Columbia Law School Tax Policy Colloquium

Despite the rise of foreign portfolio investment (FPI) as a dominant international capital flow, existing international tax policy norms are largely focused on the taxation of FDI. This paper proposes a new principle global portfolio neutrality (GPN) for assessing the efficiency of tax policy towards FPI. With respect to outbound FPI, GPN entails imposing the same tax rate on domestic and foreign investment income. With respect to inbound FPI, GPN entails imposing the same tax rate on foreign portfolio investors that they face at home. Unlike existing principles of international taxation that address FDI and worldwide welfare, GPN explicitly addresses national welfare maximization and is derived from a framework that emphasizes risk considerations and portfolio diversification as central motivations for FPI. This principle is violated in practice frequently, particularly with respect to tax-exempt entities. Possible remedies are proposed including reciprocal recognition of tax-exempt status and the implementation of refundable or tradable foreign tax credits. The utility of GPN is reinforced by exploring the legitimate role of the combination of withholding taxes and tax treaties in responding to various forms of tax evasion that employ FPI. Acknowledgments: We thank Alan Auerbach, Steve Bond, Mike Devereux, David Duff, Clemens Fuest, Bill Gentry, Michael Graetz, Harry Huizinga, Louis Kaplow, Michael Knoll, Ruth Mason, John Samuels, Richard Sansing, Dan Shaviro, Alfons Weichenrieder, David Walker, David Weisbach, and various conference participants for helpful discussions on issues related to this paper. Any remaining errors are of course our own.