Treaty Allocation Rules, Corresponding Adjustments and Binding Arbitration : A Coherent Method to Prevent Double Taxation

In bilateral tax treaties each self-interested state confers benefits to another State because it extracts from that specific treaty benefits that are superior to those it would extract without resorting to such a treaty (cooperation based on reciprocity). Tax treaties can be modelled as coordination games in which both States' dominant strategy is to make the same choice (neither of the two States has a dominant strategy). In a bilateral tax treaty, there are two Contracting States (hereinafter ‘CSs'). Each CS can act, depending on the situation, either as the treaty residence-country (hereinafter ‘RC') or as the treaty source-country (hereinafter ‘SC'). So, for example, in the treaty between France and Japan, in a certain transaction, France is the RC and Japan is the SC, while in other transactions Japan is the RC and France is the SC. So tax treaties are bilateral, are based on reciprocity and regulate the tax aspect of bilateral investments