Developing Countries, Tax Treaty Shopping and the Global Minimum Tax

Maarten van 't Riet, Arjan Lejour

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Abstract

Analysis of the international network of double tax treaties reveals a large potential for tax avoidance. Developing countries are, on average, not more likely to suffer from tax revenue losses than other countries. Yet, this average masks the fact that several countries, such as Bangladesh, Egypt, Indonesia, Kenya, Uganda and Zambia, are vulnerable to substantial potential losses of withholding tax revenue by treaty shopping. The analysis combines tax parameters of more than a hundred countries with an algorithm from network theory, which simulates the tax minimizing behaviour of multinational enterprises. We introduce the notion of potentially aggressive tax treaties. These are the key treaties in treaty shopping routes, that may lead to substantial tax revenue losses in developing countries. Moreover, the treaty partners are often in a prime position to top-up tax undertaxed profits of developing countries that offer tax incentives to attract investment, thus nullifying the incentive effects.
Original languageEnglish
Place of PublicationMunich
PublisherCESifo Working Papers
Volume11641
ISBN (Electronic)ISSN 2364-1428
Publication statusPublished - 28 Jan 2025

Publication series

NameCESifo Working Papers
PublisherCESifo

Keywords

  • treaty shopping
  • Tax treaties
  • Developing Countries
  • global minimum tax
  • network analyses
  • withholding taxes
  • aggressive tax treaties

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