Breaking the Double Tax Paradigm

Abstract

The success story of economic globalization is often linked to an increased freedom of capital movement, facilitated by the existence of more than 3,000 bilateral tax treaties, the primary purpose of which is to prevent double taxation. Even the most outspoken critics of the international tax regime subscribe to the notion that double taxation is detrimental to global growth, development and welfare. Yet, they argue that, all things considered, tax treaties might not be worth signing. Based on an extensive review of the available tax policy and economics literature, this article shows that there is not enough of a normative or empirical basis for thinking that double taxation will necessarily restrict capital flows, provided that the combined effective tax burden is kept at a reasonable level. At the same time, treaties seem to provide investors with a legal certainty that is key to cross-border business activity. This article posits that there should be more emphasis on the legal certainty aspect of tax treaties and less on their limited capacity to prevent double taxation. In fact, relaxing the double tax paradigm could help to significantly improve tax treaties, with a view to preserving their role in fostering international commerce and investment. In this respect, the authors propose a simplified tax treaty model that, by allowing an agreed overlap between home-state and host-state taxes, would diminish overall implementation costs while increasing legal certainty and reducing the risk of lengthy tax disputes, thus benefiting both taxpayers and tax administrations. The article further demonstrates that this approach is superior to the current Pillar One proposal and other popular systemic reform suggestions in the literature, specifically the destination-based cashflow tax (DBCFT) and global formulary apportionment.