Anderson, J. E., &Yotov, Y. (2016). Terms of Trade and Global Effectiveness Effects of Free Trade Agreements, 1990-2002. Journal of International Economics, 99, 279-298. Bösenberg, S., Egger, P., &Erhardt, K. (2016). The anatomy of double taxation conventions: complexity, generosity and exchange of information and their effects. Unpublished manuscript.
Traditionally, double taxation treaties (DTTs) have served as an important policy instrument to promote international economic activity by avoiding international double taxation. However, despite the growing number of contributions, empirical evidence on the impact of double taxation treaties on foreign bilateral direct investment is still inconclusive (Blonigen and Davies 2004; Egger et al. 2006; Egger and Merlo 2011; Blonigen et al. 2014). About half of the countries in our sample benefit from an exemption regime in which foreign dividends are not taxed in the country of residence (Eq. 5) – see also Table 3.Footnote 1 Other countries subject dividends received to the taxation of the country of residence at the corporate tax rate (t_R). Most of these countries avoid double taxation by counting taxes paid by the base jurisdiction ahead of the amount of dividends paid (Equation 3). This credit is generally limited to corporate taxes due in the country of residence. In some cases, an indirect credit is also proposed for the underlying corporate taxes (Eq. 4). Alternatively, a small number of countries do not exempt or credit foreign taxes, but have them deducted as business expenses (Equation 2).
Finally, some countries (especially the least developed) do not provide for double taxation relief (Eq. 1). The dividends received are then subject to full double taxation. This paper examined the impact of taxation on foreign direct investment. Despite the increasing number of contributions in the literature, empirical evidence of the impact of double taxation treaties on foreign bilateral direct investment has been inconclusive. This document proves that this can be explained by the absence of a surprising number of tax treaties. In order to avoid high withholding taxes on passive income in the host country, many multinationals make foreign direct investments through a third country with a more advantageous tax treaty. Nevertheless, the vast majority of the existing literature treats DTTs as a binary variable, thus ignoring their complexity and national and international interactions.
The results of the models derived from the network analysis show an even more complex mechanism behind the impact of tax agreements on bilateral foreign direct investment. We take into account the possibility of shopping in column 3 and we find that in the group of relevant DTL TTS, only tax treaties that are also relevant to the network lead to more IDI (almost 18%). Tax treaties can only affect foreign investment if they reduce the tax burden on the existing global network of double taxation treaties, i.e. where relevant. Any contract between third countries can undermine the relevance of a national network of contracts, which means that countries lose some of their tax policy capacity due to the purchase of contracts. Barrios, S., Huizinga, H., Laeven, L., &Nicodeme, G. (2012). International taxation and the establishment decisions of multinationals. Journal of Public Economics, 96(11), 946-958. These include countries that apply a territorial tax system exempting all foreign profits and countries that introduce global taxation with a participation exemption for foreign dividends.
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