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Bilateralism or Multilateralism? The Political Economy of Avoiding International Double Taxation

European Journal of International Relations (2010) - Volume 16, Issue 4

27 Pages Posted: 20 Feb 2016  

Thomas Rixen

University of Bamberg - Department of Political Science

Date Written: 2010

Abstract

Why do states cooperate bilaterally or multilaterally? This article addresses the issue using the example of international double tax avoidance. It is argued that double tax avoidance exhibits the strategic structure of a coordination game with a distributive conflict. The distribution of tax revenues depends on the asymmetry of investment flows between treaty partners. Since investment flows are defined dyadically, bilateral bargaining can best accommodate countries’ concerns for the distribution of tax revenues and other economic benefits connected to the tax base. Moreover, because there are no serious externality problems with bilateral agreement, this solution is also viable. At the same time, there is a need for a multilateral organization to disseminate information and shared practices in the form of a model convention that provides a focal point for bilateral negotiations. This solution minimizes transaction costs. Since agreements are self-enforcing in coordination games there is no need for third-party enforcement. Instead, the Mutual Agreement Procedure (MAP) is a device to address problems of incomplete contracting.

Keywords: bilateralism, coordination, distribution, multilateralism, rational institutional design, taxation

Suggested Citation

Rixen, Thomas, Bilateralism or Multilateralism? The Political Economy of Avoiding International Double Taxation (2010). European Journal of International Relations (2010) - Volume 16, Issue 4. Available at SSRN: https://ssrn.com/abstract=2724540

Thomas Rixen (Contact Author)

University of Bamberg - Department of Political Science ( email )

Feldkirchenstrasse 21
96045 Bamberg
Germany

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