Effects of Blocking Treaty Shopping Routes in the Tax Treaty Network

Abstract Tax authorities in developed countries agree that their governments should take action to eliminate treaty shopping, but disagree on what such action should be. Cancellation or renegotiation of existing tax treaties is two obvious alternatives. However, in order to determine which treaty network is most effective to block, the effects of blocking the treaty shopping routes should be calculated. In this paper, we measure the effects of blocking certain routes of treaty shopping in the tax treaty network. The basic model used in our research is the optimal treaty shopping route model established in a previous study. We ran the model using a few route blocking scenarios: Scenario I involves blocking tax haven routes, Scenario II involves blocking routes where the treaty tax rate is zero, and Scenario III involves blocking routes including countries with zero domestic withholding tax rates. We then compared the effectiveness of these blocking measures by assessing the results of changes in the network due to blocking in each of these scenarios. Scenario II proved to be the most effective, and blocking multiplex routes turned out to be more effective than blocking single routes. We also confirmed that blocking tax haven routes is not adequate to prevent tax avoidance. In addition, we discovered that the interests of developed nations and developing nations differ regarding tax revenue. However, not all developed countries share common interests. Our research quantifying the effectiveness of ways of blocking treaty shopping routes and differences in interest relations among nations provides useful information.JEL Classification E62·F21·F23·F53·H25·H26·H73·H87·K34