Bilateral Tax Competition and Regional Spillovers in Tax Treaty Formation

Kunka Petkova, Andrzej Stasio, Martin Zagler

Publication: Working/Discussion PaperWU Working Paper

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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.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 2020

Publication series

NameWU International Taxation Research Paper Series
No.2020-04

WU Working Paper Series

  • WU International Taxation Research Paper Series

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