Final answer:
To attract FDI, many countries have done away with double taxation on foreign income. This change aims to create a welcoming investment climate and mitigate the challenges of the global economy that can undermine financial regulation meant to control capital flow. Eliminating double taxation can help low-income countries by encouraging the foreign investment they need for development.
Step-by-step explanation:
To encourage Foreign Direct Investment (FDI), many countries have eliminated double taxation of foreign income. This strategy aims to attract investment by reducing the fiscal burden on companies seeking to invest in these countries. The concept of double taxation refers to the situation where income from foreign investments is taxed both in the country of origin and the investor's home country. By eliminating this, countries can create a more favorable environment for international investors.
Taxes on international capital flows are sometimes referred to as Tobin taxes, named after James Tobin, an economist who proposed the idea. Governments may impose such taxes on foreign exchange transactions or certain types of investments to control capital flow. However, these measures can have downsides, as they might discourage investment and complicate international trade.
Global economy complexities also pose challenges to implementing restrictive financial measures such as Tobin taxes. Firms can easily conduct transactions in tax havens, like the Grand Caymans, to avoid taxes imposed within a particular country's territory. Furthermore, in a global economy where goods and services flow freely, financial payments must also cross borders, making it nearly impossible for countries to selectively limit capital movement while participating in international trade.
Ultimately, countries, particularly those with low incomes, are in need of foreign investment for economic development. While Tobin taxes and other regulatory measures might mitigate potential harms, they also run the risk of foreclosing meaningful economic opportunities. Thus, to strike a balance between regulation and development, many countries choose to relax certain taxation principles in favor of attracting FDI.