An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment

Abstract

Double taxation treaties are intended to eliminate double taxation, thereby encouraging FDI, and prevent tax evasion, which previous literature argues will have a negative effect on FDI. Using a segmented data set and matching econometrics, I show that double taxation treaties have no effect on FDI from developed to less developed countries and substantiate why: Developed countries unilaterally provide for the relief of double taxation and the prevention of fiscal evasion regardless of the treaty status of a Host country. This eliminates the key economic benefit and risk that the treaties would otherwise create for multinational enterprises' FDI location decisions.

A Legal and Economic Analysis of Austria's Double Tax Treaty Network with Developing Countries

“…With this being considered, withholding tax rates have not been included in our empirical analysis. As corporate tax rates for many developing countries are also not available, we follow the lead of and Baker (2012), using general government final consumption expenditure as a percentage of GDP as a proxy for the corporate tax rate. 110 A higher tax rate is expected to make a country less attractive for foreign investors.…”

Estrategias e instrumentos de promoción de las inversiones: El caso de Costa Rica a la luz de las mejores prácticas internacionales

“…Adicionalmente, la firma de tratados de doble tributación (que reducen la carga impositiva para inversores que operan en más de un país) 6 también parece jugar un rol positivo a la hora de atraer IED, aunque algunos trabajos (por ejemplo, Eicher et al, 2012, Baker, 2012 no encuentran evidencia en ese sentido, lo cual se atribuye al hecho de que esos tratados pueden dificultar prácticas de precios de transferencia, que son importantes para muchas empresas multinacionales.…”

Tax Information Exchange with Developing Countries and Tax Havens

“…As of 2008, more than 50% of the DTTs were between a developing on the one and an industrialized economy on the other hand (Baker, 2014). Such agreements are likely to be asymmetric, with capital flowing predominantly from the industrialized to the developing country, and capital income flowing the other way.…”