The impact of unilateral tax treaty terminations on FDI
25 Pages Posted: 16 Sep 2023
Date Written: September 15, 2023
This paper studies the effect of unilateral tax treaty terminations on FDI. It focuses on developing countries terminating tax treaties with developed countries for the reasons of tax revenue losses. The paper focuses on the effects of terminations for developing countries. To assess the effects of terminations on FDI, a theoretical model is developed incorporating factors such as the rate of return on FDI, exit and entry costs, termination-induced distortion, and the probability of concluding new treaties. The empirical analysis adopts a case study approach due to data restrictions, examining treaty terminations in Mongolia and Argentina. The insights gained from these cases can be generalized to other contexts. Using inward FDI data from the Investment Map database and the Coordinated Direct Investment Survey, the paper applies Poisson pseudo maximum likelihood estimation with two-way fixed effects. The results indicate that during termination years, treated countries experience an average FDI decrease of 28%. These findings contribute to our understanding of the impact of tax treaty terminations on FDI and may have significant implications for policymaking and investment strategies.
Keywords: tax treaty, termination, FDI
JEL Classification: F53, F21
Suggested Citation: Suggested Citation