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The Unintended Consequences of Bilateralism: Treaty Shopping and International Tax Policy

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  • Arel-Bundock, Vincent

Abstract

The international tax system is a complex regime composed of thousands of bilateral tax treaties. These agreements coordinate policies between countries to avoid double taxation and encourage international investment. I argue that by solving this coordination problem on a bilateral basis, states have inadvertently created opportunities for treaty shopping by multinationals. These opportunities, in turn, reduce the potency of fiscal policy, put pressure on governments to change their domestic tax laws, and ultimately constrain state autonomy. This constraint is theoretically distinct from the usual race-to-the-bottom story and it generates different testable implications. I use a motivating case study to show how multinationals leverage the structure of the treaty network to reduce their tax burden. Then, I develop a new measure of treaty-shopping opportunities for firms in 164 countries. Where the proliferation of tax treaties allows multinationals to engage in treaty shopping, states’ fiscal autonomy is limited, and governments tend to maintain lower tax rates.

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  • Arel-Bundock, Vincent, 2017. "The Unintended Consequences of Bilateralism: Treaty Shopping and International Tax Policy," International Organization, Cambridge University Press, vol. 71(2), pages 349-371, April.
  • Handle: RePEc:cup:intorg:v:71:y:2017:i:02:p:349-371_00
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    Cited by:

    1. Yoram Z. Haftel & Stephanie C. Hofmann, 2019. "Rivalry and Overlap: Why Regional Economic Organizations Encroach on Security Organizations," Journal of Conflict Resolution, Peace Science Society (International), vol. 63(9), pages 2180-2206, October.
    2. James G. S. Yang & Victor N. A. Metallo, 2018. "The Emerging International Taxation Problems," IJFS, MDPI, vol. 6(1), pages 1-10, January.
    3. Garcia-Bernardo, Javier & Reurink, Arjan, 2019. "Competing with whom? European tax competition, the "great fragmentation of the firm," and varieties of FDI attraction profiles," MPIfG Discussion Paper 19/9, Max Planck Institute for the Study of Societies.
    4. Damgaard, Jannick & Elkjaer, Thomas & Johannesen, Niels, 2024. "What is real and what is not in the global FDI network?," Journal of International Money and Finance, Elsevier, vol. 140(C).
    5. Hamanaka, Shintaro, 2022. "The World of overlapping regions," IDE Discussion Papers 835, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    6. Hearson, Martin, 2018. "Transnational expertise and the expansion of the international tax regime: imposing ‘acceptable’ standards," LSE Research Online Documents on Economics 88351, London School of Economics and Political Science, LSE Library.

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