Trade, investment and size inequalities between countries and the asymmetry in double taxation agreements

The inequalities among countries and their bilateral relationship affect the asymmetry of rules in double taxation agreements. The asymmetry in rules appears when one country prefers tax credit while another country exemption, for the same type of income. According to the literature, the inequalities involve trade, investment relations, economy size and tax competition. However, the relative importance of these factors for the design and asymmetry of tax treaties is not recognised well. To address this problem we use ANOVA, Hierarchical Linear Model and Ordered Logistic Regression with spatial lags on the sample of tax treaties from large European countries. The most important factor for low asymmetry is the intensity of bilateral trade. The differences in countries’ wealth and taxation increase asymmetry but they are of less importance. These findings help to improve the negotiation of tax treaties and spur bilateral cooperation, especially when differences among countries are substantial.