Abstract:
Countries often enter into double tax treaties to encourage foreign direct investment by
preventing double taxation of income. However, double tax treaties often result in
unintended tax consequences such as: redistributing tax revenues from developing to
developed countries; facilitating tax avoidance and the resultant base erosion and profit
shifting (BEPS) and double non-taxation.
While double tax treaties are entered into with the main objective of eliminating double
taxation in order to encourage the said foreign direct investment in developing countries,
double tax treaties have not been effective in addressing the unintended consequences of
concluding them, impacting the tax revenues of source countries.
In achieving their main objective, double tax treaties contain provisions which can ensure
that income is only taxed in one country by allocating taxing rights between residence and
source countries that are party to it. However, the allocation of taxing rights in double tax
treaties simply redistributes taxing rights from the country where the income is derived (i.e.,
source country), to the residence country.
The study finds that double tax treaties, mostly those drafted based on the Organisation for
Economic Co-operation Development (OECD) Model Tax Convention (MTC), typically
favour developed countries as they allocate taxing rights to resident countries.
As a result, the study recommends that developing countries exercise extreme caution when
concluding double tax treaties as the unintended consequences of entering into the double
treaties result in the loss of much needed tax revenue as the allocation rules contained
therein, particularly those that are drafted based on the OECD MTC favour developed
countries over developing countries.
