effect of Corporate Tax Rate on the Foreign Direct Investment

Empirical Analysis of Iraqi Government Tax Policy with Comparison to KRG’s Regulations

  • Shene M. Kamaran Abdulla Department of Public Relations and Marketing, Technical College of Administration, Sulaimani Polytechnic University, Sulaymaniyah 46001, Kurdistan Region, Iraq. https://orcid.org/0000-0002-5370-7881
  • Hazhar K. Ali Department of Financial Management and Banking, Cihan University Sulaimaniya, Sulaymaniyah 46001, Kurdistan Region, Iraq. https://orcid.org/0000-0003-3956-2249
Keywords: Tax Rate, Tax policy, Tax Incentives, FDI, Multinational companies, Johansen co-integration, Granger Causation

Abstract

Corporate tax incentives are granted by governments to encourage foreign direct investment FDI. While the tax policy in Iraq varies for both domestic and foreign investments, the Iraqi government offers tax holidays between 3 to 10 years to attract foreign investors to do their desirable investments. The objective of this research is to analyze how Iraqi's corporate tax rate affects FDI, and study the comparison between Iraqi and KRG tax policies. The data are annual observations of the Iraqi tax rate which is the net percentage of profit, and FDI net percentage of GDP. The time-series data from 2005 to 2019 were employed. Three distinct sorts of tests are engaged in this research, the first stage unit root test is conducted to determine the stationary of the data, secondly, Johansen co-integration test was used to find co-integration between variables, and finally, the Granger Causation test is used to determine causality among variables over the period. The finding result shows that the tax rate and FDI are co-integrated and have a long-run relationship. Particularly, foreign direct investment is impacted by changes in the tax rate, while fluctuation in the number of FDI has not any influence on the tax rate.

Downloads

Download data is not yet available.

References

Azémar, C., & Dharmapala, D. (2019). Tax sparing agreements, territorial tax reforms, and foreign direct investment. Journal of Public Economics, 169, 89-108.

Azevedo, A., Pereira, P.J., & Rodrigues, A. (2019). Foreign direct investment with tax holidays and policy uncertainty. International Journal of Finance and Economics, 24(2), 727-739.

Baccini, L., Li, Q., & Mirkina, I. (2014). Corporate tax cuts and foreign direct investment. Journal of Policy Analysis and Management, 33(4), 977-1006.

Braymen, C., Chang, Y.M., & Luo, Z. (2016). Tax policies, regional trade agreements and foreign direct investment: a welfare analysis. Pacific Economic Review, 21(2), 123-150.

Bureau of Economic Analysis. (2019). Investment Climate Statements: Iraq. Embassy Baghdad, Economic Section. Bureau of Economic Analysis, United States. Available from: https://www.state.gov/reports/2019-investment-climatestatements/iraq. [Last accessed on 2022 Jan 06].

Deng, Z., Falvey, R., & Blake, A. (2012). Trading market access for technology? Tax incentives, foreign direct investment and productivity spillovers in China. Journal of Policy Modeling, 34(5), 675-690.

Farnsworth, K., & Fooks, G. (2015). Corporate taxation, corporate power, and corporate harm. Howard Journal of Criminal Justice, 54(1), 25-41.

Hristu-Varsakelis, D., Karagianni, S., & Saraidaris, A. (2011). Equilibrium conditions in corporate tax competition and foreign direct investment flows. Economic Modelling, 28(1-2), 13-21.

Kellard, N.M., Kontonikas, A., Lamla, M.J., Maiani, S., & Wood, G. (2022). Risk, financial stability and FDI. Journal of International Money and Finance, 120, 102232.

Kim, S.K., Kim, M., & Kim, Y.H. (2012). The impacts of PTA formation on small economies’ tax competition for FDI inflows. Economic Modelling, 29(6), 2734-2743.

Merz, J., Overesch, M., & Wamser, G. (2017). The location of financial sector FDI: Tax and regulation policy. Journal of Banking and Finance, 78, 14-26.

Tavares-Lehmann, A.T., Coelho, Â., & Lehmann, F. (2012). Taxes and foreign direct investment attraction: A Literature review. Progress in International Business Research, 7, 89-117.

Tian, Y. (2018). Optimal policy for attracting FDI: Investment cost subsidy versus tax rate reduction. International Review of Economics and Finance, 53, 151-159.

Yu, C.F., Chang, T.C., & Fan, C.P. (2007). FDI timing: Entry cost subsidy versus tax rate reduction. Economic Modelling, 24(2), 262-271.

Published
2022-04-30
How to Cite
Abdulla, S., & Ali, H. (2022). Determinants of Tax Incentives and the Effect of Corporate Tax Rate on the Foreign Direct Investment. Cihan University-Erbil Journal of Humanities and Social Sciences, 6(1), 92-96. https://doi.org/10.24086/cuejhss.v6n1y2022.pp92-96
Section
Articles