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This chapter begins with an overview of the background and function of tax treaties and their proclaimed benefits. It then presents the case study of a hypothetical tax treaty between the United States and Ghana. It shows that such a treaty would produce few tax benefits to current or potential investors and would therefore be largely ineffective in stimulating trade and investment between these two countries. It is argued that after decades of adherence to the promise of tax treaties, we must acknowledge their failure to deliver and search for alternative ways to achieve the goal of promoting aid through the vehicles of investment and trade.

This chapter examines the combination of fiscal sovereignty and coordination in national taxation systems in the context of globalization. It evaluates the rationale behind the design of cooperative rules across tax jurisdictions and discusses corporate profits and the treatment of income and capital flows across national borders. This chapters concludes that in order to have a fair and efficient international tax order, countries should adopt a combination of taxes, such as personal tax expenditure tax with a schedular corporate tax or a value-added tax (VAT) of the origin type together with an integrated corporate-individual income tax.

An outline is given of the complex issue of transfer pricing (the cross‐border intra‐firm transactions between related parties), as seen by multinational enterprises (MNE) managers and by governments faced with the task of taxing business profits. First, transfer pricing from the MNE's perspective, and the problems that this raises for national governments, are briefly discussed. The basic rules of international taxation as they apply to MNE profits are then reviewed. The specific rules and procedures that apply to transfer pricing, as practised in the USA and recommended by the OECD, are then outlined. The rest of the chapter discusses an alternative approach to taxing MNEs—the arm's length standard, which is based on separate accounting or the separate entity approach, and outlines future trends that are likely to have major impacts—globalization, regionalization, and the Internet.

This chapter examines whether double taxation treaties (DTTs) attract more foreign direct investment (FDI) to developing countries. It begins by describing the importance of foreign investment to developing countries and illustrates the growth of DTTs. It then reviews the existing empirical studies, presents the research design, and reports results. The final section concludes with the finding that DTTs are effective in attracting FDI, but only in the group of middle-, not low-, income developing countries.

This chapter sheds further light on the question of how tax treaties affect outward foreign direct investment (FDI). The chapter is organized as follows. Section A outlines the general equilibrium model of trade and multinational firms for studying the welfare and FDI effects of tax treaties. The theoretical hypotheses are summarized in Section B. Section C presents the database, the econometric methods, and the empirical results. Section D discusses the results in the light of previous research, and provides an extension regarding the time pattern of accumulation of the treaty-induced effect on FDI.

This chapter discusses double taxation treaties (DTTs). The existing network of more than 2,500 bilateral DTTs represents an important part of international law. Current DTTs are all based on two models, the Organization for Economic Co-operation and Development (OECD) and United Nations (UN) model DTTs, which in turn are based on models developed by the League of Nations between 1927 and 1946. All DTTs are remarkably similar in the topics covered (even the order of articles are always the same) and in their language. About 75% of the actual words of any given DTT are identical with the words of any other DTT. Thus, the DTT network is the most important element of the international tax regime, that is, the generally applicable rules governing income taxation of cross-border transactions.

This chapter discusses some basic international tax issues. Within the field of international tax law, convergence is evident mainly in the treaty network. There are currently over 2,500 bilateral income tax treaties, mostly designed to prevent double taxation and fiscal evasion, and they cover most countries in the world (e.g., all OECD countries have treaties with each other). Moreover, all the treaties follow the same OECD and UN models, and that means that about 80% of the wordings of the tax treaties are identical. This is a remarkable phenomenon, and it poses significant constraints on a country's tax laws.

This chapter describes the multilateral efforts regarding four key concerns of the international community: Prevention of double taxation, fighting “harmful tax competition,” sharing of information, and the “gaps and frictions” between the tax systems of various countries noted by the recent BEPS report. It then asks what, in fact, constitutes the community’s interest in the international tax area, arguing that where tax policy is concerned, there is no clear “textbook answer” regarding the best way to tax internationally. The chapter criticizes two proxies which are often implicitly endorsed in order to evaluate international tax policy: Cooperation among states, and the prevention of market failures. It argues that cooperation, contrary to conventional wisdom, is neither a goal in itself nor is it a good enough proxy for the collective good, and that the elimination of market failures, although indisputably beneficial, may raise a second-best problem.

This introductory chapter first considers the core dilemmas in U.S. international tax rules. It examines five conceptual problems in the existing international tax policy literature: the problem of double and/or nontaxation; foreign taxes; multiple margins; the reliance on “alphabet soup” or the “battle of the acronyms”; and lack of conceptual integration between entity-level corporate taxation and the taxation of individuals. The chapter then proposes an approach towards better analysis of international tax policy issues, followed by a discussion of its main policy implications.

