The tax treatment of interest and dividends under tax treaties from the perspective of law and economics

There is an assumption in academic literature and legal practice that tax treaties are effective, i.e. that they succeed in removing tax obstacles and therefore lead to an increase in economic activity between both contracting states. However, there has been remarkably little fundamental research in order to assess whether that assumption is correct. An analysis on the basis of law and economics may offer valuable insights in this respect. The proposed research project will seek to assess the effectiveness of tax treaties in the context of interest and dividend payments. In particular, three core issues will be addressed: (1) the classification of items of income as interest or dividends, (2) the determination of the source of interest and dividend income and the resulting division of taxing powers between source state and residence state, and (3) the different measures aiming to prevent the abuse of tax treaties.

A broad topic was chosen for the project in order to allow for additional research avenues. During the project, the initial research findings were relied upon to initiate two PhD projects on adjacent topics (3H150272 -  Tax gaps in developing countries : legal causes and solutions and 3H170581 -  Digital economy and international taxation).

The project, and the PhD projects that have been initiated, have led to the conclusion that tax treaties show important deficiencies that undermine their effectiveness. That is particularly the case in asymmetrical tax treaty situations and in areas where rapid technological evolutions have rendered the fundamental concepts on which tax treaties are based difficult to apply in practice, which results in issues in the interpretation and application of tax treaties.