Classical corporation tax as a global means of tax harmonization

Tax neutrality of financial and dividend policies of the multinational with multinational ownership are studied using the trapped equity approach whereby all dividend taxes in the repatriation and onward distribution stage capitalize in the market value of foreign profits. The practice of imputing corporation tax only to the domestic shareholders converts the imputation system effectively back to a classical corporation tax. Imputation system also requires complex rules for exempting flow-through dividends from equalization tax to avoid its cumulation. In contrast, classical corporation tax is neutral in respect of the financing and dividend decisions by adopting double taxation of interest income.