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Reassessing the effects of bilateral tax treaties on US FDI activity

Author

Listed:
  • Abdullah Kumas

    (University of Richmond)

  • Daniel L. Millimet

    (Southern Methodist University)

Abstract

Despite substantial evidence that foreign direct investment (FDI) is influenced by taxation, the impact of bilateral tax treaties on FDI is surprisingly unclear. We provide a simple theoretical framework illustrating why the impact of tax treaties may be heterogeneous across the distribution of FDI, and thus why focusing on the average effect of tax treaties may be misleading. We then assess the empirical relevance of such heterogeneity by estimating the quantile treatment effects of tax treaties on US inbound and outbound FDI using panel data from 1980–1999. Our results are striking, and consistent with our expectations. We obtain positive effects of tax treaties at lower quantiles of the distribution of FDI, but negative effects in the upper quantiles. Moreover, while the negative effects are substantially larger in absolute terms relative to the positive effects, the two effects are roughly equivalent in percentage terms.

Suggested Citation

  • Abdullah Kumas & Daniel L. Millimet, 2018. "Reassessing the effects of bilateral tax treaties on US FDI activity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 451-470, July.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:3:d:10.1007_s12197-017-9400-3
    DOI: 10.1007/s12197-017-9400-3
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    Cited by:

    1. Ronald B. Davies & Pehr‐Johan Norbäck & Ayça Tekin‐Koru, 2009. "The Effect of Tax Treaties on Multinational Firms: New Evidence from Microdata," The World Economy, Wiley Blackwell, vol. 32(1), pages 77-110, January.
    2. Abdullah Kumas & Daniel L. Millimet, 2018. "Reassessing the effects of bilateral tax treaties on US FDI activity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 451-470, July.
    3. Lee, Siwook & Kim, Daeyong, 2022. "The impact of tax treaties on foreign direct investment: The evidence reconsidered," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 44(3), pages 27-48.
    4. West, Ashley & Wilkinson, Brett, 2024. "What do we know about tax treaties and how can accounting research contribute?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    5. Chen, Dong & Li, Yi & Lu, Jiani & Li, Chenming, 2024. "Do international tax treaties govern financial report quality?," Research in International Business and Finance, Elsevier, vol. 69(C).
    6. Harendt, Christoph & Dreßler, Daniel & Overesch, Michael, 2016. "The Impact of Tax Treaties and Repatriation Taxes on FDI Revisited," VfS Annual Conference 2016 (Augsburg): Demographic Change 145588, Verein für Socialpolitik / German Economic Association.
    7. Zagler, Martin, 2023. "Foreign direct investment, legal uncertainty and corporate income taxation," International Economics, Elsevier, vol. 173(C), pages 19-28.
    8. Castillo-Murciego, Ángela & López-Laborda, Julio, 2019. "The effect of double taxation treaties and territorial tax systems on foreign direct investment: Evidence for Spain," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-33.
    9. Leibrecht, Markus & Rixen, Thomas, 2020. "Double Tax Avoidance and Tax Competition for Mobile Capital," SocArXiv dgw5k, Center for Open Science.
    10. Mário MARQUES & Carlos PINHO, 2014. "Effects of Corporate Taxation and Bilateral Tax Treaties on European Multinationals’ Investment, 2005-2009. A Multi-Country Analysis," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 14(1), pages 33-44.
    11. Joseph Daniels & Patrick O’Brien & Marc Ruhr, 2015. "Bilateral tax treaties and US foreign direct investment financing modes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(6), pages 999-1027, December.

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    More about this item

    Keywords

    Foreign direct investment; Tax treaties; Quantile treatment effects; Propensity score weighting;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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