Optimal tax routing: network analysis of FDI diversion

Abstract

The international corporate tax system is considered as a network and, just like for transportation, 'shortest' paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the 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 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator.

The Role of Conduit Countries and Tax Havens in Corporate Tax Avoidance

“…Recent network analyses of Garcia-Bernardo et al (2017), Hong (2018), and van 't Riet and Lejour (2018) confirm the conclusion of . Conduit countries are in the middle of the countrynetwork of international corporate taxation.…”

“…Second, I also include the quantitative effects of treaty shopping on global tax revenue losses (van 't Riet and Lejour, 2018). 6 Recent treaty shopping analyses identify pivotal jurisdictions on international routes.…”

“…6 De Beer et al (2020) also discuss treaty shopping and refer to some estimates on revenue losses, but these are for specific countries. 7 Hong (2018), Petkova et al (2019), and van 't Riet and Lejour (2018). 8 Recently, Damgaard et al (2019) have labelled double counted investments as phantom investments.…”

Tax treaties worldwide: Estimating elasticities and revenue foregone

“…(2009), Baker (2014), with Davies (2004) providing an earlier overview. In a recent addition to this discussion, van‘t Riet and Lejour (2018) consider an international corporate tax system a network and estimate how MNEs repatriating profits can minimize their taxes (including corporate income tax rates, withholding taxes on dividends, double tax treaties, as well as double taxation relief methods). They find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of approximately 6 percentage points, with the United Kingdom, Luxembourg and the Netherlands as the most important conduit countries.…”

“…While some papers suggest that tax treaties have a positive impact on FDI-for example, Neumayer (2007), Barthel et al (2010), Egger and Merlo (2011) or Blonigen et al, 2014, other studies do not find much support for this effect-for example, Blonigen and Davies (2002), Hallward-Driemeier (2003), Blonigen and Davies (2004), Egger et al (2006), Coupé et al (2009), Baker (2014), with Davies (2004) providing an earlier overview. In a recent addition to this discussion, van't Riet and Lejour (2018) consider an international corporate tax system a network and estimate how MNEs repatriating profits can minimize their taxes (including corporate income tax rates, withholding taxes on dividends, double tax treaties, as well as double taxation relief methods). They find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of approximately 6 percentage points, with the United Kingdom, Luxembourg and the Netherlands as the most important conduit countries.…”