Special Features of the UN Model Convention

1. S. 428Introduction

Tax sparing and matching credits are well-weathered topics that have been discussed, analyzed, criticized, and defended by practitioners and academics worldwide. Over the last decades, there have been debates between developed and developing countries when negotiating the inclusion of such provisions in tax treaties that are based on the controversial question of whether a tax treaty with a tax sparing or matching credit is effective and suitable as well as being able to attract higher foreign direct investment (FDI).

In order to encourage inbound FDI, developing countries often grant tax incentives to foreign investors. Their efficiency is significantly dependent on the investor’s residence State tax regime particularly when the residence State uses a worldwide tax system and levies taxes on foreign income. The tax incentive may be reduced or even limited when the investor’s State uses the credit method to avoid double taxation. In order to prevent the host State tax incentives being nullified by the residence State taxation, tax sparing provisions can be found in many bilateral tax treaties. Such provisions are mainly incorporated in tax treaties that are negotiated...