The Foreign Investment Effects of Tax Treaties

Arjan Lejour

No 1403, Working Papers from Oxford University Centre for Business Taxation

Abstract: We examine the impact of bilateral and multilateral tax treaties on bilateral FDI stocks. First, we present panel regressions of the effects of treaties on FDI based on an extensive database of all OECD countries from 1985 onwards. We use geographic instruments to correct for the endogeneity of tax treaties. In contrast to many papers we find that these treaties increase bilateral FDI significantly. The incrase is about 16 percent and for new treaties this is even 21 percent. Moreover, the EU parent subsidiary directive doubles bilateral FDI stocks. Second, we analyse the effects of treaty shopping on FDI using the number of tax treaties as proxy for the attractiveness of a country for establishing a holding. This indicator has a significant impact on FDI: twenty extra tax treaties increase bilateral FDI stocks by about 50 percent. Lower withholding tax rates of dividends do also attract FDI.

Keywords: bilateral tax treaties; instrumental variables; FDI; treaty shopping (search for similar items in EconPapers)
JEL-codes: F21 F23 H25 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-int and nep-mfd
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Citations: View citations in EconPapers (7)

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Working Paper: The Foreign Investment Effects of Tax Treaties (2014)
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