Tax administration quality and foreign investment in developing countries: Evidence from participation in tax inspectors without borders

We examine how tax administration quality in developing countries impacts foreign direct investment (FDI). Developing countries are improving tax administration to raise revenue and reduce dependence on foreign aid. These reforms may deter FDI by raising taxes or attract it by creating a more transparent and predictable investment environment. We use participation in Tax Inspectors Without Borders—a joint OECD-UN program that helps developing countries audit and tax multinational corporations (MNCs)—as a proxy for improved tax administration. We find that tax administration quality is positively related to FDI. Heterogeneity tests demonstrate that tax administration quality attracts FDI by curbing corruption by tax authorities, reducing tax uncertainty, and mitigating agency problems. A falsification test using foreign portfolio investment, which is less affected by changes targeting foreign MNCs, supports our inferences. Our findings have important policy implications as developing countries continue to consider improvements to tax administration capacity.