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Separating the Opposing Effects of Bilateral Tax Treaties

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  • Bruce A. Blonigen
  • Lindsay Oldenski
  • Nicholas Sly

Abstract

Bilateral tax treaties (BTT) are intended to promote foreign direct investment and foreign affiliate activity through double taxation relief. However, BTTs also typically contain provisions that facilitate sharing of tax information between countries intended to curtail tax avoidance by multinational firms. These provisions should disproportionately affect firms that intensively use inputs for which an arms-length price is easily observed, since strategic transfer practices that manipulate tax liabilities are no longer effective with information sharing between countries. Using BEA firm-level data we are able to separately estimate the impacts of double-taxation relief and sharing of tax information on investment behavior of US multinational firms. We find a significant positive effect of new tax treaties on foreign affiliate activity between member nations that is offset (and even reversed) the more a firm relies on inputs traded on an organized exchange (i.e., inputs for which the arms-length price is easily observed). We find these opposing BTT effects for both the intensive margin (sales of existing affiliates) and the extensive margin (entry of new affiliates).

Suggested Citation

  • Bruce A. Blonigen & Lindsay Oldenski & Nicholas Sly, 2011. "Separating the Opposing Effects of Bilateral Tax Treaties," NBER Working Papers 17480, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17480
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    References listed on IDEAS

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    Cited by:

    1. Ronald B. Davies & Julien Martin & Mathieu Parenti & Farid Toubal, 2018. "Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 120-134, March.
    2. Maarten van 't Riet & Arjan Lejour, 2014. "Ranking the Stars: Network Analysis of Bilateral Tax Treaties," CPB Discussion Paper 290.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.
    4. Niels Johannesen & Gabriel Zucman, 2014. "The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown," American Economic Journal: Economic Policy, American Economic Association, vol. 6(1), pages 65-91, February.
    5. Arjan Lejour, 2014. "The Foreign Investment Effects of Tax Treaties," Working Papers 1403, Oxford University Centre for Business Taxation.
    6. Nicholas Sly & Caroline Weber, 2013. "International Fiscal Policy Coordination and GDP Comovement," CESifo Working Paper Series 4358, CESifo.
    7. Maarten van 't Riet & Arjan Lejour, 2014. "Ranking the Stars: Network Analysis of Bilateral Tax Treaties," CPB Discussion Paper 290, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Arjan Lejour, 2014. "The Foreign Investment Effects of Tax Treaties," Working Papers 1403, Oxford University Centre for Business Taxation.
    9. Joseph Daniels & Patrick O’Brien & Marc Ruhr, 2015. "Bilateral tax treaties and US foreign direct investment financing modes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(6), pages 999-1027, December.
    10. Deborah Schanz & Andreas Dinkel & Sara Keller, 2017. "Tax attractiveness and the location of German-controlled subsidiaries," Review of Managerial Science, Springer, vol. 11(1), pages 251-297, January.

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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