The OECD Model Tax Treaty: Tax Competition And Two-Way Capital Flows

Ronald Davies

International Economic Review, 2003, vol. 44, issue 2, 725-753

Abstract: Model tax treaties do not require tax rate coordination, but do require that either credits or exemptions be applied to repatriated earnings. This contradicts recent models with a single capital exporter where deductions are most efficient. I incorporate the fact that capital flows are typically bilateral. With symmetric countries, credits by both is the unique and efficient treaty equilibrium. This equilibrium weakly dominates the nontreaty equilibrium. With asymmetric countries, the treaty need not offer improvements without tax harmonization. With harmonization, it is always possible to reach efficient capital allocations while increasing both countries' welfares only if neither uses deductions. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Date: 2003
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