Tax Treaties as a Network Product

Abstract

The copiousness of tax treaties is often presented as living proof not only of their success but also of their desirability. However, in focusing on alleviating double taxation by allocating tax revenues, the treaties project is a missed opportunity. This article explains that an international tax standard is a network product and uses network theory to explore the potential advantages and drawbacks of the tax treaty network in entrenching such a standard. Networks facilitate stability and self-enforcement. By joining a network (or staying in one), the users benefit from the compatibility with other users, which incentivizes new users to join and current users to remain, even in the absence of an enforcement mechanism. These advantages are not, however, without costs. Similarly to some other networks, the tax treaties network is locked in a suboptimal standard, which leaves unattended points of friction between jurisdictions as well as allows the network initiators (i.e., developed countries) to disproportionately benefit from it at the expense of other users (i.e., developing countries) and, potentially, at the expense of taxpayers.

Keywords: Tax Treaties, Networks, International Tax Policy