Tax Policy Challenges in the 21st Century

S. 530I. Introduction

Historically, bilateral tax treaties are mainly concluded between developed economies of the OECD member countries. These countries share in a certain sense a common interest and ideology, and the flows of income between these countries are roughly reciprocal. With this background in mind, the OECD Model was designed to address the issue of international double taxation. In a typical tax treaty, two signatory countries agree on how to allocate between them the right to tax to various types of income. The OECD Model, which is drafted in line with the needs and requirement of its member states, tends to emphasize residence taxation, by putting limitations to source taxation. If indeed flows of investments are reciprocal then each signatory state will serve both as source state for foreign investments and residence state for its own residents. The revenue sacrifices would then more or less offset each other.

In a treaty between a developed and a developing country however, these investment flows are largely in one direction. In this situation developing countries are most often in the position of net capital importers, which are countries typically characterized by insig...