Bilateral tax treaties and US foreign direct investment financing modes

Abstract

Though it is often claimed that bilateral tax treaties promote foreign direct investment (FDI), previous empirical studies do not support this view. Indeed, the literature provides mixed results where bilateral tax treaties have a positive impact on FDI flows in some studies and a negative impact in other studies. Using US FDI outflows disaggregated into financing modes, equity capital, reinvested earnings, and inter-company debt, we estimate fixed-effects quantile regression models that include controls for new tax treaties, existing treaties (in place prior to the start of the sample period), and the total number of tax treaties a host country has in effect. Results, in general, indicate that both new and existing US bilateral tax treaties are associated with lower FDI outflows to the host country, while the total number of treaties a host country has in place is associated with greater US FDI outflows to the host country. These results also hold for reinvested earnings flows and equity capital flows. For debt flows, however, existing treaties are associated with greater flows, while new treaties and the total number of host treaties show no consistent statistically significant effect.