The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements

Braun, Julia; Zagler, Martin

doi:10.1111/twec.12628

Cited by 14 publications

(8 citation statements)

References 32 publications

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“…There are also other reasons for why developing countries may still commit to negotiate and enter DTAs even when the benefits are not guaranteed. This includes increasing diplomatic ties with the treaty partner and the incentive of receiving foreign aid (Braun and Zagler, 2017). The other is a prisoner's dilemma situation; collectively, developing countries would be better off refusing to sign DTAs, but each one has an incentive to sign DTAs to gain a competitive advantage (Barthel and Neumayer, 2012).…”

Section: Discussionmentioning

confidence: 99%

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The Advantages and Disadvantage of Double Taxation Agreements for Developing Countries

Boustati¹

2022

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When a developing and a developed country sign Double Taxation Agreements (DTAs), its generally the case that the developing country is the one that forgoes some of its tax revenues (Braun & Fuentes, 2016). Nevertheless, developing countries enter these agreements on the assumption that this will have enough economic benefits to offset these losses (Neumayer, 2007). Besides alleviating the burden of double taxation, DTAs also have the added value of improving exchange of information, which helps combat tax evasion and avoidance (Barthel et al., 2009). One of the incentives for signing DTAs for developing countries is the increase in Foreign Direct Investments (FDIs) (Neumayer, 2007). The evidence from the literature on the link between signing DTAs and increasing FDIs is very mixed, with some finding a positive impact and others finding no impact (Quak & Timmis, 2018). However, the literature points to some clear factors that drive the relationship between FDIs and DTAs. There are also studies that attempt to quantify the tax revenue loss of developing countries when they enter DTAs. All the studies find substantial negative loss, although most do not account for the potential benefit of increased FDIs (ActionAid, 2016; IMF, 2014; Janský & Šedivý, 2018; McGauran, 2013; Van de Poel, 2016). There are also other reasons for why developing countries may still commit to negotiate and enter DTAs even when the benefits are not guaranteed. This includes increasing diplomatic ties with the treaty partner and the incentive of receiving foreign aid (Braun and Zagler, 2017). The other is a prisoner’s dilemma situation. The two most prevalent DTA conventions are the OECD Model and the UN Model. The UN Model tends to be more advantageous for developing countries compared to the OECD Model (Eyitayo-Oyesode, 2020). There are many issues over which the UN Committee’s expert members from developed and developing countries disagree but developed country member are better at influencing decisions. Finally, the OECD Model is updated more frequently, resulting in the UN one being comparatively out of date (Hearson, 2015; Quak & Timmis, 2018). Generally, the literature on the impact of DTAs on developing countries’ economies is extensive. This is especially the case for the impact of DTAs on FDIs as well as on tax revenue loss. However, because of the complexity of these issues, many of the empirical studies inevitably suffer from methodological issues that make conclusive claims very difficult. Notably missing from the literature is the impact of DTAs on international trade.

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Section: Discussionmentioning

confidence: 99%

“…According to Braun and Zagler (2017), there were around 3,000 DTAs in force as of 2010. While this is a large number, it is only a fraction of the number of potential bilateral relationships (IMF, 2014;Quak & Timmis, 2018).…”

Section: Introductionmentioning

confidence: 99%

The Advantages and Disadvantage of Double Taxation Agreements for Developing Countries

Boustati¹

2022

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“…To estimate the equation, we opt for the Poisson pseudo‐maximum‐likelihood (PPML) method, which is preferable to the ordinary least squares (OLS) method. PPML, applied recently in the tax treaty context by Braun and Zagler (2018), helps us address the issue of a large number of zeros in the observations of our dependent variable, that is, dividend or interest outflow (6,051 and 5,863 zeros respectively). Since we wish to interpret our results as elasticities, the standard approach is to use logarithms of our dependent variable.…”

Section: Methodsmentioning

confidence: 99%

Tax treaties worldwide: Estimating elasticities and revenue foregone

Jánský

Láznička

Palanský

2020

Rev International Economics

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An ongoing research discussion focuses on the extent to which tax treaties, or double taxation agreements, are capable of accomplishing one of their stated objectives, that is, providing support for cross-border investment. While this discussion currently lacks a conclusive outcome, it has been established that tax treaties lead to lower withholding tax rates on dividends and interest payments. This practice lowers government revenues from such taxes worldwide. Although there are now over 3,000 bilateral tax treaties, little is known about the scale of potential tax revenue foregone associated with the lower taxation they facilitate. Furthermore, what little we know is mostly based on static estimates, which unrealistically assume that tax treaties themselves do not influence dividends and interest payments. In this paper, we overturn this assumption by estimating the extent to which dividend and interest flows react to changes in withholding rates, and reflect these elasticities in new estimates of potential tax revenue foregone.

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“…Braun and Zagler (2018) find that the signing of tax treaties between developed and developing countries is associated with an increase in official development assistance from the former to the latter.…”

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confidence: 86%

Tax sparing agreements, territorial tax reforms, and foreign direct investment

Azémar

Dharmapala

2019

Journal of Public Economics

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The governments of many developing countries seek to attract inbound foreign direct investment (FDI) through the use of tax incentives for multinational corporations (MNCs). The effectiveness of these tax incentives depends crucially on MNCs' residence country tax regime, especially where the residence country imposes worldwide taxation on foreign income. Tax sparing provisions are included in many bilateral tax treaties to prevent host country tax incentives being nullified by residence country taxation. We analyse the impact of tax sparing provisions using panel data on bilateral FDI stocks from 23 OECD countries in 113 developing and transition economies over the period 2002-2012, coding tax sparing provisions in all bilateral tax treaties among these countries. We find that tax sparing agreements are associated with up to 97 percent higher FDI. The estimated effect is concentrated in the year following the entry into force of tax sparing agreements, with no effects in prior years, and is thus consistent with a causal interpretation. Four countries -Norway in 2004, and the U.K., Japan, and New Zealand in 2009 -enacted tax reforms that moved them from worldwide to territorial taxation, potentially changing the value of their preexisting tax sparing agreements. However, there is no detectable effect of these reforms on bilateral FDI in tax sparing countries, relative to nonsparing countries. These results are consistent with tax sparing being an important determinant of FDI in developing countries for MNCs from both worldwide and territorial home countries.

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The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements

Cited by 14 publications

References 32 publications

The Advantages and Disadvantage of Double Taxation Agreements for Developing Countries

The Advantages and Disadvantage of Double Taxation Agreements for Developing Countries

Tax treaties worldwide: Estimating elasticities and revenue foregone

Tax sparing agreements, territorial tax reforms, and foreign direct investment

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