Tax discrimination against investment in a foreign country

Discrimination against foreign income arises in many ways. In some instances special taxes are imposed on foreign investment income, and in others, foreign income is taxed in a way so fundamentally different from that in which domestic income is taxed that there is a strong presumption of intention to discriminate. In some countries, domestic inter-company dividends are exempt from profits tax in the receiving company on the grounds that the profits have already suffered the same tax in the paying company; dividends from a foreign company fail to qualify for exemption in this way. In the case of individual shareholders in foreign companies, an indirect form of discrimination may be occasioned by the fact that a special rebate or credit to the shareholder is afforded in his country of residence only in respect of domestic dividends. In each of these cases, the total tax payable on foreign income may be materially greater than for domestic income. It is believed that this is a significant factor in the relative decline in private as against public sector investment in many countries and that it is largely responsible for the failure to achieve an expansion of more broadly based equity financing.