Tax Treaties and Foreign Direct Investment: A Network Approach
نویسنده
چکیده
Multinational investors often reduce tax on dividends by using indirect investment routes. This paper constructs a tax rate matrix to represent a real-world network of tax treaties between 70 countries and develops network algorithms to study the structure of tax-minimizing (direct or indirect) investment routes in the tax treaty network. The treaty shopping arbitrage rate, defined as the difference between the foreign tax rates of the direct route and a tax-minimizing route, is estimated to be about 3.57 percentage points on average. In bilateral FDI data, it appears that the average inward FDI stock via a taxminimizing direct route is about 3.75 times larger than the average via a direct route that is not tax-minimizing. Empirical results confirm that the availability of a tax-minimizing direct route is positively and significantly related to FDI. By making a direct route tax-minimizing, countries can encourage FDI via the direct route and reduce the use of indirect routes through conduit countries. JEL classification: F23, H25, H87
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