This paper examines the role of international tax evasion for the choice of an optimal foreign tax credit by a capital exporting region. Since a foreign tax credit raises the opportunity cost of concealing foreign source income, it can be employed to discourage evasion activity. The existence of international tax evasion possibilities could thus help rationalize a choice of tax credit in excess of a deduction-equivalent credit level. Our analysis shows that, in general the optimal credit will be one that results in a mixed tax system and, under certain conditions, the presence of international tax evasion can indeed result in a higher optimal foreign tax credit for a capital exporting country.
Authors
![Person graphic](/sites/default/files/styles/square_desktop/public/2022-06/IFS-person-graphic.png?itok=hWCtTSrz)
Research Associate University of Nottingham
Kim is Professor of Economics and Public Policy and Head of the School of Economics at the University of Nottingham.
Working Paper details
- DOI
- 10.1920/wp.ifs.1997.9711
- Publisher
- IFS
Suggested citation
Scharf, K. (1997). International capital tax evasion and the foreign tax credit puzzle. London: IFS. Available at: https://ifs.org.uk/publications/international-capital-tax-evasion-and-foreign-tax-credit-puzzle (accessed: 30 June 2024).
More from IFS
Understand this issue
![Microphone](/sites/default/files/styles/square_desktop/public/2024-06/Microphone.jpg?itok=soM7Wvbz)
Election Special: Your questions answered
27 June 2024
![Tom Waters](/sites/default/files/styles/square_desktop/public/2024-06/tom%20waters.jpg?itok=faDtwS3F)
What is the two-child limit in benefits?
27 June 2024
![Interview](/sites/default/files/styles/square_desktop/public/2024-06/1.jpg?itok=mjderngL)
Election Special: The big issues politicians haven't spoken about
25 June 2024
Policy analysis
![Welsh town with mountains behind](/sites/default/files/styles/square_desktop/public/2024-06/Welsh-town-feature.jpg?itok=5axb5wZn)
How would the parties’ tax and spending plans affect Scotland and Wales?
28 June 2024
![Polling station](/sites/default/files/styles/square_desktop/public/2024-06/Polling-station-school.jpg?itok=uS-l6b-1)
What are the parties’ plans for benefits and taxes?
24 June 2024
![Ambulance and police car](/sites/default/files/styles/square_desktop/public/2024-06/Ambulance-and-police-car.jpg?itok=RMgHb2lX)
How should we interpret parties’ public spending pledges this election?
23 June 2024
Academic research
![Journal cover](/sites/default/files/styles/portrait/public/2024-01/Review%20of%20Economics%20and%20Statistics.jpg?itok=17sKhTtl)
Intertemporal income shifting and the taxation of business owner-managers
24 January 2024
![Working Paper Cover](/sites/default/files/styles/portrait/public/2023-11/WP202333-Insurance-redistribution-and-the-inequality-of-lifetime-income_Page_01.jpg?itok=R5jXnKQm)
Insurance, redistribution, and the inequality of lifetime income
2 November 2023
![Working paper cover](/sites/default/files/styles/portrait/public/2024-03/WP202405-The-menopause-penalty.jpg?itok=EMllthlH)
The menopause "penalty"
18 March 2024