Strategic Treaty Shopping

Treaty shopping refers to a situation in which an individual or a company that is not eligible for the benefits of a tax treaty uses an intermediary entity that is eligible for such benefits to obtain these benefits indirectly. This paper examines treaty shopping with a gametheoretic model in a network of tax treaties. An investor can choose an investment route across national borders to minimize tax while a tax agency can choose to audit the investor to find out the route. The audit is costly but it can give additional revenue to the tax agency if it reveals that the investor chose an indirect route for tax avoidance. I analyze the equilibrium of this model and calculate tax revenue loss due to treaty shopping. I also examine the structure of tax-minimizing investment routes in a real-world network of tax treaties between selected countries. While about 75 percent of tax-minimizing indirect routes pass through countries with no withholding tax, about 21 percent of tax-minimizing indirect routes pass through countries with tax treaty networks favorable to certain residence countries. Network centrality measures are introduced to assess the role of pass-through countries.To prevent treaty shopping countries may amend tax treaties with possible pass-through countries.