Optimal Tax Routing: Network Analysis of FDI Diversion

CentER Discussion Paper Series No. 2017-022

45 Pages Posted: 26 Apr 2017  

Maarten van 't Riet

CPB Netherlands Bureau of Economic Policy Analysis

Arjan Lejour

CPB Netherlands Bureau of Economic Policy Analysis; Tilburg School of Economics and Management

Date Written: April 25, 2017

Abstract

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

Suggested Citation

van 't Riet, Maarten and Lejour, Arjan, Optimal Tax Routing: Network Analysis of FDI Diversion (April 25, 2017). CentER Discussion Paper Series No. 2017-022. Available at SSRN: https://ssrn.com/abstract=2958027 or http://dx.doi.org/10.2139/ssrn.2958027

Maarten Van 't Riet (Contact Author)

CPB Netherlands Bureau of Economic Policy Analysis ( email )

P.O. Box 80510
2508 GM The Hague, 2585 JR
Netherlands

Arjan M. Lejour

CPB Netherlands Bureau of Economic Policy Analysis ( email )

Bezuidenhoutseweg 30
po box 80510
The Hague, 2594AV
Netherlands
+31 652485843 (Phone)

HOME PAGE: http://www.cpb.nl/en/medewerkers/arjan-lejour

Tilburg School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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