Navigating optimal treaty-shopping routes using a multiplex network model

Area of Science:

• Economics
• Network Science
• International Relations

Background:

• The international tax treaty system is complex, enabling multinational enterprises (MNEs) to engage in treaty abuse.
• This abuse leads to substantial tax revenue losses for nations, with limited systematic regulation.
• Detecting optimal tax avoidance routes is crucial for understanding and mitigating these effects.

Purpose of the Study:

• To investigate the international tax treaty network for foreign investment channels using real-world data.
• To introduce novel network analysis measures, including tax-routing centrality, for analyzing tax avoidance strategies.
• To provide a unified framework for analyzing the international tax treaty system and MNE tax avoidance behavior.

Main Methods:

• Network analysis of the international tax treaty system.
• Utilizing real-world data on foreign investment channels.
• Introducing and applying measures of tax-routing centrality and other network centralities within a multiplex network framework.

Main Results:

• Identification of various tax-minimizing routes and their associated rates.
• Discovery of novel tax-avoidance paths not apparent in single network layers.
• Identification of strongly connected components within the multiplex tax treaty system, highlighting minimal tax shopping routes involving over 80 countries.

Conclusions:

• Network analysis provides a powerful framework for understanding the complexity of international tax treaties.
• The multiplex network approach reveals hidden tax-minimizing strategies employed by MNEs.
• This research offers insights into treaty abuse and a method for observing its effects on global tax revenues.