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.
Original language | English |
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Pages (from-to) | 1277-1320 |
Number of pages | 44 |
Journal | International Tax and Public Finance |
Volume | 25 |
Issue number | 5 |
DOIs | |
State | Published - 1 Oct 2018 |
Keywords
- Foreign direct investment
- Tax treaty network
- Tax-minimizing route
- Treaty shopping rate