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The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements

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  • Julia Braun
  • Martin Zagler

Abstract

Of a total of 2,976 double tax agreements (DTAs), some 60% are signed between a developing and a developed economy. As DTAs shift taxing rights from capital†importing to capital†exporting countries, the latter inherently benefit more from the agreements. In this paper, we argue that capital exporters use foreign aid to incite capital importers into signing DTAs. We demonstrate in a theoretical model that in a deal, one country does not trump the other, but that the deal must be mutually beneficial. In the case of an asymmetric DTA, this requires compensation from the capital†exporting country to the capital†importing country. Examining DTAs that are signed between donor and recipient countries between 1991 and 2012, and using a fixed effects Poisson model, we find that bilateral foreign aid commitments increase by 22% in the year of the signature of a DTA. Evaluated at the sample mean, this translates into around US$ six million additional aid commitments in a DTA signatory year.

Suggested Citation

  • Julia Braun & Martin Zagler, 2018. "The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements," The World Economy, Wiley Blackwell, vol. 41(6), pages 1478-1507, June.
    • Handle: RePEc:bla:worlde:v:41:y:2018:i:6:p:1478-1507
    DOI: 10.1111/twec.12628
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    Cited by:

    1. Pranvera Shehaj & Martin Zagler, 2025. "Asymmetric Double Tax Treaties: Relief Method and Tax Sparing for Foreign Direct Investment in Developing Countries," Public Finance Review, , vol. 53(1), pages 94-135, January.
    2. Erokhin, Dmitry & Zagler, Martin, 2024. "Who will sign a double tax treaty next? A prediction based on economic determinants and machine learning algorithms," Economic Modelling, Elsevier, vol. 139(C).
    3. Azémar, Céline & Dharmapala, Dhammika, 2019. "Tax sparing agreements, territorial tax reforms, and foreign direct investment," Journal of Public Economics, Elsevier, vol. 169(C), pages 89-108.
    4. Kudła, Janusz & Kopczewska, Katarzyna & Stachowiak-Kudła, Monika, 2023. "Trade, investment and size inequalities between countries and the asymmetry in double taxation agreements," Economic Modelling, Elsevier, vol. 122(C).
    5. Petr Janský & Jan Láznička & Miroslav Palanský, 2021. "Tax treaties worldwide: Estimating elasticities and revenue foregone," Review of International Economics, Wiley Blackwell, vol. 29(2), pages 359-401, May.
    6. Anh D. Pham & Ha Pham & Kim Cuong Ly, 2019. "Double Taxation Treaties as a Catalyst for Trade Developments: A Comparative Study of Vietnam’s Relations with ASEAN and EU Member States," JRFM, MDPI, vol. 12(4), pages 1-16, November.

    More about this item

    JEL classification:

    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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