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An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment

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  • Paul L. Baker

Abstract

Double taxation treaties (DTTs) are intended to eliminate double taxation and thereby increase foreign direct investment (FDI). DTTs are also meant to prevent tax evasion which previous literature argues has a negative effect on FDI. Using matching econometrics and a large data set of developed to less developed country-pairs, I show that despite their intentions and the significant costs of entering into DTTs, the treaties have no effect on the flows of FDI. An analysis of the treaties in conjunction with the related domestic tax legislation shows why this is the case. Developed countries unilaterally provide for the relief of double taxation and the prevention of fiscal evasion regardless of the treaty status of a host country. This eliminates the key economic benefit and the risk that these treaties would otherwise create for the FDI location decisions of multinational enterprises.

Suggested Citation

  • Paul L. Baker, 2014. "An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 21(3), pages 341-377, November.
    • Handle: RePEc:taf:ijecbs:v:21:y:2014:i:3:p:341-377
    DOI: 10.1080/13571516.2014.968454
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    References listed on IDEAS

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    1. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769, December.
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    Cited by:

    1. Lee, Siwook & Kim, Daeyong, 2022. "The impact of tax treaties on foreign direct investment: The evidence reconsidered," KDI Journal of Economic Policy, Korea Development Institute (KDI), vol. 44(3), pages 27-48.
    2. West, Ashley & Wilkinson, Brett, 2024. "What do we know about tax treaties and how can accounting research contribute?," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 54(C).
    3. Ali, Amjad & Asim, Muhammad & Ahmad, Khalil, 2025. "Macroeconomic Drivers of Foreign Capital Inflows: Revisiting Taxation and Foreign Direct Investment Nexus in Pakistan," MPRA Paper 127529, University Library of Munich, Germany.
    4. Braun, Julia & Weichenrieder, Alfons, 2015. "Does exchange of information between tax authorities influence multinationals' use of tax havens?," ZEW Discussion Papers 15-015, ZEW - Leibniz Centre for European Economic Research.
    5. Kunka Petkova & Andrzej Stasio & Martin Zagler, 2020. "On the relevance of double tax treaties," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 575-605, June.
    6. 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.
    7. 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.
    8. Alfred A. Haug & Anh T. N. Nguyen & P. Dorian Owen, 2023. "Do the determinants of foreign direct investment have a reverse and symmetric impact on foreign direct divestment?," Empirical Economics, Springer, vol. 64(2), pages 659-680, February.
    9. Mumtaz Hussain Shah & Saba Qayyum, 2015. "Impact of Double Taxation Treaties on Inward FDI in Latin American and Caribbean Developing Countries," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 7(1), pages 1-18, April.
    10. 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.

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