Spillover Effects in International Law: Evidence from Tax Planning.

The article examines the phenomenon of proxy arbitration, where multinational firms use intermediate shell companies incorporated in third states to access bilateral investment treaties (BITs) and initiate investor–state dispute settlement (ISDS) claims against host states. It argues that this practice primarily arises as a spillover effect of corporate tax planning rather than deliberate investment treaty shopping. Firms invest indirectly through conduit subsidiaries to exploit favorable bilateral tax treaties (BTTs) that reduce withholding taxes, and because tax and investment treaty networks overlap extensively, these subsidiaries often gain BIT coverage as a side benefit, enabling proxy arbitration. Using detailed data on multinational firms’ ownership structures and tax treaty networks, the study finds that tax considerations strongly drive indirect investment and conduit location choices, while BIT access influences conduit selection mainly in high-political-risk host states. The findings highlight the complex interplay between international tax and investment regimes and suggest that efforts to reform investment treaty abuse should also address global tax avoidance mechanisms.