The Case for Residency-Based Taxation of Financial Transactions in Developing Countries


This paper will endorse adoption of residency-based taxation for financial transactions by developing countries. The paper will focus on the following three tax aspects of cross –border financial transactions: (i) taxation of interest, dividends and capital gains earned by nonresidents; (ii) taxation of cross-border derivatives; and (iii) taxation of non-residents trading in securities in the developing country. The paper will use models contained in several countries, including the United States and Israel, to illustrate and support the proposed regime. The conclusions advanced are that to sustain economic growth, developing countries should adopt residency-based taxation for financial transactions, which would allow the developing country to attract foreign investors. In particular, the benefits for the developing country would be: (i) allowing domestic companies to raise capital by issuing bonds or stock to foreign investors, for lower finance costs; (ii) allowing domestic companies access to the global derivatives markets, which will enhance their risk management activity; and (iii) allowing nonresidents more access to the domestic capital markets, which would enhance the efficiency and liquidity of the markets.



Date of this Version

October 2006