Do Double Taxation Treaties Increase Foreign Direct Investment to Developing Countries?

Abstract

Developing countries invest time and other scarce resources to negotiate and conclude double taxation treaties (DTTs) with developed countries. They also accept a loss of tax revenue as such treaties typically favour residence-based over source-based taxation and developing countries are typically net capital importers. The incurred costs can only pay off if developing countries can expect to receive more foreign direct investment (FDI) in return. This is the first study to provide evidence that developing countries that have signed a DTT with the US or a higher number of DTTs with important capital exporters actually do receive more FDI from the US and in total. However, DTTs are only effective in the group of middle-, not low-income developing countries.

Keywords: Foreign direct investment, double taxation, bilateral treaties, corporate income