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Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence"

  • Richard Chisik

    ()

    (Florida International University Department of Economics)

  • Ronald B. Davies

    ()

    (University of Oregon Economics Department)

Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty’s 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 University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2001-2.

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Length: 39
Date of creation: 01 Apr 2001
Date of revision: 01 Jun 2002
Handle: RePEc:ore:uoecwp:2001-2
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