An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment

Double taxation treaties are intended to eliminate double taxation, thereby encouraging FDI, and prevent tax evasion, which previous literature argues will have a negative effect on FDI. Using a segmented data set and matching econometrics, I show that double taxation treaties have no effect on FDI from developed to less developed countries and substantiate why: Developed countries unilaterally provide for the relief of double taxation and the prevention of fiscal evasion regardless of the treaty status of a Host country. This eliminates the key economic benefit and risk that the treaties would otherwise create for multinational enterprises ’ FDI location decisions.