THE (UN)CERTAIN FUTURE OF TAX SPARING CREDIT IN INTERNATIONAL TAX TREATY LAW

Abstract

Tax sparing clause emerged in double taxation treaties 63 years ago. Despite criticisms, it can presently be found in about 15% of all treaties, with Serbia having this clause in 46% of its double taxation agreements. It is the authors’ view that this provision represents a confirmation of the right to introduce tax incentives as a part of a country’s right to tax, while pointing out the necessity of preventing abuses of the provision. After conducting an analysis of the effects of tax sparing on foreign direct investments in Serbia and outgoing investments of Serbia’s residents, the remaining portion of the paper is dedicated to exploration of the interaction between GloBE Income Inclusion Rule and tax sparing. Their incompatibility, which implies that tax sparing would be annulled under BEPS 2.0, may be overcome via a specific carve-out, but at present such initiative is not endorsed by Inclusive Framework on BEPS.