Can Developing Countries Increase Foreign Investments by Sharing Their Taxation Rights
An Economic Analysis of Double Taxation Treaties between Countries in Asymmetric Investment Positions
DOI:
https://doi.org/10.33119/ASCASP.2022.2.2Keywords:
double taxation treaty, Foreign Direct Investment, gravity equation, international tax cooperation, developing countriesAbstract
This paper examines the effects of double taxation treaties on FDI inflows into both developing and developed countries. A gravity model equation was used to first estimate the general effect of the existence of a tax treaty between symmetric and asymmetric country pairs on FDI. Secondly, indices that indicate the proportion of source taxation rights negotiated in a tax treaty were employed in the same gravity equation as predictors. Both the conclusion of tax treaties in general and in particular those with a high share of source taxation were found to be negatively correlated with FDI inflows (–23.05%). A stronger effect could be estimated for FDI inflows into developing countries (–29.53%), indicating that developing countries face a more severe trade-off between the attraction of FDI from MNEs and the generation of tax revenue from business activities rendered in their territory.
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