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Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence

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  • Richard Chisik

    (Department of Economics, Ryerson University, Toronto, Canada)

  • Ronald B. Davies

    (Department of Economics, University of Oregon, Eugene, Oregon)

Abstract

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 1992 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.

Suggested Citation

  • Richard Chisik & Ronald B. Davies, 2010. "Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence," Working Papers 020, Toronto Metropolitan University, Department of Economics.
    • Handle: RePEc:rye:wpaper:wp020
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    More about this item

    Keywords

    Foreign Direct Investment; Tax Treaties; Multinational Corporations; Bargaining; Withholding Taxes.;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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