Weekly SSRN Tax Article Review And Roundup: Elkins Reviews Oei's Disentangling Power And Preferences In Tax Treaties Between Developing And OECD Countries

This week, David Elkins (Netanya, Google Scholar) reviews a new work by Shu-Yi Oei (Duke; Google Scholar), Disentangling Power and Preferences in Tax Treaties between Developing and OECD Countries Using Multilevel Modeling.

One of the linchpins of the international tax regime is the network of over 3,000 bilateral tax treaties. Of those, as noted by Prof. Oei, about 40% are between developed and developing countries. The primary goals of tax treaties are to prevent double taxation and to divide up taxing rights between the taxpayer’s country of residence (the home country) and the country from which the income is derived (the source country). However, it is often not necessary to conclude a tax treaty to prevent the taxation of the same income by more than one country. Foreign tax credits and territorial taxation are unilateral means by which counties can and do prevent double taxation. Moreover, these unilateral measures tend to give precedence to source countries. The question that has been raised in the literature is why developing countries, which to a great extent rely upon source taxation, would enter into treaties, the effect of which is to limit their ability to tax income deriving from their own territory.

Some researchers have claimed that treaties encourage investment in the developing country. According to research cited by Prof.  Oei, empirical evidence for this claim is inconclusive. Some studies show that they increase investment, some that they decrease investment, and some that they have little effect (although it might be noted that to explain the phenomenon of tax treaties between developed and developing countries, the question of whether they actually encourage investment is irrelevant; the relevant question would appear to be whether developing countries believe that they encourage investment).

A number of theories have been proposed to explain why developing countries are willing to conclude tax treaties with developed countries. One set of theories relies upon the unequal power relationship between developed and developing countries. Another set of theories argues that treaty outcomes – even seemingly unfair outcomes – reflect rationally bargained-for preferences of both signatories. Institutional social science theories point to contextual characteristics such as differences in tax culture and norms, regional differences, and historical relationships.

To test these theories, Prof. Oei hypothesizes how each set of theories would play out in the tax treaty network. For example, she proposes that if the power-based theories were correct, then one would expect an inverse relationship between the size and income level of the developed country on the one hand and the degree of favorability of the treaty to the developing country on the other. The paper then turns to the dataset released in 2019 by the International Centre for Tax and Development (ICTD), which indexes and analyzes treaties and, most importantly, provides a Source Index score (SI score), which measures treaty favorability to source countries. Because developing countries tend to be more reliant on source taxing rights, the author considers the SI score to be a reasonable measure of treaty favorability to developing countries. From the treaties, the author isolates 1,206 treaties between developing and developed countries signed between 1950 and 2019 and uses them to test each hypothesis.

The author claims that the regression models show qualified support for power-based and contractual theories, with the data supporting some but not all of the hypotheses that derive from these theories. The models also show that certain contextual factors, such as the geographical location of the developing country or a former colonial relationship, are significant. Regarding the latter, the author expresses some surprise that a former colonial relationship tends to be associated with a more source-favorable treaty and suggests that this phenomenon merits further investigation. Intuitively, I would suggest that the ties between former colonial powers and their former colonies are often not completely severed upon independence, and that former colonial powers commonly view themselves as bearing some degree of special responsibility toward their former colonies. It is perhaps not surprising to discover that former colonial powers would bestow favorable treatment on their former colonies when negotiating tax treaties.

The author points out that her research is subject to a number of limitations. First, the SI score is broad-based and does not reveal granular information about specific treaty provisions. Second, the study holds the risk of overgeneralization and needs to be complimented by country-specific and treaty-specific analyses. Third, the regression method can only identify association; it cannot identify or isolate causal links. Fourth, the paper does not distinguish important treaties in the global tax treaty network from less important ones.

The field of international taxation is currently undergoing a once-in-a-century revolution, one focus of which is the distribution of taxing power between source countries and home countries. The international tax treaty network is one important element of that revolution. This paper makes an important contribution to the literature in the field.

Here’s the rest of this week’s SSRN Tax Roundup:

• Quynh Anh Do (Swansea) & Van Phan (U. of West of Eng., Bristol), Geopolitical Crises and Resource Tax Revenue (2023)
• Reuven Avi-Yonah (Michigan), Should Large Corporate Mergers be Subsidized? (2024)
• Keshav Choudhary (Max Planck) & Bhanu Gupta (Ashoka), Dynamics of Firm Growth around Tax Thresholds: Evidence from India (2024)
• Monte Jackel (Jackel), Combined Partnership Tax Reform Articles (2024)
• Dhruv Janssen-Sanghavi (Maastricht) & Riya Bhatt (Field Court), Attributing Profits to a Former PE & Other Issues: A Critical Comment on the Interpretation of the UK-India Tax Treaty in the SIS Live Case, Bull. for Int’l Tax. (2023)
• Kimberly S. Krieg (San Diego), Amanda Marino (San Diego) & Landi Morris (Northern Arizona), Exploring (In)Equity in the Internal Revenue Code: Discussions of Race in the Tax Classroom (2024)
• Shajoe Lake (Warwick), The Ethical Validity of Health-Promoting Taxes on Unhealthy Food and Beverages in the Commonwealth Caribbean, _ Caribbean L. Rev. _ (2024)
• Kirsten Widner (San Francisco) & Heather M. Kolinsky (Florida), Building Resilience by Removing Barriers: Addressing Structural Impediments to Advocacy by Nonprofit Organizations on Behalf of the Unenfranchised, 92 U. Cin. L. Rev. 786 (2024)
• Libin Zhang (Fried Frank), International Tax Reform and the Biden-Harris Tax Pledge (2024)

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