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Tax treaties and developing
countries
Martin Hearson
European Economic & Social Committee
28 April 2017
Presentation outline
1. Context
2. Three key questions:
i. Wisdom of concluding tax treaties at all
ii. Fairness of treaties signed by developing countries
iii. Tax avoidance through ‘treaty shopping’
3. Outlook and solutions
1. Context: Elements of the international
tax regime
Multilateral norm-setting
3000 bilateral treaties
Domestic law provisions
(eg transfer pricing)
1. Context: Growing number of tax treaties
signed by developing* countries
*low & lower-middle income
0
500
1000
1500
2000
2500
1950 1960 1970 1980 1990 2000 2010
With higher
income
countries
With middle
income
countries
With other
developing
countries
Source: IBFD Year
Cumulativetotal
2. Three key questions
i. Wisdom of concluding tax treaties at all
ii. Fairness of treaties signed by developing
countries
A. Multilateral level
B. Bilateral level
iii. Tax avoidance through ‘treaty shopping’
2i) The wisdom of signing tax
treaties at all
• Purportedly designed to alleviate double taxation and
combat tax evasion
• Main effect is to limit ability to tax inward investment
• Critical literature questions benefits to capital importers
(eg Irish, Dagan, Brooks & Krever, IMF, ActionAid)
• Empirical literature does not give a clear picture on
investment effects for developing countries (eg Sauvant &
Sachs, Davies et al, Lejour, Barthel et al)
Certain (often unanticipated) costs
Vs uncertain benefits
2i) The wisdom of signing tax
treaties at all: historical view
“In the absence of an agreement there is no question of
United Kingdom investors being doubly taxed”
- unpublished review of double tax relief, 1976
“Above all, they [treaties] impose acceptable standards for
allocating profits to branches and subsidiaries and for
dealing with transfer pricing in countries (some of them
within the EEC) where such standards would otherwise be
absent.”
– Deputy Chairman of Inland Revenue, 1976
2ii) Fairness of treaties signed by
developing countries
A. Multilateral level. Tax treaty norms (OECD &
UN models) inherently biased against
developing countries.
B. Bilateral level. Negotiation outcomes for
developing countries tend to curtail more of
their taxing rights, even within those
parameters.
A. Multilateral level
• OECD model represents consensus among
capital exporters
• No equivalent exists for capital importers.
• Regional models (eg SADC, COMESA, EAC)
depart from OECD/UN models.
• UN model is an improvement, but :
• It’s a compromise between developed and
developing.
• It’s a technical document
A. Multilateral level
“For developing countries the balance between source and
residence taxation [is] very crucial. International tax rules with
its preferences for residence based taxation [are] not in
interest of developing countries.”
- Eric Mensah, Ghana Revenue Authority, 2017
“The global tax system is stacked in favour of paying taxes in
the headquarters countries of transnational companies, rather
than in the countries where raw materials are produced.”
- Francophone LIC Finance Ministers Network, 2014
B. Bilateral level: EU member states
0.0
0.1
0.2
0.3
0.4
0.5
0.6
Indexvalue
Average overall settlement in treaties signed by EU member states
with developing countries
Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
B. Bilateral level: Vietnam
Vietnam's tax treaties scored against its declared
position in reservations to the OECD model treaty
Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
B. Bilateral level: Vietnam
Vietnam’s interpretations of its tax treaties have “made
the application of DTA[s] of foreign enterprises
impossible, effectively it obliterate[s] the legitimate
benefit of enterprises.”
– Vietnam Business Forum
“They should be looking into the OECD interpretations
if they’re serious. As it is, it’s just window dressing.”
- Tax lawyer, Vietnam
2iii) Treaty shopping
Vulnerability to tax avoidance is typically connected
with fairness issues
Some key areas of concern:
• Withholding taxes
• Permanent establishment
• Taxation of services
• Capital gains tax
Withholding taxes
Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
Withholding taxes: estimates of
revenue foregone
Estimates from dividend and interest only:
Developing countries’ treaties with:
– Netherlands €771m/year (McGauran 2013)
– US $1.6bn/year (IMF 2014)
Treaties signed by:
– Bangladesh $85m/year (ActionAid 2016)
– Zambia $42m/year (Hearson 2015)
– Uganda $17m/year (Hearson 2015)
Withholding taxes: Mongolia
Oyu Tolgoi mine
Domestic rate: 20%
Oyu Tolgoi
Netherlands B.V.
