IMPACT OF TAX TREATY ON FOREIGN DIRECT INVESTMENT
Chapter one
Introduction
Background of the study
To increase foreign direct investment (FDI) in their country is a desirable policy goal for most policy-makers. Yet, often the factors influencing the influx of FDI are not easily amenable to policy, either because they are unalterable, like natural endowment of physical resources, and cultural and geographic proximity to major source countries, or because changing them is a very long-term process, as in the case of the efficiency of political institutions, market size, or the education and productivity of the local labour force. However, there are still a number of measures which can be taken to compete in the rivalry for foreign investment: on the one hand, restrictions imposed on investors regarding, e.g., the profit repatriation can be unilaterally eased, red tape or corporate taxes can be reduced, and on the other hand, bilateral measures can be taken, such as concluding bilateral investment treaties (BIT) or double taxation treaties (DTT)
The role of bilateral tax treaties attracts a lot of attention nowadays. Although bilateral tax treaties are originally used to avoid double taxation, it seems that multinational firms use the network of these treaties to avoid taxation by establishing shell companies in countries with attractive treaties (treaty shopping), resulting sometimes even in double non taxation. Many people are worried about tax base erosion and profit shifting of multinationals resulting in lower profit tax payments using these treaties (OECD, 2013). There is less attention now for the investment effects of tax treaties which is the prime aim of negotiating on these treaties. This topic is the main purpose of this paper. Various papers have investigated the impact of bilateral tax treaties on bilateral FDI using macro and micro data, but their findings are not clear cut and often point to insignificant or negative effects. These negative or insignificant results in the literature are often explained by a second aim of tax treaties: the administrative cooperation between countries to fight tax evasion. However, the effectiveness of this cooperation is hardly studied (if possible at all), and these theoretical explanations of negative investment effects are therefore not very satisfactory. Keen and Ligthart (2004) is one of the few papers that investigates information sharing. They conclude that information sharing is increasing in recent years, particularly due to automatic exchange. However, there are many impediments to an effective use of this information by tax authorities.
Given their bias in favour of residence-based taxation for many types of income, on their face, tax treaties appear to be costly to capital-importing nations required by treaties to cap source country taxation on many types of passive income and forgo entirely taxation on active business income in some circumstances. However, if the treaties were a factor that generated significant increases in FDI, the short-term revenue costs from reductions in tax on existing investments might be greatly outweighed over the longer term by the economic benefits of FDI stimulated by the agreements. The relationship between tax treaties and possibly increased levels of FDI is thus a question of considerable concern to policymakers.
Statement of the problem
A number of papers have empirically tried to establish the effects of bilateral tax treaties on foreign direct investment. Due to the dual objectives of bilateral tax treaties, the qualitative effect is a priori unclear (Davies, 2004). The prevention of double taxation, has a stimulating effect on FDI, the sharing of information between governments, can counteract tax evasion and thus discourage FDI. Based on this the researcher wants to investigate the impact of tax treaty on foreign direct investment
Objective of the study
The objectives of the study are;
To ascertain the effects of bilateral tax treaties on foreign direct investment To ascertain the impact of tax treaty on Nigeria economy To ascertain whether double taxation, has a stimulating effect on FDI
IMPACT OF TAX TREATY ON FOREIGN DIRECT INVESTMENT