Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence

Richard Chisik and Ronald Davies

No 20, Working Papers from Toronto Metropolitan University, Department of Economics

Abstract: Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty?s terms. This paper focuses on how bargaining can affect the withholding taxes set under the treaty. In a simple framework, we develop hypotheses about patterns in treaty tax rates. A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity. In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1992 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.

Keywords: Foreign Direct Investment; Tax Treaties; Multinational Corporations; Bargaining; Withholding Taxes. (search for similar items in EconPapers)
JEL-codes: F23 H25 K34 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-08
New Economics Papers: this item is included in nep-acc and nep-ifn
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Related works:
Journal Article: Asymmetric FDI and tax-treaty bargaining: theory and evidence (2004)
Working Paper: Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence (2004)
Working Paper: Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence (2002)
Working Paper: Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence" (2002)
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