The true art of the tax deal: Evidence on aid flows and bilateral double tax agreements

Martin Zagler

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International Development and Aid Taxation and Legal Issues Corporate Taxation and Avoidance

Abstract

Abstract Of a total of 2,976 double tax agreements ( DTA s), some 60% are signed between a developing and a developed economy. As DTA s shift taxing rights from capital‐importing to capital‐exporting countries, the latter inherently benefit more from the agreements. In this paper, we argue that capital exporters use foreign aid to incite capital importers into signing DTA s. We demonstrate in a theoretical model that in a deal, one country does not trump the other, but that the deal must be mutually beneficial. In the case of an asymmetric DTA , this requires compensation from the capital‐exporting country to the capital‐importing country. Examining DTA s that are signed between donor and recipient countries between 1991 and 2012, and using a fixed effects Poisson model, we find that bilateral foreign aid commitments increase by 22% in the year of the signature of a DTA . Evaluated at the sample mean, this translates into around US$ six million additional aid commitments in a DTA signatory year.

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References

2006The Log of Gravity 1982Perfect Equilibrium in a Bargaining Model 2000Who Gives Foreign Aid to Whom and Why?2011Further simulation evidence on the performance of the Poisson pseudo-maximum likelihood estimator 2006How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations 2008Development aid and international politics: Does membership on the UN Security Council influence World Bank decisions?2009Global horse trading: IMF loans for votes in the United Nations Security Council 2009A Political Economy of Aid

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