In light of the important and expanding role of foreign direct investment (FDI) in today's global economy, a vast literature has emerged attempting to uncover the salient factors determining the spatial and temporal pattern of FDI activity. This chapter investigates one potential factor: bilateral tax treaties. The chapter is organized as follows: Section A describes the empirical methodology. Section B discusses the data. Section C presents the results, while Section D concludes.

This chapter presents some concluding thoughts. This book attempted to clarify that while divergence is predominant in individual tax matters, there is some degree of convergence in the corporate tax area and this is even more noticeable in international tax matters. This is not surprising because it is in these areas that globalization operates most directly, and corporations are more flexible than individuals when it comes to switching jurisdictions. Nevertheless, the debate between functionalists and culturalists is far from over. Even where convergence does exist, it is frequently superficial and masks a myriad of differences.

This chapter takes a different approach from earlier studies to determine how host-country governance affects U.S. foreign direct investment (FDI). Instead of looking at the effect on the amount of investment, it looks at the effect on the rates of return that companies require on their FDI. It shows that poor host-country governance, as indicated by indexes measuring corruption or political instability, causes U.S. companies to require a significantly higher rate of return on their FDI. There is no evidence that a bilateral income tax treaty with the United States reduces the required rates of return to U.S. FDI. This finding is consistent with theoretical predictions, particularly those of Sinn (1991, 1993), and with the conclusions reached by Blonigen and Davies (2001). Failing to include a variable for the quality of host-country governance can cause a simple cross-section regression to yield the misleading implication that a tax treaty encourages U.S. FDI.

This chapter analyzes whether the international tax reform measures instituted under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Project are effective in ensuring African countries get a fair share of taxes from multinational enterprises (MNEs) transacting within their borders, so that they can finance their development goals and promote the human rights of their citizens. The OECD chose to focus on curtailing sophisticated tax-avoidance schemes by strengthening existing anti-avoidance provisions. MNEs have abused these existing laws, however, making them largely ineffective. Given that MNEs are always a step ahead in devising new tax-avoidance strategies, one wonders whether emphasis on strengthening anti-avoidance laws will achieve much. The OECD seems to have missed an opportunity to evaluate the whole tax system and deal with the very root of the problems inherent in international taxation.

The reform of corporate and business taxation is central to current tax policy debates in the United States. This chapter provides a framework for analyzing reform proposals by describing the lessons from current economic research for business tax reform, addressing both international and domestic reforms within a unified perspective. The chapter begins by identifying ten potential inefficiencies created by the current corporate tax regime. It then discusses three classes of reform proposals. The first involves a substantially lower corporate tax rate and a territorial regime. The second is a formula apportionment system. The third category includes a destination-based cash flow tax. The chapter evaluates each of these proposals in the light of the framework introduced earlier. It concludes that the relatively modest reforms currently under discussion would address only a few of these margins. In contrast, more fundamental reforms would eliminate all or most of the inefficiencies of corporate taxation.

The ability of modern multinational corporations to adjust the scale, character, and location of their worldwide operations creates serious challenges for governments that seek to collect tax revenue from the profits generated by these operations. One of the most important issues that policy makers confront in setting tax policies is to evaluate the extent to which taxation influences the activities of multinational firms. International taxation clearly has the potential to affect the volume of foreign direct investment (FDI), since higher tax rates depress after-tax returns, thereby reducing incentives to commit investment funds. This book analyzes empirical evidence concerning FDI and the behavior of multinational firms. It addresses issues that fall into three broad categories: the way in which taxation affects FDI, the effect of tax policies in encouraging international tax avoidance, and the relationship between tax incentives and international spillovers of technology. It also examines stock market reactions to international tax deferral that is reported in the tax footnotes of company annual reports.

In this chapter, multinational enterprises (MNE) and their effect on transfer pricing, taxable profits and payments are explored. One of the purposes of the chapter is to consider the international taxation of MNEs and enforcement of the arm’s-length principle. The analysis carried out in the chapter is heavily reliant upon the work done by Kind, Midelfart Knarvik, and Schjelderup on the study of the effects of economic integration on equilibrium taxes. Both Peralta’s and Kind’s models are modified in order reveal that as governments increase the level of enforcement as a response to transfer pricing, the results show that equilibrium tax rates also increase. An analysis is then made on the effects of increased economic integration on transfer pricing and quantity decisions by MNEs when facing two policy instruments. In the end, increased economic integration is shown to affect corporate profit tax rates in either a race to the bottom or a race to the top.