Too high a price? Tax treaties with investment hubs in Sub-Saharan Africa

Tax treaties worldwide: Estimating elasticities and revenue foregone

“…The above‐mentioned study by Beer and Loeprick (2020), another recent addition to the general research area on the effects of tax treaties, finds no impact on FDI. Furthermore, Beer and Loeprick (2020) speculate that the inconclusive empirical findings on the importance of tax treaties for FDI might be in part due to a secondary role that tax plays in FDI decisions and due to MNEs pursuing a variety of strategies (Bergstrand & Egger, 2007; Carr et al., 2001), including between those making greenfield investments and mergers and acquisitions (Head & Ries, 2008).…”

“…The above‐mentioned study by Beer and Loeprick (2020), another recent addition to the general research area on the effects of tax treaties, finds no impact on FDI. Furthermore, Beer and Loeprick (2020) speculate that the inconclusive empirical findings on the importance of tax treaties for FDI might be in part due to a secondary role that tax plays in FDI decisions and due to MNEs pursuing a variety of strategies (Bergstrand & Egger, 2007; Carr et al., 2001), including between those making greenfield investments and mergers and acquisitions (Head & Ries, 2008). While Chisik and Davies (2004b) provide a model‐based explanation for the decreasing trends in withholding tax rates under tax treaties, a more recent contribution by Azémar and Dharmapala (2019) finds that so‐called tax sparing provisions in tax treaties, which aim to prevent host country tax incentives from being nullified by residence country taxation (previously studied e.g., by Azémar et al., 2007), are associated with up to 97% higher FDI.…”

“…Two studies which have calculated cross‐country estimates of potential revenue foregone have both focused on developing countries. Beer and Loeprick (2020) find that for 41 African countries between 1985 and 2015, signing treaties with investment hubs was associated with non‐negligible revenue foregone but not with additional investments. Their unique empirical strategy uses a difference‐in‐difference framework and exploits the role of Mauritius, which is a tax treaty hub with treaties with only some of the sub‐Saharan African countries.…”

“…Although we are not able to empirically investigate which of the estimated revenue foregone results from treaty shopping, our data confirm this observation. Unlike Beer and Loeprick (2020), who focus solely on sub‐Saharan Africa, we cover all countries with available data. Furthermore, while they evaluate both costs and benefits, we focus exclusively on the tax revenue foregone.…”

“…The potential benefits of tax treaties in terms of increased FDI have been extensively discussed in literature, however, the evidence on these effects remains inconclusive. While some papers suggest that tax treaties have a positive impact on FDI-for example, Neumayer (2007), Barthel et al (2010), Egger and Merlo (2011) or Blonigen et al, 2014, other studies do not find much support for this effect-for example, Blonigen and Davies (2002), Hallward-Driemeier (2003), Blonigen and Davies (2004), Egger et al (2006), Coupé et al (2009), Baker (2014), with Davies (2004) providing an earlier overview. In a recent addition to this discussion, van't Riet and Lejour (2018) consider an international corporate tax system a network and estimate how MNEs repatriating profits can minimize their taxes (including corporate income tax rates, withholding taxes on dividends, double tax treaties, as well as double taxation relief methods).…”