Bilateral Tax Competition and Regional Spillovers in Tax Treaty Formation

46 Pages Posted: 10 Apr 2020 Last revised: 5 Jun 2020

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 28, 2020

Abstract

Tax treaties are often seen as a means to mitigate fierce tax competition. Building on former literature, we challenge this view by arguing that taxes on passive income reduce effective average tax rates; and induce neighbouring countries to react by reducing bilateral tax rates. As opposed to traditional tax competition, where every foreign investor would benefit from lower tax rates, we show that countries also engage in cutting tax rates for investors from a particular country, leaving taxes for everyone else unaffected. We call this bilateral tax competition, and we test these predictions empirically. We focus on the four treaty withholding tax rates on passive income - portfolio dividends, participation dividends, interest, and royalties - and collect these rates for 3,000 tax treaties and amending protocols signed between 1930 and 2012. We find a positive relationship in the negotiated withholding tax rates of a destination country's tax treaty and destination country's competitors' past tax treaties with the same source country. This relationship is strongest for the tax rates on interest and royalties.

JEL Classification: F50, F53, F68, H29, H39

Suggested Citation

Petkova, Kunka and Stasio, Andrzej and Zagler, Martin, Bilateral Tax Competition and Regional Spillovers in Tax Treaty Formation (February 28, 2020). WU International Taxation Research Paper Series No. 2020-04, Available at SSRN: https://ssrn.com/abstract=3567791 or http://dx.doi.org/10.2139/ssrn.3567791

Kunka Petkova

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Andrzej Stasio

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

Augasse 2-6
A-1090 Wien
Austria

Martin Zagler (Contact Author)

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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