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Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence

  • Chisik, Richard

    (Florida International University)

  • Ronald B. Davies

    (University of Oregon)

Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treatyís terms. This paper focuses on how bargaining can affect the withholding taxes set under the treaty. In a simple framework, we develop hypotheses about patterns in treaty tax rates. A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity. In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1997 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 48.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:48
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