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Optimal tax routing: network analysis of FDI diversion

Maarten ‘t Riet () and Arjan Lejour ()
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Maarten ‘t Riet: CPB Netherlands Bureau for Economic Policy Analysis

International Tax and Public Finance, 2018, vol. 25, issue 5, 1321-1371

Abstract: Abstract The international corporate tax system is considered a network. Just like for transportation, “shortest” paths are computed, which minimize tax payments for multinational enterprises when they repatriate profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties, and double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6% points. An indicator for centrality in the tax network identifies the UK, Luxembourg, and the Netherlands as the most important conduit countries. Low-tax havens do not have a crucial role in reducing dividend repatriation taxes. By contrast, tax haven financial centres do. In the regressions we find that the centrality measures are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.

Keywords: Corporate taxation; Tax treaties; Treaty shopping; Tax havens; Shortest path (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 H87 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Optimal Tax Routing: Network Analysis of FDI diversion (2017) Downloads
Working Paper: Optimal Tax Routing: Network Analysis of FDI Diversion (2017) Downloads
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