Abstract
This paper investigates the effects of double tax treaties (DTTs) on foreign direct investment (FDI) after controlling for their relevance in the presence of treaty shopping. DTTs cannot be considered a bilateral issue, but must be viewed as a network. We define tax distance as the cost of channelling corporate income from one country to another and, by considering treaty shopping through intermediate jurisdictions, we calculate the shortest (i.e. the cheapest) distance between any two countries. We show that relevant tax treaties—which reduce the direct tax distance both over domestic law and the entire existing treaty network—will increase FDI by about 18%.
Highlights
Double tax treaties (DTTs) served as an important policy tool to promote international economic activity by preventing international double taxation
This paper investigates the effects of double taxation treaties on foreign direct investment (FDI) controlling for the possibility of treaty shopping that might give multinational companies benefits, such as lower or no withholding taxes
We plot for every single observation in our panel the direct tax distance in the absence of treaty shopping, DirectTaxDistance
Summary
Double tax treaties (DTTs) served as an important policy tool to promote international economic activity by preventing international double taxation. The OECD highlights that treaty shopping is one of the most significant sources of concerns regarding the Base Erosion and Profit Shifting (BEPS) project (OECD 2015) Against this background, this paper investigates the effects of double taxation treaties on foreign direct investment (FDI) controlling for the possibility of treaty shopping that might give multinational companies benefits, such as lower or no withholding taxes. Using the United States Bureau of Economic Analysis firm-level data, Blonigen et al (2014) find a positive effect of DTTs on foreign direct investment, but only when accounting for the firms’ use of differentiated inputs These (multinational) firms benefit from treaty provisions establishing guidelines for resolving disputes between taxation authorities.
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