Spillover Effects in International Law: Evidence from Tax Planning

Abstract

Multinational firms frequently route their foreign investments through intermediate shell companies. Increasingly, firms engage in proxy arbitration, using these shell companies to access other states’ bilateral investment treaties and file investor–state disputes against their host states. I argue that proxy arbitration is actually a spillover effect of firms’ efforts to reduce their tax burdens. Firms invest abroad through intermediate shell companies to access the bilateral tax treaty network, reducing their withholding taxes. Because the tax and investment treaty networks overlap extensively, these “tax-planning” firms often gain investment treaty coverage as a side benefit, enabling them to file proxy arbitration in the event of a dispute. Using novel, fine-grained data on the ownership structures of multinational firms, I find evidence in support of the spillover effects theory. The results shed new light on the costs of corporate tax planning, and inform ongoing policy debates about reforming the international investment regime; moreover, they make clear that understanding the true effects of global governance institutions requires attention to how firms strategically change their legal forms to access or avoid them.