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Tax treaties and developing
countries
Martin Hearson
Bundestag
20 February 2019
Contract for research in Kenya
Signed September 2014
UK-Kenya convention
Signed July 1973
An example
Inland revenue telegram
January 1972
The rationale for tax treaties
A B A business from country A invests in
country B
A B Sometimes countries A and B make
overlapping claims to the right to tax
its profits – so it pays tax twice
A B A tax treaty is an agreement between
country A and B to eliminate the
overlap – in this case at B’s expense
In practice 1: ‘aid in reverse’
A B A business from country A invests in
country B
A already alleviates double taxation
unilaterally
A B Tax treaty shifts the cost of doing so
onto B
A B
In practice 2: tax incentive
A B A business from country A invests in
country B
A already alleviates double taxation
unilaterally
Tax treaty reduces tax raised by B,
with benefits accruing to the
multinational
A B
A B
Three key questions
1. Wisdom of concluding tax treaties at all
2. Fairness of treaties signed by developing
countries
A. Multilateral level
B. Bilateral level
3. Treaty abuse/‘treaty shopping’
1. Wisdom of signing
treaties at all
“Considerable caution is needed in
entering into any BTT. A critical
decision for any primarily capital-
importing country is whether it can
achieve more by signing a treaty
than it can simply through its own
domestic law.”
– IMF, 2014
2A. Multilateral level
Multilateral norm-setting
3000 bilateral
treaties
Domestic law provisions
(eg transfer pricing)
2A. 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
2B. 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
Learning from past mistakes:
interview evidence
“There wasn’t a very good awareness of the revenue
consequences of the treaties, not very much at all.”
- Former adviser in Zambia, Lusaka, 2014
“When we were beginning to negotiate DTAs, we didn’t
have so much experience. When the countries came to
negotiate with us they forced us to use the OECD model.”
- Negotiator, Vietnam, Hanoi, 2015
How does Germany compare?
Indexvalue
Treaties signed by Vietnam
Indexvalue
Tax treaties signed by Ghana
Indexvalue
Tax treaties signed by Papua New
Guinea
Indexvalue
Tax treaties signed by the
Philippines
Indexvalue
Average treaty content for EU MSIndexvalue
Overall source index for EU28
treaties with developing countries
Lowest HighestAverage
EU average
Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
Mixed success in renegotiations by
developing countries
Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
Three policy recommendations
1. Conduct spillover analysis
2. Formulate policy coherence position (forward and
backward-looking)
3. Renegotiate
mh@martinhearson.net

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Tax treaties and developing countries

  • 1. Tax treaties and developing countries Martin Hearson Bundestag 20 February 2019
  • 2. Contract for research in Kenya Signed September 2014 UK-Kenya convention Signed July 1973 An example
  • 4. The rationale for tax treaties A B A business from country A invests in country B A B Sometimes countries A and B make overlapping claims to the right to tax its profits – so it pays tax twice A B A tax treaty is an agreement between country A and B to eliminate the overlap – in this case at B’s expense
  • 5. In practice 1: ‘aid in reverse’ A B A business from country A invests in country B A already alleviates double taxation unilaterally A B Tax treaty shifts the cost of doing so onto B A B
  • 6. In practice 2: tax incentive A B A business from country A invests in country B A already alleviates double taxation unilaterally Tax treaty reduces tax raised by B, with benefits accruing to the multinational A B A B
  • 7. Three key questions 1. Wisdom of concluding tax treaties at all 2. Fairness of treaties signed by developing countries A. Multilateral level B. Bilateral level 3. Treaty abuse/‘treaty shopping’
  • 8. 1. Wisdom of signing treaties at all “Considerable caution is needed in entering into any BTT. A critical decision for any primarily capital- importing country is whether it can achieve more by signing a treaty than it can simply through its own domestic law.” – IMF, 2014
  • 9. 2A. Multilateral level Multilateral norm-setting 3000 bilateral treaties Domestic law provisions (eg transfer pricing)
  • 10. 2A. 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. 2B. 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
  • 12. Learning from past mistakes: interview evidence “There wasn’t a very good awareness of the revenue consequences of the treaties, not very much at all.” - Former adviser in Zambia, Lusaka, 2014 “When we were beginning to negotiate DTAs, we didn’t have so much experience. When the countries came to negotiate with us they forced us to use the OECD model.” - Negotiator, Vietnam, Hanoi, 2015
  • 13. How does Germany compare? Indexvalue
  • 14. Treaties signed by Vietnam Indexvalue
  • 15. Tax treaties signed by Ghana Indexvalue
  • 16. Tax treaties signed by Papua New Guinea Indexvalue
  • 17. Tax treaties signed by the Philippines Indexvalue
  • 18. Average treaty content for EU MSIndexvalue
  • 19. Overall source index for EU28 treaties with developing countries Lowest HighestAverage EU average Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
  • 20. Mixed success in renegotiations by developing countries Source: Hearson, 2016, The ActionAid Tax Treaties Dataset
  • 21. Three policy recommendations 1. Conduct spillover analysis 2. Formulate policy coherence position (forward and backward-looking) 3. Renegotiate mh@martinhearson.net