Identification of Conduit Countries and Community Structures in the Withholding Tax Networks

TL;DR

This paper analyzes global withholding tax networks to identify jurisdictions vulnerable to treaty shopping, revealing community structures and suggesting targeted regulations to prevent international tax avoidance.

Contribution

It introduces a network-based approach to detect jurisdictions involved in treaty shopping and uncovers community structures within withholding tax networks.

Findings

Identified jurisdictions likely used for treaty shopping.

Detected community structures in withholding tax networks.

Suggested targeted regulations for treaty abuse prevention.

Abstract

Due to economic globalization, each country's economic law, including tax laws and tax treaties, has been forced to work as a single network. However, each jurisdiction (country or region) has not made its economic law under the assumption that its law functions as an element of one network, so it has brought unexpected results. We thought that the results are exactly international tax avoidance. To contribute to the solution of international tax avoidance, we tried to investigate which part of the network is vulnerable. Specifically, focusing on treaty shopping, which is one of international tax avoidance methods, we attempt to identified which jurisdiction are likely to be used for treaty shopping from tax liabilities and the relationship between jurisdictions which are likely to be used for treaty shopping and others. For that purpose, based on withholding tax rates imposed on dividends, interest, and royalties by jurisdictions, we produced weighted multiple directed graphs, computed the centralities and detected the communities. As a result, we clarified the jurisdictions that are likely to be used for treaty shopping and pointed out that there are community structures. The results of this study suggested that fewer jurisdictions need to introduce more regulations for prevention of treaty abuse worldwide.