Ranking the Stars: Network Analysis of Bilateral Tax Treaties

With a novel approach this paper sheds light on the international tax planning possibilities of multinationals. The international corporate tax system is considered a network, just like for transportation, and ‘shortest’ paths are computed, minimizing tax payments for the multinationals when repatriating profits. Read the accompanying background documents A and B. With a novel approach this paper sheds light on the international tax planning possibilities of multinationals. The international corporate tax system is considered a network, just like for transportation, and ‘shortest’ paths are computed, minimizing tax payments for the multinationals when repatriating profits. The network consists of 108 jurisdictions, and the ‘shortest’ paths are constructed from the rates of corporate income taxes, withholding taxes on dividends and the double taxation relief methods. Double taxation treaties typically lower bilateral withholding taxes. The possibility to funnel investments through a third country to take advantage of treaty provisions, treaty shopping, is found to lead to an average potential reduction of the combined effective tax rate of more than 6 percent. On average, multinationals need only pay taxes of 6 percent, after the corporate income tax in the host country. Moreover, the network approach identifies the countries which are most likely to perform the role of conduits. The United Kingdom heads the rankings of three out of four network centrality measures. The tax revenues on dividends for the conduit countries are less than a half percent of the worldwide flows. Finally, a crackdown on tax havens is simulated. The impact is found to be modest, both on the tax reduction and on network centrality. The result illustrates the strong dampening effect treaty shopping has on the remaining double tax rates.