Tax Treaties: A Key Tool That Latin America and the Caribbean Has Yet to Leverage

Created over a century ago in Europe, double taxation conventions are today a fundamental component of the global international tax framework. They define how taxing rights over cross-border investment are allocated between jurisdictions, provide legal certainty to investors, and offer a vehicle for dispute resolution.

There are currently more than 3,500 tax treaties in force worldwide. However, despite their long track record and strategic value in strengthening the business climate and regional integration, their adoption remains limited in Latin America and the Caribbean (LAC). On average, the region falls well below the levels observed in OECD countries, where it is common to have between 75 and 95 treaties in force. What needs to be done to change this reality?

The first step is to recognize that these instruments are a key tool for economic development. The second lies in having clarity about the types of provisions that best suit each country's circumstances and in the negotiating team's capacity to defend national interests. This is essential because tax treaties are complex instruments. By signing one, a country agrees to partially limit its taxing rights over certain investments — akin to offering a tax incentive — to attract capital and provide greater predictability for investors. Moreover, they can be difficult to administer and, in negotiations between countries at different levels of development, there is a risk that existing imbalances may be consolidated.

Below, we discuss the importance of these conventions, their adoption across the region, and the opportunities for action that the IDB can support.

The Economic Rationale: Why Does It Pay to Sign a Double Taxation Convention?

With few exceptions, LAC countries have not recognized the potential of tax treaties as instruments of economic policy and regional integration. The few agreements signed within the region are predominantly with extra-regional partners, and generally at their initiative. A degree of skepticism prevails: treaties are perceived as instruments that cede taxing rights and reduce revenues. However, this view overlooks a growing body of evidence demonstrating that the benefits of tax treaties more than offset the perceived costs.

The myth of "revenue loss." It is often assumed that double taxation conventions cause source countries — those receiving foreign investment — to lose tax revenue. However, that "loss" is not always real: the allocation of taxing rights is not the same as a transfer of tax revenues, as noted by the Oxford University Centre for Business Taxation (Zolt, 2018).

In practice, there are many mechanisms — such as foreign tax credits, exemptions, and deferral provisions — that limit the ability to collect additional revenue in the investor's country of residence. Consequently, the potential tax revenue in the recipient country (the one receiving the investment and generating the profits) rarely translates into an actual tax gain. It is, therefore, more logical to view these conventions as economic incentives rather than agreements on how to divide a fixed revenue pie. The implication for Latin American countries is clear: the perceived "loss" is largely an accounting illusion that does not reflect the underlying economic dynamics.

Greater Foreign Direct Investment, Growth, Innovation, and Revenue

The empirical evidence shows that tax treaties drive foreign direct investment (FDI), trade, employment, and technology transfer, ultimately broadening the tax base over time.

Studies by the London School of Economics (LSE) and WU Vienna University of Economics and Business find that double taxation conventions are associated with a reduction in the tax cost of cross-border investment and an increase in FDI. The IMF notes that double taxation discourages investment, while the global treaty network has helped create a more predictable environment. Along the same lines, UNCTAD underscores that these conventions are central pillars of international tax coordination and facilitate cross-border business activities, trade, and investment.

For Latin America and the Caribbean, the message is clear: double taxation conventions facilitate investment, and that investment generates employment, knowledge transfer, and productive development, broadening a tax base that can more than compensate for the revenues initially "ceded."
 

Tax Certainty as a Fiscal Asset

Investors do not only seek low tax rates — they also seek predictable rules. According to the World Economic Forum, 68% of global investors prioritize tax certainty over low tax rates when choosing investment destinations. The G20 has documented that predictable tax regimes are correlated with increases of up to 20% in FDI to developing economies.

Tax treaties are, par excellence, the instrument that provides such certainty: they guarantee investors that the rules governing cross-border taxation will not be changed unilaterally during the life of the treaty, that mutual agreement procedures (MAP) are available for dispute resolution, and that there will be no discrimination based on the investor's country of origin.

The average lifespan of a double taxation convention worldwide is approximately 15 years (Pickering, 2013) — a degree of stability that few domestic tax laws can match. In a world where uncertainty is the greatest disincentive to investment, tax treaties function as an anchor of confidence.

Finally, the breadth of a country's treaty network serves as an indicator of its sophistication in international tax matters and, more broadly, of the quality of its institutional environment — a point we discuss below.

Where Does Latin America and the Caribbean Stand?

According to the CIAT Tax Treaties Database, the landscape in LAC is heterogeneous and, in comparative terms, lagging behind. Countries in the region can be grouped into four categories based on the density of their treaty network — the vast majority of which are with European, Asian, or North American partners:
 

• Fewer than 15 treaties in force: Most Central American and Caribbean countries, as well as some South American economies, fall within this range. With such limited networks, coverage of their main trade and investment partners is inevitably incomplete.
• Between 15 and 30 treaties: Several medium-sized countries in the region have made progress, but their networks remain modest relative to their ambitions for international integration.
• Between 30 and 60 treaties: A smaller group of the region's more open economies has networks that are beginning to be functional but still fall short of OECD standards.
• More than 60 treaties: Virtually no LAC country reaches this threshold, which constitutes the floor for OECD advanced economies.
   

Compare this with global data: the United Kingdom has 130 treaties in force, France 125, the United Arab Emirates 115, China 110, and Switzerland and Singapore approximately 90–100 each. International financial centers have deliberately built extensive networks as part of a state-level strategy to position themselves as global investment hubs. Singapore, for example, has a diverse array of treaty partners, ranging from Albania to Vietnam.

Three Actions to Leverage Tax Treaties as a Strategic Policy Instrument

First, recognize their value as policy instruments for boosting investment and regional integration. Is the expansion of the tax treaty network on the radar of ministries of finance and trade? In this regard, it is highly instructive to compare the map of trade agreements with the map of tax treaties. Where they do not align, trade policy becomes less effective.

Second, develop a national negotiation model. Before sitting at the negotiating table, each country needs to answer fundamental questions: Do the characteristics of my economy — commodity exporter, net capital importer, services-based economy — call for a specific preference for the UN Model, the OECD Model, or a hybrid? What are my red lines regarding withholding tax rates on dividends, interest and royalties? What level of source taxation do I need to preserve? Without this compass, negotiators arrive at the table without a clear mandate, and the outcome tends to favor the better-prepared counterpart.

Third, build an experienced negotiating team. Negotiating a tax treaty is a highly technical exercise that requires deep expertise in international taxation, strategic skills, and practical experience. Countries with experienced negotiators obtain better outcomes. And experience is built through training andpractice.

IDB Strategic Support

At the Inter-American Development Bank (IDB), we view double taxation conventions as a strategic tool to help countries in the region integrate more effectively, develop their economies, and strengthen the business climate.

To this end, we support country-level analysis to identify gaps and opportunities. We can also help countries define their tax treaty policy, including developing national model conventions tailored to each country's economic characteristics, drawing on provisions from the two existing models (the OECD Model Tax Convention and the United Nations Model Double Taxation Convention).

Finally, we have an ongoing program to train treaty negotiators in partnership with Spain's Institute for Fiscal Studies (IEF), with participation from the OECD and the United Nations.

To learn more about IDB support, read our publication: IDB Manual on the Negotiation, Interpretation and Application of Conventions for the Elimination of Double Taxation.