Abstract
Out of all double tax treaties (DTTs) in force in 2012, around 41% are symmetric (single-rated) and 59% are asymmetric (multi-rated), i.e., they prescribe different dividend withholding tax rates depending on the foreign investor’s ownership fraction. The paper investigates the reasons for this phenomenon, namely why some countries in their DTTs prefer homogenous withholding tax rates over separate rates for participation and portfolio dividends. In a theoretical model, I demonstrate why home countries may have an interest in a high withholding tax rate in the host country, even though they do not receive the revenue from this tax. Further, I find confirming evidence that a reason for having multi-rated withholding taxes on dividends is an existing spatial dependence on the rates of the countries’ peers that may be a driving factor for setting multi-rated taxes. Finally, I confirm that the spread itself (i.e., the difference between the portfolio and participation dividends negotiated in the tax treaty) is also affected by the peer countries.
Highlights
Double taxation or the levying of tax by two jurisdictions on the same declared income, asset or transaction is not a recent problem
Shareholders owning more than the prescribed limit are often granted a more generous reduction or even elimination of withholding tax and are labeled significant shareholders. This is the first, and so far only, paper dealing with this phenomenon, namely why some countries in their double tax conventions prefer homogenous withholding tax rates over separate rates for participation and portfolio dividends
The trends differ for the withholding tax rates (WTRs) on participation and portfolio dividends
Summary
Double taxation or the levying of tax by two jurisdictions on the same declared income, asset or transaction is not a recent problem. Ligthart et al (2011) use a gravity model to conclude that countries sign DTTs mainly to reduce international double taxation and, to a lesser extent, to provide a legal instrument for the exchange of information in tax matters Despite these contributions, certain parts of the international tax treaty policy still remain unexplored. Shareholders owning more than the prescribed limit are often granted a more generous reduction or even elimination of withholding tax and are labeled significant shareholders To my knowledge, this is the first, and so far only, paper dealing with this phenomenon, namely why some countries in their double tax conventions prefer homogenous withholding tax rates over separate rates for participation and portfolio dividends.
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