Navigating optimal treaty-shopping routes using a multiplex network model.

Abstract

The international tax treaty system is a highly integrated and complex network. In this system, many multinational enterprises (MNEs) explore ways of reducing taxes by choosing optimal detour routes. Treaty abuse by these MNEs causes significant loss of tax revenues for many countries, but there is no systematic way of regulating their actions. However, it may be helpful to find a way of detecting the optimal routes by which MNEs avoid taxes and observe the effects of this behavior. In this paper, we investigate the international tax treaty network system of foreign investment channels based on real data and introduce a novel measure of tax-routing centrality and other centralities via network analysis. Our analysis of tax routing in a multiplex network reveals not only various tax-minimizing routes and their rates, but also new paths which cannot be found by navigating a single network layer. In addition, we identify strongly connected components of the multiplex tax treaty system with minimal tax shopping routes; more than 80 countries are included in this system. This means that there are far more pathways to be observed than can be detected on any given individual single layer. We provide a unified framework for analyzing the international tax treaty system and observing the effects of tax avoidance by MNEs.