International tax & business 2018

Tax treaties and the international allocation of production: the welfare consequences of tax credits

Source: Australian Tax Forum Journal Article

Published Date: 1 Apr 2018


The international taxation of profit is regulated by numerous tax treaties that describe the treatment of cross border flows. A common feature of these treaties is tax credits for multinationals when they repatriate profit. The tax credits eliminate the double taxation of profit and the disincentive this causes for overseas investment and distribution of profit to home shareholders. The article investigates the welfare impact of tax credits. The impacts of the tax credit operate through two channels: an efficiency channel that increases the tax base and a distributional channel that allocates the tax base between countries. The distributional effect works against the residence country so it will generally suffer a welfare loss unless source countries react to the tax credit by cutting tax rates.

Author Profile
Gareth D Myles
Author Profile
Nigar Hashimzade

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International tax & business 2018

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