On the Relevance of Double Tax Treaties
29 Pages Posted: 19 Feb 2018
Date Written: February 18, 2018
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
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