1) Tax treaties are agreements between countries to eliminate double taxation of business profits earned across borders. However, treaties often shift the taxing rights and revenue away from developing countries where investments are made. 2) Developing countries have expressed concerns that international tax rules and most bilateral tax treaties favor residence-based taxation, benefiting companies' home countries over source countries where economic activity takes place. Analysis of Vietnam's treaties found they did not fully align with the country's declared negotiating positions. 3) Interviews with former negotiators revealed that developing countries often lacked experience and awareness of revenue impacts when concluding early treaties. The speaker recommends developing countries conduct analysis of treaty impacts, formulate coherent policy

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

3. Inland revenue telegram
January 1972

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