Working Paper: NBER ID: w17480
Authors: 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).
Keywords: bilateral tax treaties; foreign direct investment; tax avoidance; information sharing
JEL Codes: F21; F23; H25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bilateral tax treaties (BTTs) (F38) | Foreign direct investment (FDI) activity (F23) |
| Bilateral tax treaties (BTTs) (F38) | Foreign affiliate activity (F23) |
| Bilateral tax treaties (BTTs) (F38) | Decrease in foreign affiliate activity (F23) |
| Reliance on homogeneous inputs (D29) | Decrease in net effect of BTTs on FDI activity (F23) |