The true art of the tax deal: Evidence on aid flows
and bilateral double tax agreements
Centre for European Economic Research (ZEW), Mannheim, Germany
UPO University of Eastern Piedmont, Novara, Italy
WU Vienna University of Economics and Business, Vienna, Austria
Universita del Piemonte Orientale; Norwegian Science Fund; OeNB Jubiläumsfonds, Grant/Award Number: 16017;
MannheimTaxation (MaTax) Science Campus; Leibniz Association
With rising cross-border capital flows, the interaction of national tax jurisdictions has increasingly
gained in relevance in the last decades. Given the lack of a unified global tax order and the so far
limited scope of multilateral initiatives, the tax treatment of cross-border activities remains to a
large degree regulated by bilateral double taxation agreements (DTAs).
These agreements set tax
rules and allocate taxing rights between the two signatory states.
Of the 2,976 DTAs in place as of 2010, some 500 DTAs covered relationships between OECD
countries (17% of the total). About a third of the treaties were signed between two developing econ-
omies, and more than 50% were between a developing on the one hand and an OECD country on the
other hand (Baker, 2014). This latter category, so-called asymmetric DTAs, is the focus of this paper.
The large majority of DTAs is drafted along either the OECD or the UN Model Tax Conven-
tions (MTC) (Wijnen & de Goede, 2014). Both these conventions (albeit the UN Convention to a
lesser degree) tend to shift taxing powers from the source state, that is, the state where income is
generated, to the residence state of a company. For two countries with largely symmetric invest-
ment patterns, this imbalance is not problematic.
Conversely, when two countries with an asymmetric investment position sign such a DTA, this
shifting of taxing powers inherently implies a loss of tax base for the capital-importing country
(see, e.g., Rixen & Schwarz, 2009). With capital still flowing predominantly from industrialised to
developing countries and capital income flowing the other way, such agreements may thus put cap-
ital-importing developing countries at a disadvantage.
This raises the question as to why capital-importing countries sign such DTAs. Several reasons
have been brought forward. Most prominently, it has been argued that developing countries expect
increased capital inflows after the signature of DTAs (e.g., Lang & Owens, 2014). Empirical evi-
dence as to whether DTAs indeed lead to higher investment flows is, however, far from conclusive
A multilateral instrument for the streamlining of DTAs has recently been proposed by the OECD in the framework of the
Base Erosion and Profit Shifting (BEPS) project.
© 2018 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:1478–1507.