According to information obtained from the Central Bank, the share of dividends paid to portfolio investors remained on average below 5 percent of all dividend payments to Cyprus during the period from 2005 to 2015. Similarly, the shares of portfolio investments for the Netherlands, Russia, the UK, Austria, Switzerland, the US, France, and Germany and Sweden on average stood below 5%. Given differences in portfolio and non‐portfolio investor definitions across DTTs and the Central Bank classification<sup>21</sup> we assume that just about 80%<sup>22</sup> of dividend payments qualify for the non‐portfolio rates stipulated in treaty provisions.

# **3.2 Measuring the behavioral response to withholding rate changes**

We attempt to quantify behavioral responses to changes in withholding taxation by looking at historical variation in Ukrainian treaty provisions. This variation is limited and largely driven by new treaty formation,<sup>23</sup> leading to important imprecisions of our results as discussed further below.

Combining information on (limited) variations with administrative information on income flows, we estimate the magnitude of country‐specific dividend, royalty and interest payments, conditional on the structure of the withholding tax regime. To derive estimates on the impact of a partial tax reform, we assume that income flows with partner country i, denoted I(i), are functions of the entire set of withholding tax rates, {T(1),T(2),..T(n)}. Governmental income accruing from the taxation of capital transfers is thus given by ��∑���� T�i� I�i� . We are interested in the impact of a small change of tax rate T(k). Using the above notation, this reads: The first term represents the mechanical effect. Its magnitude is readily available by combining information on current capital transfers with the hypothesized reform, dT(k). The second term accounts for a behavioral response. Quantification of this indirect response requires estimates of the sensitivity of the tax base, dI(i). To arrive at these estimates, we assume that own‐ and cross‐price elasticities are different but constant across partner countries, so that a linearized version of income stream I(i) reads: Here, the first coefficient represents the own‐price semi‐elasticity: income streams to partner country i decrease by _a_ percent in response to a one percentage point increase in the withholding tax rate to partner country i. The second coefficient is given by (N‐1) times the cross‐price semi elasticity. In contrast to the own‐price elasticity, it is expected to take a positive sign due to substitution effects. The variable

> 21 Please note that the definitions of the Central Bank do not always correspond to the definition of the ownership threshold for the non‐portfolio investments specific in each treaty. In DTTs the rates differ between 10%, 20%, 25%, or 50%, depending on the specific provisions. For instance, the treaties with: Cyprus requires 20% shareholding; with Austria the requirement is 10%; while the UK requires at least 20% of the (direct or indirect) voting powers.

> 22 This estimate of 80% thus being fairly conservative, with the average of dividends to portfolio investors being below 5 percent of total payments.

> 23 During our sampling period, rates for the treaty with Cyprus were revised in 2012 and with Norway in 2008. New treaties were concluded with Iceland (2006), Jordan (2005), Libya (2008), Mexico (2012), Montenegro (2007) and Singapore (2007).

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