Withholding Taxes in Developing Countries : Relief Method and Tax Sparing in Tax Treaties with OECD Members

This study investigates the impact of residence country’s double tax relief method and of tax sparing agreements, on the difference between developing countries’ withholding taxes under domestic law, and negotiated withholding taxes in tax treaties with OECD member states. Using a dyadic panel dataset of asymmetric double tax treaties between 2005 and 2019, this study suggests first, that the difference between developing country’s domestic and treaty negotiated WHTs on portfolio dividends is higher when the OECD member state treaty partner uses the credit method, as compared to when it uses the exemption method. Second, results suggest that the inclusion of tax sparing provisions vanishes the positive effect of the credit method at home country on the difference between domestic and negotiated WHTs on portfolio dividends, incentivizing developing countries to negotiate higher withholding taxes