Question

“Traditionally, double tax treaties (DTTs) served as an important policy tool to
promote international economic activity by preventing international double

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taxation. However, despite the growing number of contributions, the empirical
evidence on the effects of double tax treaties on bilateral FDI remains
inconclusive.”

With reference to the above statement critically evaluate the significance of
double tax treaties (double taxation avoidance agreements) to developing
countries.

Answer 1

The Double Tax Avoidance Treaty (DTAA) is effectively a bilateral deal between the two countries. The fundamental goal is to facilitate and encourage free trade and investment between the two countries by avoiding double taxation. Global double taxation has negative effects on goods and services and on property and human movement. Taxing two or more countries on the same income will constitute a prohibitive burden on the tax-payer. Most countries' domestic laws, including India, mitigate this problem by providing unilateral relief on such doubly taxed revenue (Section 91 of the Income Tax Act).

The need for a Double Tax Avoidance Agreement exists because of contradictory laws in two separate countries concerning income chargeability dependent on receipt and accrual, residential status etc. Because there is no consistent concept of income and taxability, which is universally agreed, an income that become taxable in two countries.

Tax deductions or tax credits are the most common strategies used to avoid or limit double taxation under these agreements. The form of tax exemption can be extended entirely or gradually. In the case of the full tax exemption system, no tax would be levied on the country in which the revenues or wages are received, the resident country being the one which levies the tax.

Widespread economic-policy liberalization has effectively sparked an increase in foreign direct investment ( FDI). Most countries are seeing rapid growth within their economies and local industries by attracting foreign investors to join international markets. Not only does the surge of FDI carry capital to developing or growing sectors, it is also capable of boosting the country's economy by creating greater access to finance, more employment prospects, and future spillovers of information and technology. The basic aim of signing bilateral investment treaties (BITs) and double taxation treaties (DTTs) is to warn investors that, in the event of political instability, investments will be legally secured under international law and to reduce the risk of double taxation of foreign entities. Nonetheless, the real impact of the BITs and DTTs on foreign direct investment flows is debatable. The Impact of Foreign Direct Investment Treaties: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows is a thorough review of the success of these Treaties, which presents the current literature on BITs which DTTs and their effect on foreign investment.