Tax treaties worldwide: Estimating elasticities and revenue foregone

Abstract

An ongoing research discussion focuses on the extent to which tax treaties, or double taxation agreements, are capable of accomplishing one of their stated objectives, that is, providing support for cross-border investment. While this discussion currently lacks a conclusive outcome, it has been established that tax treaties lead to lower withholding tax rates on dividends and interest payments. This practice lowers government revenues from such taxes worldwide. Although there are now over 3,000 bilateral tax treaties, little is known about the scale of potential tax revenue foregone associated with the lower taxation they facilitate. Furthermore, what little we know is mostly based on static estimates, which unrealistically assume that tax treaties themselves do not influence dividends and interest payments. In this paper, we overturn this assumption by estimating the extent to which dividend and interest flows react to changes in withholding rates, and reflect these elasticities in new estimates of potential tax revenue foregone.

Natural Resource Revenues and Double Taxation Treaties in Developing Countries: Evidence from Neural Networks

“…Regarding the first question, we argue that countries with many tax treaties within the network will experience lower revenue mobilization, because of lower withholding tax rate differentials 7 and reduced tax burdens for businesses and individuals operating in several jurisdictions (Janský et al, 2021). In the second question, the intuition is that aggressive tax optimization is profitable, and investors seek indirect routes (via intermediate jurisdictions) that maximize their tax savings.…”

“…The second strand of literature is similar to the first but within a cross-country dimension (Hong, 2018;Janský and Šedivý, 2019;Janský et al, 2021). While there are obvious differences in data, methods, and samples, the overarching finding is that tax treaties constitute significant revenue losses for source countries in developing economies, losses that are perpetrated by tax treaty exploitation.…”

Double taxation treaties and resource revenue mobilization in developing countries: A neural network approach

“…Mongolia also loses approximately 0.2 per cent of GDP, although the volume is considerably smaller ($19.9 million). Janský et al (2021) estimate revenue elasticities, using 65,000 annual country-year observations covering the period 2009-16 and incorporating the effects of the EU Parent-Subsidiary and Interest and Royalties Directives (a guideline which reduces withholding tax rates among all EU members and Switzerland to zero). They find that dividend flows are highly elastic: i.e.…”

“…The paper makes four key contributions to the literature. First, we contribute to the empirical literature estimating the revenue impact of BTTs (Balabushko et al 2017;Beer and Loeprick 2021;Hearson 2018;Janský and Šedivý 2019;Janský et al 2021). Most of these papers estimate revenue forgone from tax treaties (where withholding tax rates on passive incomes in tax treaties are lower than those that otherwise apply) or revenue elasticities (i.e.…”

Illicit financial flows and country-by-country reporting in extractive industries

“…Increased harmonization might help with problems of data accuracy, but it will not help with any misalignment between concept and reality. The complex interactions of international trade and finance remain a challenge for measuring bilateral relationships, as indicated by challenges encountered in empirical analyses of bilateral tax treaties (e.g., Janský et al 2021b;Petkova et al 2020) or bilateral information exchanges (e.g., Bilicka and Fuest 2014;Janský et al 2021c).…”