Global Treaties and Domestic Politics: Do Bilateral Investment Treaties Constrain Taxation in Developing Countries?

Abstract

Abstract Bilateral investment treaties (BITs) define a set of investors’ rights and allow foreign investors to sue countries for policies that breach them. Political scientists typically study the extent to which that chastens policymaking in the context of health and environmental rules. We extend that literature to tax policy. We argue and show that BITs limit developing country governments’ tax intake. We further argue that umbrella clauses are an important driver of these dynamics. Umbrella clauses extend BITs’ protection to side agreements that are often more constraining than the BITs themselves and are typical in developing country resource extraction projects. Umbrella clauses’ tax-inhibiting effects are significant because resource revenues are important to developing countries’ public finance systems. Any assessment of BIT’s developmental benefits should consider their fiscal impact alongside their potential to attract capital inflows.