The ActionAid tax treaties dataset makes transparent for the first time the taxing rights that some of the world’s poorest countries lose by signing tax treaties.
Why did we look into tax treaties?
Tax treaties allocate taxing rights between treaty partners. There are currently more than 3,000 tax treaties in force. About half of the world’s current tax treaties are between a developed country and a developing country. The major boom in negotiations over such treaties started about 20 years ago, and continues to this day. Even so, development issues are not mentioned in treaty texts and are not an express consideration during treaty negotiations.
Tax treaties facilitate tax avoidance, and have played a part in the most well-known cases of aggressive tax planning, such as in Google and Amazon’s tax schemes.
In 2014, IMF staff raised a red warning flag. They said, “the use of tax treaty networks to reduce tax payments… is a major issue for many developing countries, which would be well advised to sign treaties only with considerable caution”.
On a global scale, just two rules in tax treaties – dividend and interest payment rules - cost developing countries billions of dollars each year. The losses vary between countries. Tax treaties also cause many other losses – such as lost profit tax contributions and lost tax on capital gains, royalties and services fees – but the size of these losses is still unknown. While wealthier developing countries lose more than the poorest, the impact of losses on the bottom end is disproportionate given the greater human need and the low corporate tax take (overall and as a % of GDP) in those countries.
Indeed, the research we commissioned found that Bangladesh is losing approximately US$85 million every year from just one clause in its tax treaties that severely restricts its right to tax dividends. Bangladesh is one of the world’s poorest countries. With an annual total health expenditure of approximately US$25 per capita, remedying this alone could pay for health services for 3.4 million people.
Additional funds are desperately needed to meet women and children’s needs. All national resources that can be mobilised behind the fight for development should be explored.
Opening tax treaties to scrutiny for the first time
ActionAid commissioned academic consultant Martin Hearson to do an analysis of treaties, and the data has been independently peer reviewed. It covers more than 500 treaties signed since 1970 by low and lower middle income countries (referred to as “lower income countries”) from Sub-Saharan Africa and Asia.
It will allow academics, policy professionals and interested citizens to examine the outcomes that their Governments have achieved in treaty negotiations. For example, what taxing rights a particular lower income country has retained and/or signed away and which higher income countries have negotiated to remove important taxing options from poorer treaty partners.
The research is ground-breaking - exposing and making comprehensible the detail of agreements which were previously hidden from view.
At present, most tax treaties involving lower-income countries are not publicly available. Even where treaties are published on government sites, analysis and comparison of terms negotiated is extremely time consuming.
This works to the disadvantage of lower-income countries in their preparation for negotiations with wealthier countries. Wealthier countries can pay for expensive data subscription services and spend the necessary resources on analysis. Because of this, the dataset is likely to make these negotiations slightly more balanced.
Which tax treaties should your Government be most worried about?
While all tax treaties restrict the rights of lower income countries to tax foreign multinationals, some are worse than others. ActionAid is releasing a report to coincide with the launch of the dataset that highlights the “very restrictive” treaties – the bottom half of all treaties in the ActionAid tax treaties dataset.
Mistreated. The tax treaties that are depriving the world’s poorest countries of vital revenue, shows that the UK and Italy are tied first place in the list of wealthier countries with the highest number of very restrictive treaties with lower income countries, followed by Germany. China, Kuwait and Mauritius also have a rapidly growing number of very restrictive treaties with some of the world’s poorest countries.
Amongst lower income countries, Bangladesh has signed the largest number of very restrictive treaties with wealthier treaty partners followed by Mongolia, Pakistan and then (tied) Zambia and Sri Lanka.
While these very restrictive treaties should be reconsidered by Governments as a matter of priority, they are not the only ones to be concerned about. Treaties not classified as “very restrictive” overall, may have particularly restrictive individual clauses with a disproportionately large impact on revenue potential. For example, failure to include a simple clause to protect against capital gains tax avoidance could cost lower income countries hundreds of millions of dollars, as this tax has generated payments of this magnitude where it’s being levied.
As it stands developing countries have been prevented by rich countries from having an equal say in the international tax system, and the BEPS reforms which the world’s rich country clubs - the OECD and G20 - have put on the table do not do enough to make the system work for the poorest countries.
This is particularly concerning when our report finds that tax treaties that lower income countries have with OECD countries take away more rights to tax than those with non-OECD countries, and are gradually getting worse over time.
Lower income countries’ choice over their tax mix
Fixing tax treaties would not fix corporate tax avoidance by itself, but improving tax treaties would be an important step forward on tax.
Reducing tax by signing tax treaties has been promoted internationally as a way to attract more investment, but when the IMF surveyed the evidence on this point they found it to be mixed.
Meanwhile, countries which attempt to lower their effective tax rates by signing low tax treaties are involved in a dangerous race to the bottom. Any investment impact, if it exists, is directly undermined by low taxes in another potential investment location. Countries competing to go lower and lower leads to reduced overall tax collected globally, and devastating human consequences in the poorest countries.
The reforms to tax treaties we are calling for would not force developing countries to increase tax rates - but it would give them more freedom to adjust rates and set them at the level that is right for the country.
How to increase revenue for development
ActionAid campaigners around the world are calling for a democratic global tax system that gives developing countries a voice, helps them to find a sustainable route out of poverty by unlocking the billions lost to tax avoidance and prioritises the needs of women and girls.
Tax treaties are an important element of this – and importantly, changing them does not rely on a global level agreement, but can be changed by individual countries acting on their own.
If the thousands of treaties in existence were reviewed to take development principles into account, the likely result would be much more more corporate taxation collected by lower income countries.
The OECD model tax treaty is the global standard setter when it comes to international treaty norms. When relied on in treaties between lower-income countries and wealthier countries, it squeezes the tax rights of lower-income countries.
The United Nations has made a push for a fairer sharing of taxing rights through the UN model tax treaty, but ActionAid’s tax treaty dataset shows that many of the rules that the UN has proposed are still commonly not used in treaties between wealthy countries and lower-income countries.
A development friendly approach would see the UN model setting the minimum standard for treaties between lower income countries and wealthier countries.
ActionAid’s report, in conjunction with the new data is an opportunity for a fairer and more transparent approach to tax treaties. The fact that legislative debate is a rare occurrence at present and that the deals which can severely impair a developing country’s taxing power generally happen ‘behind closed doors’ is just not good enough.
To see how many very restrictive treaties your country has, view the interactive map.
For those who want to get into the detail, view the ActionAid tax treaties dataset