Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties¹

Abstract

Barthel, Fabian and Eric Neumayer. (2012) Competing for Scarce Foreign Capital: Spatial Dependence in the Diffusion of Double Taxation Treaties. International Studies Quarterly, doi: 10.1111/j.1468‐2478.2012.00757.x © 2012 International Studies Association Recent research suggests that double taxation treaties (DTTs) increase bilateral foreign direct investment (FDI). However, entering such a tax treaty is not unambiguously favorable for both partners if their bilateral FDI positions are asymmetric. Due to the usual bias toward residence‐based taxation in DTTs, net capital importers can face a considerable loss of tax revenues when entering these treaties. Nevertheless, there is an ever denser and growing global network of such treaties. This article argues that net capital–importing countries are caught in a prisoners’ dilemma: Collectively, they would be better off refusing to sign DTTs, but each one has an incentive to sign DTTs to gain a competitive advantage. Countries will look toward and be influenced by the policy choices of other focal countries and will follow their DTT activity. We find evidence for such spatial dependence in our analysis of DTT diffusion in a global sample over the period 1969–2005. Dyads are more likely to sign a DTT the more DTTs have previously been concluded by the regional peers of the dyad members as well as by other countries who compete with at least one of the dyad members in terms of export product structure.

Global Governance, Tax Treaties, and Credible Commitments

“…However, tax treaties may lead to substantial inflows of FPI that can rapidly spur economic growth through financial development-a significant benefit (see Alfaro et al 2004). Ultimately, the decision on whether or not to sign a tax treaty will follow the interests of the potential signatories, all of whom have many of their own unique priorities and concerns (Barthel and Neumayer 2012). Country Dummies…”

Using New Data to Support Tax Treaty Negotiation

“…For most lower-income countries, the constraints on taxing rights are a straight revenue cost in static terms, mitigated by the hope that the treaty will stimulate investment and in turn increase welfare and expand the tax base. Competition to attract inward investment has clearly motivated decisions to conclude tax treaties (Barthel and Neumayer 2012;Hearson 2021), and some research suggests that treaty shopping may create added pressure on countries to revisit their tax treaty policy and therefore to negotiate new agreements to take back control of their fiscal policy (Arel-Bundock 2017).…”

“An Unacceptable Surrender of Fiscal Sovereignty”: The Neoliberal Turn to International Tax Arbitration

“…Recognizing this, states have created a regime based on two instruments: transfer pricing rules and tax treaties. Both have diffused widely, in part a product of tax competition (Barthel and Neumayer 2012;Eden, Dacin, and Wan 2001;Hearson 2021). Transfer pricing rules dictate how the profits of multinational firms are attributed to the countries in which they operate.…”

“…The first is the widespread erosion of sovereignty as a norm in economic policy, as part of an ongoing trend towards the legalization and in particular the judicialization of international relations (Abbott et al 2000; Alter, Hafner-Burton, and Helfer 2019) as well as the emergence of new constitutionalism (Gill 1998). The second is the intensification of competition for FDI, which has created pressure for states to adopt capital-friendly tax policies and international agreements (Barthel and Neumayer 2012; Clausing 2016; Elkins, Guzman, and Simmons 2006).…”