Developing countries and the social nature of international tax
Converging or diverging policies?Developing countries and the social nature of international tax Martin Hearson, London School of Economics and Political Science Critical Tax Conference, UC Hastings, April 2013
A simplified model of international tax institutions OECD United NationsModel TIEA Transfer pricing Model treaties guidelinesTax informationexchange Domestic law Double tax treatiesagreements
Double tax treaties: conventional understanding• Purpose of treaty is primarily to alleviate double taxation, also to aid cooperation on tax evasion• Developing country gives up tax revenue, but is compensated through greater inward investment – Some argue the treaty causes reallocation of capital from residence to source country – Others describe it as a competition effect – treaty gives a relative advantage over other source countries• Hence developing countries seek tax treaties• Evidence for effect on investment is mixed, because it’s hard to isolate the effects of individual tax treaties
Double tax treaties: critical understanding• Treaty is unnecessary to alleviate double taxation, as residence states do so unilaterally• Primarily a political settlement through which taxing rights are transferred from source to residence country• A ‘badge of respectability’ to show that countries are part of an international economic club• No evidence that they increase overall levels of investment in a country
Policy diffusion as a framework of analysis• Defined as when policy in one country influences that in another• Four diffusion mechanisms: – Competition – Learning – Emulation – Coercion• Neumayer & Barthel (2012) find a role for competition in driving tax treaty diffusion.• Emphasis now is on explaining heterogeneity: – National-level scope conditions – Regional variation – Non-linear patterns of diffusion
Double tax treaties: questions that are rarely askedThe literature tends focus on rationalist explanations, whichassume country preferences are fixed. I consider the role ofintersubjective understandings in preference formation.• How are tax treaties understood by policymakers in developing countries?• What motivates their tax treaty policymaking? – Almost certainly depends on the treaty partner – Do outcomes correspond to a clearly defined policy?• Which stakeholders are involved in the decision? – Officials/ministers? Tax or investment promotion? – Role of business? – Outside organisations e.g. OECD, IMF?• What is the role of the treaty partner (instigator/reactor?) and what are their preferences?
What am I trying to explain? (1) sub Saharan Africa Source: author’s own analysis, based on IBFD data
What am I trying to explain? (2) Ghana AverageTreaty partner Year WHT rateUnited Kingdom 1947Denmark (not in force) 1954United Kingdom (renegotiated) 1977France 1993 9.4United Kingdom (renegotiated) 1993 10.6Serbia (not in force) 2000Germany 2004 7.8Italy 2004 8.8South Africa 2004 8.8Belgium 2005 8.8Barbados 2008Netherlands 2008 7.3Switzerland 2008 7.8
What am I trying to explain?1. A large number of tax treaties are not signed withmajor sources of investment2. The role of domestic political and administrativefactors3. Different policy towards (and of) different kindsof treaty partners4. Variations in treaty content: preferences versusnegotiating capability5. Triggers for new treaty signings - often in groups6. Renegotiation, repudiation, stalemate
A word on transfer pricing and institutional reform• Brazil, India, China have made unilateral moves. What do they want from OECD &UN? – Institutional reform versus content reform• How does this change the context for smaller developing countries? – Is the dividing line OECD v non-OECD, or large economy versus small economy?• What is driving the trend towards TP adoption?• Why is there no heterogeneity in Africa?
Conclusions• A lot has been written about developing countries’ international tax policy…but it’s rarely based on actually asking them.• International relations research suggests that a model of policymaking should take into account: – Emulation, bounded learning, socialisation, coercion – Tax/investment policy may not always be the right lens through which to understand tax reforms• Policymaking should also be seen in the light of unstable international institutions.