Over the years, DTTs have pursued additional objectives, such as ensuring legal security, preventing tax discrimination in investment and exchanging tax information. Indeed, Ligthart et al. (2011) shows, in a framework of gravity, that while countries mainly sign TDs to reduce international double taxation, they create another important objective for the exchange of tax information. In support of a broader function of the DTTs, Davies et al. (2009) and Blonigen et al. (2014) report positive contractual effects attributed to legal security and the definition of guidelines for the settlement of disputes between the tax authorities of the signatory states. In addition, the current preamble to the OECD Model Tax Convention adds the prevention of tax evasion and evasion as additional objectives of double taxation conventions. Finally, the scope of the DTT covers corporate income taxes and includes the determination of tax stay and the rules for the allocation of personal tax duties. In this context, even contracts identified as irrelevant in this document are far from “incessing” and the role of DTTs is unlikely to diminish in the near future. In all of our baseline estimates, we follow current practice in the empirical literature on the effects of DTTs and use DL stocks as a dependent variable (Blonigen and Davies 2004; Egger et al. 2006; Azémar and Dharmapala 2019). In the event of a great inertia in the case of foreign direct investment, changes in the contractual network could only concern new foreign direct investment, indicating rather the use of FDI flows. We do this by including one-year DL-FDI as a dependent variable in Table 8, columns (5) and (6), and the results remain robust.
Footnote 23 In addition, the use of FDI stocks has the added value that no significant observations about negative FDI flows are lost. In agreement with Barrios et al. (2012), we interpret the international tax system as a network in which the tax gap between two countries is defined as the cost of channelling business income from one country to another in the form of taxes payable. The tax costs between two countries include corporation tax, which must be paid in the host country, a non-resident withholding tax on the subsidiary`s income and corporation tax in the country of origin. We take into account contract-related purchases and calculate the shortest (i.e. cheapest) distance between two countries, so that business revenues can be routed to one or more intermediate zones. Our main assumption is that only relevant tax treaties – that is, tax treaties that offer investors a financial advantage over the conditions provided by national legislation and given the entire existing network of tax agreements – lead to a more immediate home of the host country`s foreign direct investment. As a withholding agent, you should consult the actual provisions of the tax treaty that apply to the person you must pay to if you have reason to question the documents you have received. After examining the position of tax treaties that are irrelevant in domestic law, we focus our attention on the relevant ODL DTTTs and the driving forces behind their relevance.