Suppose that the corporate tax schedule in Finland is as follows:

• 25 percent tax on income below eur 50,000.

• 30 percent tax on income between eur 50,000 and eur 100,000.

• 35 percent tax on all income exceeding eur 100,000.

(a) What is the tax if a Finnish corporation's income is eur 200,000, whereof 100,000 are profits on domestic sales and 100,000 are profits on exports to Hong Kong (without PE in Hong Kong)?

(b) Assume that Hong Kong levies a flat 15 percent corporate tax, and no withholding tax on dividends, and that Finland applies a pure exclusion system. Is there any incentive to set up a branch/PE in Hong Kong? If so, what is the worldwide tax?

(c) Add to question (b) a rule under which Finland preserves the progressiveness of the tax schedule (see Figure ??). Is there still an incentive to set up a branch/PE in Hong Kong? If so, what is the worldwide tax?

(d) Repeat question (c) and assume that Hong Kong's tax schedule is identical to Finland's, and that Hong Kong also preserves progressiveness. Is there still an incentive to set up a branch/PE in Hong Kong? If so, what is the worldwide tax?