On the relevance of double tax treaties

04  June 2018    11:00 am CEST

Andrzej Stasio, Vienna University of Economics and Business (WU)

In cooperation with:


wiiw, Rahlgasse 3, 1060 Vienna


The presentation is based on a paper co-authored with Kunka Petkova (WU) and Martin Zagler (UPO University of Eastern Piedmont).

This paper investigates the effects of double tax treaties (DTTs) on foreign direct investment (FDI) after controlling for their relevance in the presence of treaty shopping. DTTs cannot be considered a bilateral issue, but must be viewed as a network, since FDI can flow from home to host country through one or more conduit countries. Accounting for treaty shopping, we calculate the shortest (i.e. the cheapest) tax distance between any two countries allowing the corporate income to be channeled through intermediate jurisdictions. We consider the relevance of tax treaties vis-à-vis the domestic law and the entire tax treaties network and show that tax treaties that reduce the direct tax distance, both against domestic law and the entire existing treaty network, will increase FDI. Such a relevant treaty will increase direct FDI by roughly 20%. The effect increases with reductions in the direct tax cost and we can quantify this effect at almost 8% for a 10-percentage-point tax reduction below the minimum rate in the network. We also find that a treaty can lead to more direct FDI if the cheaper route is complicated and involves more than one conduit country.

JEL classification: F21, F23, F53, H25, H26, H73, H87, K34.