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

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.