IS TAXATION AFFECTING THE ATTRACTIVENESS OF CENTRAL AND EASTERN EUROPE COUNTRIES FOR FDI?

Abstract

The target of this paper is to determine whether taxation affects the attractiveness of Central and EasternEurope (CEE) countries for foreign investors. In this scope, the paper analyzes the impact of taxation for thelocation decision of foreign direct investment (FDI) in CEE countries both in 2007 and 2010. A taxation indexinvesting the effect of multiple host country taxes is developed in order to draw the attractiveness matrix for thecountries taken into account. The taxation level comprises the corporate income tax rate, representing directtaxation, the value-added tax (VAT) and the social security contributions expressing indirect taxation and finally theease of paying taxes, as provided in Doing Business report. The results indicate that relieving the burden of payingtaxes by tackling the taxation issue is a mean for improving the FDI attractiveness of a country. Still, there are otherfactors that have higher influence on FDI inflows. The main finding is that there is no perfect correspondencebetween the shifts in taxation rankings and the FDI inflows performance.

Keywords

• foreign direct investment
• corporate income tax rate
• indirect taxation
• Central and Eastern Europe