The Effect of Corporate Profit Tax on Attracting Foreign Direct Investment in Albania

Abstract

The aim of this study is to analyze the major cause of the instability of foreign direct investments in Albania these last years, their lowest level of FDI when compared with other countries in the region, and the importance of these investments in developing countries like Albania. The size of FDI has a significant effect on the financial and macroeconomic factors, government and infrastructure factors, and the factors by fiscal nature. In this study, we disengage fiscal factors and in particular, the corporate profit tax rate. The aim of this study was to prove that in countries with weak legal infrastructure, this factor is statistically significant in attracting Foreign Direct Investment. Thus, should Albania be considered as a country with weak legal infrastructure? Due to this question, we took into consideration specific indicators measured in recent years by various world organizations by comparing them with various countries of the region. Also, we built an econometric model through multiple regression by collecting data on the tax rate applied in Albania from 1992-2016, and the level of FDI for this period. This is in a bid to ascertain the effect or impact that profit taxes has on FDI inflows in Albania. In conclusion, Corporate Tax Rates is a factor that has a very significant impact on the size of FDI in Albania.

Macroeconomic Implications of Changes in Corporate Tax Rates: A Review

“…The study finds a median tax elasticity of −1.45. Using a gravity model for nine OECD countries, Coelho (2011) finds a significant negative tax effect on FDI. Based on a dynamic panel model for European transitional economies, Demekas et al (2007) assess the impact of labour cost, corporate tax burden, etc.…”