Optimal Tax Routing: Network Analysis of FDI Diversion
CentER Discussion Paper Series No. 2017-022
45 Pages Posted: 26 Apr 2017
Date Written: April 25, 2017
The international corporate tax system is considered as a network and, just like for transportation, ‘shortest’ paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.
Keywords: corporate taxation, tax treaties, treaty shopping, tax havens, shortest path
JEL Classification: F23, H25, H26, H87
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