Bargaining Over the Avoidance of Double Taxation: Evidence from German Tax Treaties
39 Pages Posted: 29 Sep 2014
Date Written: September 28, 2014
Previous empirical studies have mainly analyzed tax competition, neglecting the role of tax cooperation in international taxation. We focus on German double taxation agreements (DTAs) and show for up to 45 tax treaties that the bargaining outcomes depend on investment asymmetries between the countries. A transition from a purely symmetrical country pair to a situation where foreign direct investment (FDI) flows in only one direction would increase on average the negotiated withholding tax rate by roughly five percentage points. We also show that bargaining over DTA outcomes is not only about withholding tax rates, but also about the definition of a permanent establishment (PE). Our results are robust with regard to the concept of investment asymmetries (either in shares or levels) and different operationalizations (FDI stocks or sales).
Keywords: double taxation agreements, foreign direct investment, international tax cooperation, withholding tax
JEL Classification: F23, H25
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