The Role of Double Taxation Treaties on Attracting Foreign Direct Investment: A Review of Literature

Abstract

Double taxation treaties are enacted to abolish incidents of double taxation. Moreover, it helps less developed countries in attracting foreign direct investment, discourage, and eradicate double taxation. Several studies have revealed that there is a positive impact of implementing DTTs on attracting foreign direct investment to developing countries. Implementing a double taxation treaty is not something that happens overnight. In fact less developed countries spent years efforts and other very scarce resources to discuss, implement and finalize these treaties with developed nations. In addition, less developed nations also forgo potential tax revenues. Most often these treaties favour residence-based over source-based taxation. The forgone tax incomes and the money invested in negations with developed nations in addition to other implementation cost can only make sense if the expected benefits in terms of FDI out-weight such costs. This paper critically reviews the literature on the impact of implementing double taxation treaties on attracting FDI inflows to developing nations. This review is further augmented with a synopsis of economic models used by policy makers to analyse potential tax impact on FDI decisions.

Keywords: Emerging Economies, Double Taxation, Treaties, Foreign Direct Investment, Developing Nations