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Venue address: ISEG - Lisbon School of Economics & Management, R. Francesinhas 21, 1200-675 Lisboa, Portugal
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D03: Tax Treaties and Cross-Border Profit Shifting
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Bilateral tax treaties and profit shifting: Evidence from Japanese Multinationals 1The University of Osaka; 2IDE-JETRO; 3Yokohama National University; 4Hosei University Are bilateral tax treaties effective for tackling tax avoidance by multinationals? While recently signed treaties aim at restricting profit shifting, their primary goal has been the elimination of the double taxation of foreign-earned income, which may induce multinational to shift profits more. We measure the shifted profits of Japanese multinationals in the last two decades and examine how they are affected by bilateral tax treaties between Japan and host countries. We find that a newly signed treaty reduces the shifted profits of a foreign subsidiary by around 10 to 20$\%$. However, treaties are not as effective especially (i) when a subsidiary belongs to the multinational group having more subsidiaries in tax havens; and (ii) since 2009 in which Japan introduced a foreign dividend exemption system, which attempted to increase the repatriation of foreign subsidiaries' income.
Bilateral Tax Treaties, Tax Sparing and Cross-Border Banking Rennes School of Business, France This paper shows that the effects of bilateral tax treaties (BTTs) on international banking in developing countries depend critically on treaty design. Using bilateral banking loan data from the Bank for International Settlements matched with newly assembled information on treaty provisions, we find that BTTs have no average effect on cross-border lending, consistent with existing evidence for foreign direct investment. However, this aggregate null masks strong and economically meaningful heterogeneity. BTTs that include tax sparing provisions significantly increase cross-border loans to both banks and non-bank borrowers, while regular BTTs without tax sparing reduce interbank lending and have little impact on lending to non-banks. These patterns suggest that tax sparing preserves host-country tax incentives and stimulates international credit, whereas information exchange provisions constrain tax-motivated financial activity. Overall, the results demonstrate that treaty design, not treaty existence, shapes cross-border banking between developed and developing economies.
The Outsized Role of Tax Havens in Mergers and Acquisitions 1University of Texas at Dallas; 2Securities and Exchange Commission; 3University of Münster Tax havens are used for tax minimization. Whether tax havens affect corporate control in the form of cross-border mergers and acquisitions (M&A) or are merely used as conduits between host and destination countries of (greenfield) foreign direct investment and portfolio investment is an open question. We provide new stylized facts through the first comprehensive analysis of cross-border, tax-haven mergers and acquisitions (M&A). Using novel tax residence data, we investigate 20,360 such transactions from 1990 to 2023, totaling $8.3 trillion in deal value, or 29.7% of cross-border M&A volume. $4.6 of the $8.3 trillion exceeds our prediction based on a gravity model with economic fundamentals. Small havens such as Bermuda alone make up $2.4 trillion or 8.5% of cross-border M&A volume. For identification, we use a change in US tax law in 2004.
When Outbound Payments Get Taxed: Multinational Profit Shifting Under Withholding Taxes 1University of Bonn, Germany; 2University of Münster; 3Norwegian University of Life Sciences This paper evaluates the effectiveness of a withholding tax on internal interest, lease and royalty payments to low-tax jurisdictions introduced in Norway to constrain multinational profit shifting. We combine administrative tax records with cross-border international bank transfers and employment histories to document that the reform led to a reduction in outflows to affected locations while simultaneously raising tax payments and reported profits in Norway. At the same time, we find a small and statistically insignificant increase in resource use for in-house tax advisors.
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