On the Relevance of Double Tax Treaties

29 Pages Posted: 19 Feb 2018

See all articles by Kunka Petkova

Kunka Petkova

Vienna University of Economics and Business

Andrzej Stasio

Vienna University of Economics and Business - Department of Economics

Martin Zagler

Vienna University of Economics and Business - Department of Economics; University of Piemonte Orientale - Facoltà di Economia

Date Written: February 18, 2018

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, since FDI can flow from home to host country through one or more conduit countries. By accounting for treaty shopping, we calculate the shortest (i.e. the cheapest) tax distance between any two countries allowing the corporate income to be channelled through intermediate jurisdictions. We differentiate between relevant and neutral DTTs - i.e. tax treaties that offer investors a financial advantage - and irrelevant DTTs and use these data to derive two important results. First, only relevant and neutral tax treaties increase bilateral FDI, whereas irrelevant DTTs do not. We can quantify the increase of FDI due to a relevant DTT at around 22%. Second, significant tax reductions due to treaty benefits will lead to an increase in FDI.

Keywords: Double Tax Treaties, Treaty Shopping, Treaty Network, Foreign Direct Investment, Network Analysis

JEL Classification: F21, F23, F53, H25, H26, H73, H87, K34

Suggested Citation

Petkova, Kunka and Stasio, Andrzej and Zagler, Martin, On the Relevance of Double Tax Treaties (February 18, 2018). WU International Taxation Research Paper Series No. 2018-05. Available at SSRN: https://ssrn.com/abstract=3126593 or http://dx.doi.org/10.2139/ssrn.3126593

Kunka Petkova

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Andrzej Stasio (Contact Author)

Vienna University of Economics and Business - Department of Economics ( email )

Augasse 2-6
A-1090 Wien
Austria

Martin Zagler

Vienna University of Economics and Business - Department of Economics ( email )

Augasse 2-6
A-1090 Wien
Austria

University of Piemonte Orientale - Facoltà di Economia ( email )

Via Perrone, 18
Novara, 28100
Italy

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