On the relevance of double tax treaties in the presence of treaty shopping

Kunka Petkova, Andrzej Stasio, Martin Zagler

Publication: Working/Discussion PaperWU Working Paper

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.
Original languageEnglish
Publication statusPublished - 2018

Publication series

NameWU International Taxation Research Paper Series
No.2018-05

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502047 Economic theory
  • 502010 Public finance
  • 502046 Economic policy

WU Working Paper Series

  • WU International Taxation Research Paper Series

Cite this