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Tax treaties and foreign direct investment: a network approach

Sunghoon Hong ()
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Sunghoon Hong: Korea Institute of Public Finance

International Tax and Public Finance, 2018, vol. 25, issue 5, 1277-1320

Abstract: Abstract 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 a computation algorithm to study the structure of tax-minimizing (direct or indirect) investment routes in the tax treaty network. The treaty shopping rate, defined as the difference between the foreign tax rates of the direct route and a tax-minimizing route, is about 3.66 percentage points on average. This paper also examines the relationship between FDI and the structure of tax-minimizing routes. Empirical results show that the existence of a tax-minimizing direct route is positively and significantly related to FDI. The inward FDI stock via a tax-minimizing direct route is about 2.14 times larger than the inward FDI stock via a direct route that is not tax-minimizing. By making a direct route tax-minimizing, countries can encourage FDI via the direct route and reduce treaty shopping.

Keywords: Tax treaty network; Tax-minimizing route; Treaty shopping rate; Foreign direct investment (search for similar items in EconPapers)
JEL-codes: F23 H25 H87 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:itaxpf:v:25:y:2018:i:5:d:10.1007_s10797-018-9489-0