Treaty
rates: 0%
Domestic rate: 20%
Treaty rate: 5%
Estimate cost: $6.9 billion over project lifetime (source: OpenOil)
Withholding taxes: Mongolia
“The current Mongolian DTA network, however, is
prone to international tax planning as some DTAs
contain favorable provisions allowing residents of
other countries to substantially reduce source
taxation in Mongolia…The Mongolian authorities are
currently considering cancelling all DTAs and start
building up a new DTA network with countries based
on trade volumes and reciprocity in economic
relations”
- IMF technical assistance report, 2012
3. Outlook and solutions
i. Wisdom of
concluding tax
treaties at all
ii. Fairness of
treaties actually
signed by
developing
countries
iii. Tax avoidance
through ‘treaty
shopping’
Capital exporters:
• Spillover analysis
• Policy coherence
Capital importers:
• Technical capacity-building
• Political awareness-raising
• Treaty reviews
Bilateral
• Renegotiations
Multilateral
• New regional models
• Changes to global norms
• A global political institution
Thankyou
m.hearson@lse.ac.uk
martinhearson.wordpress.com

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Tax treaties and developing countries

  • 1. Tax treaties and developing countries Martin Hearson European Economic & Social Committee 28 April 2017
  • 2. Presentation outline 1. Context 2. Three key questions: i. Wisdom of concluding tax treaties at all ii. Fairness of treaties signed by developing countries iii. Tax avoidance through ‘treaty shopping’ 3. Outlook and solutions
  • 3. 1. Context: Elements of the international tax regime Multilateral norm-setting 3000 bilateral treaties Domestic law provisions (eg transfer pricing)
  • 4. 1. Context: Growing number of tax treaties signed by developing* countries *low & lower-middle income 0 500 1000 1500 2000 2500 1950 1960 1970 1980 1990 2000 2010 With higher income countries With middle income countries With other developing countries Source: IBFD Year Cumulativetotal
  • 5. 2. Three key questions i. Wisdom of concluding tax treaties at all ii. Fairness of treaties signed by developing countries A. Multilateral level B. Bilateral level iii. Tax avoidance through ‘treaty shopping’
  • 6. 2i) The wisdom of signing tax treaties at all • Purportedly designed to alleviate double taxation and combat tax evasion • Main effect is to limit ability to tax inward investment • Critical literature questions benefits to capital importers (eg Irish, Dagan, Brooks & Krever, IMF, ActionAid) • Empirical literature does not give a clear picture on investment effects for developing countries (eg Sauvant & Sachs, Davies et al, Lejour, Barthel et al) Certain (often unanticipated) costs Vs uncertain benefits
  • 7. 2i) The wisdom of signing tax treaties at all: historical view “In the absence of an agreement there is no question of United Kingdom investors being doubly taxed” - unpublished review of double tax relief, 1976 “Above all, they [treaties] impose acceptable standards for allocating profits to branches and subsidiaries and for dealing with transfer pricing in countries (some of them within the EEC) where such standards would otherwise be absent.” – Deputy Chairman of Inland Revenue, 1976
  • 8. 2ii) Fairness of treaties signed by developing countries A. Multilateral level. Tax treaty norms (OECD & UN models) inherently biased against developing countries. B. Bilateral level. Negotiation outcomes for developing countries tend to curtail more of their taxing rights, even within those parameters.
  • 9. A. Multilateral level • OECD model represents consensus among capital exporters • No equivalent exists for capital importers. • Regional models (eg SADC, COMESA, EAC) depart from OECD/UN models. • UN model is an improvement, but : • It’s a compromise between developed and developing. • It’s a technical document
  • 10. A. Multilateral level “For developing countries the balance between source and residence taxation [is] very crucial. International tax rules with its preferences for residence based taxation [are] not in interest of developing countries.” - Eric Mensah, Ghana Revenue Authority, 2017 “The global tax system is stacked in favour of paying taxes in the headquarters countries of transnational companies, rather than in the countries where raw materials are produced.” - Francophone LIC Finance Ministers Network, 2014
  • 11. B. Bilateral level: EU member states 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Indexvalue Average overall settlement in treaties signed by EU member states with developing countries Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
  • 12. B. Bilateral level: Vietnam Vietnam's tax treaties scored against its declared position in reservations to the OECD model treaty Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
  • 13. B. Bilateral level: Vietnam Vietnam’s interpretations of its tax treaties have “made the application of DTA[s] of foreign enterprises impossible, effectively it obliterate[s] the legitimate benefit of enterprises.” – Vietnam Business Forum “They should be looking into the OECD interpretations if they’re serious. As it is, it’s just window dressing.” - Tax lawyer, Vietnam
  • 14. 2iii) Treaty shopping Vulnerability to tax avoidance is typically connected with fairness issues Some key areas of concern: • Withholding taxes • Permanent establishment • Taxation of services • Capital gains tax
  • 15. Withholding taxes Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
  • 16. Withholding taxes: estimates of revenue foregone Estimates from dividend and interest only: Developing countries’ treaties with: – Netherlands €771m/year (McGauran 2013) – US $1.6bn/year (IMF 2014) Treaties signed by: – Bangladesh $85m/year (ActionAid 2016) – Zambia $42m/year (Hearson 2015) – Uganda $17m/year (Hearson 2015)
  • 17. Withholding taxes: Mongolia Oyu Tolgoi mine Domestic rate: 20% Oyu Tolgoi Netherlands B.V. Treaty rates: 0% Domestic rate: 20% Treaty rate: 5% Estimate cost: $6.9 billion over project lifetime (source: OpenOil)
  • 18. Withholding taxes: Mongolia “The current Mongolian DTA network, however, is prone to international tax planning as some DTAs contain favorable provisions allowing residents of other countries to substantially reduce source taxation in Mongolia…The Mongolian authorities are currently considering cancelling all DTAs and start building up a new DTA network with countries based on trade volumes and reciprocity in economic relations” - IMF technical assistance report, 2012
  • 19. 3. Outlook and solutions i. Wisdom of concluding tax treaties at all ii. Fairness of treaties actually signed by developing countries iii. Tax avoidance through ‘treaty shopping’ Capital exporters: • Spillover analysis • Policy coherence Capital importers: • Technical capacity-building • Political awareness-raising • Treaty reviews Bilateral • Renegotiations Multilateral • New regional models • Changes to global norms • A global political institution