Design matters: Firm-level evidence on tax treaty provisions and multinational investment

This study provides the first firm-level evidence on how the residence country's double tax relief method and tax sparing provisions in asymmetric tax treaties affect foreign investment by OECD multinational enterprises in low-and-middle income countries. Combining unconsolidated subsidiary-level data for 2005-2016 with detailed tax treaty information, the analysis distinguishes between investment entry (extensive margin), investment intensity (intensive margin), and the directness of the investment route. The results show that treaty-induced changes in the residence country's relief method do not affect subsidiary creation once investment routing is taken into account, while tax sparing provisions consistently encourage market entry. At the intensive margin, improvements in the residence country's relief method increase investment intensity only for firms investing through indirect routes, whereas tax sparing provisions have either no effect or are negatively associated with reinvestment. These findings reveal substantial heterogeneity concealed by aggregate FDI data and demonstrate that the investment effects of tax treaty provisions differ across firms depending on whether they enter or expand, as well as on the route through which they invest.