THE IMPACT OF CORPORATE INCOME TAX ON FDI INFLOW IN EMERGING EU ECONOMIES

Abstract

After global financial crisis, intensive tax policies adjustments were applied in emerging European Union (EU) economies, for the sake of tax competitiveness. In order to ensure that aim, emerging EU economies most often choose the policy of tax reduction and particularly lowering corporate income tax rate. This paper deals with the impact of corporate income taxes on foreign direct investment (FDI) inflow in selected emerging EU economies (Czech Republic, Hungary, Lithuania, Latvia, Poland, Slovakia, Slovenia) between two crises (global financial and pandemic), namely, over the period 2010-2019. Using classical panel data models (Fixed Effects and Random Effects model), the research shows that it is expected that corporate income taxes reduction provides FDI inflow. Observing the relationship between other factors (corruption index, competitiveness index and short-term interest rate) and FDI inflows, positive relations are confirmed. Panel-corrected standard errors (PCSE) estimator, implemented as robustness check, confirmed the results and conclusions based on FE model. However, negative relationship between corporate income taxes and FDI in the case of PCSE model is only verified in case of Hungary and Latvia, indicating tax competitiveness existence.