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Exemption vs. Credit Method in International Double Taxation Treaties

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Author Info
Thomas Dickescheid ()
Abstract

This paper examines the choice of international double taxation relief methods by two small countries that mutually exchange foreign direct investment. At the first stage, each country chooses between the exemption and the credit method (as prescribed by the OECD model treaty) and at the second stage, each country sets nationally optimal non-discriminatory capital tax rates. It is shown that in the subgame perfect equilibrium both countries choose the exemption method. Mutual application of the exemption method is also shown to yield the highest welfare for each country. While the tax export effect generally induces both countries to choose inefficiently high tax rates, this effect is weakest when both countries exempt foreign earned profits from domestic taxation. Copyright Kluwer Academic Publishers 2004

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File URL: http://hdl.handle.net/10.1023/B:ITAX.0000045328.78142.d9
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Publisher Info
Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 11 (2004)
Issue (Month): 6 (November)
Pages: 721-739
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Handle: RePEc:kap:apfinm:v:11:y:2004:i:6:p:721-739

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Web page: http://springerlink.metapress.com/link.asp?id=102851

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Related research
Keywords: international taxation; double taxation relief; tax competition; tax export;

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  1. Gordon, Roger H, 1992. " Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-80, July. [Downloadable!] (restricted)
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  2. Bucovetsky, Sam & Wilson, John Douglas, 1991. "Tax competition with two tax instruments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 333-350, November. [Downloadable!] (restricted)
  3. Konrad, Kai A. & Schjelderup, Guttorm, 1999. "Fortress Building in Global Tax Competition," Journal of Urban Economics, Elsevier, vol. 46(1), pages 156-167, July. [Downloadable!] (restricted)
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  4. Janeba, Eckhard, 1995. "Corporate income tax competition, double taxation treaties, and foreign direct investment," Journal of Public Economics, Elsevier, vol. 56(2), pages 311-325, February. [Downloadable!] (restricted)
  5. Davies, Ronald B & Gresik, Thomas A, 2003. "Tax Competition and Foreign Capital," International Tax and Public Finance, Springer, vol. 10(2), pages 127-45, March. [Downloadable!] (restricted)
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  6. Bond, Eric W & Samuelson, Larry, 1989. "Strategic Behaviour and the Rules for International Taxation of Capital," Economic Journal, Royal Economic Society, vol. 99(398), pages 1099-1111, December. [Downloadable!] (restricted)
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  7. Mintz, Jack & Tulkens, Henry, 1996. "Optimality properties of alternative systems of taxation of foreign capital income," Journal of Public Economics, Elsevier, vol. 60(3), pages 373-399, June. [Downloadable!] (restricted)
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  8. Ronald B. Davies, 1999. "The OECD Model Tax Treaty: Tax Competition and Two-Way Capital," University of Oregon Economics Department Working Papers 2002-7, University of Oregon Economics Department, revised 01 Jan 2002. [Downloadable!]
  9. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September. [Downloadable!] (restricted)
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