By Hannah Brejnholt, Tax Policy and Programme Manager, Mellemfolkeligt Samvirke/ActionAid Denmark
Yesterday, at the European Development Days in Brussels, we presented a new report titled ”ActionAid’s Guiding Framework for National Tax Spillover Analyses”. Behind this somewhat technical title, lies the story about contradicting policies.
It may sound strange, but nonetheless it is the reality: while rich countries such as Denmark, provide billions of Euros in development aid to the world’s poorest countries, they often simultaneously sign tax treaties with the same countries they are supporting. As a result the taxing right of the countries is reduced and as is the collection of taxes. In short tax agreements often lead to developing countries losing billions of Euros in tax every single year.
But what is the reason then for this rather absurd situation? It is actually quite simple: the reason is that different ministries administer development aid and tax policies, respectively; usually the Ministry of Development and the Ministry of Finance.
Take the case of Ghana for example: in 2014, Denmark signed a double taxation treaty with the country. In short the agreement defines how to divide the rights of a Danish company in Ghana (and a Ghanaian company in Denmark) between Ghana and Denmark. As in most negotiations, the strongest negotiator is at an advantage, in this case, Denmark. This means that Ghana's ability to tax Danish companies is significantly reduced, in return, the tax is collected in Denmark. The outcome of the negotiation was surprising because in parallel, Denmark launched a four-year development program with Ghana, which had a strong focus on increasing Ghana's capacity and the ability to collect taxes at national level. Just to be clear, Denmark’s case is no exception in the EU and tax treaties are not the only element of national tax policies that impact developing countries.
At a global level the bias in tax treaties means that developing countries are losing billions of Euros in tax foregone. For example, Bangladesh loses approximately US$85 million (app. 75m Euro) annually, due to just one clause in its global tax treaties. By comparison Bangladesh received approximately 22.3 million Euro in Danish development assistance in 2016. Overall losses to corporate tax avoidance in developing countries are estimated by the IMF at 200 billion USD (178bn Euro) every year – which is more than they receive in development aid.
As of right now, there are no definite analyses of the impacts of national tax policies such as e.g. tax treaties on developing countries. Hence, the tax policies repeatedly undermine long-term development work in these countries. This is unsustainable, to say the least. Although, it is true that in most of the EU countries no specific analyses are done before - or after - the adoption of tax treaties and other tax policies, it should be noted that Ireland and Netherland have in fact undertaken first analyses of the spillover effects of their tax systems on developing countries. However, these analyses remain the exceptions rather than the rule and there is a clear need for further debate on the scope and methodologies.
With the report we presented yesterday, "ActionAid's Guiding Framework for National Tax Spillover Analyses", we aim to start this debate and encourage other Member States to undertake such studies. It is not only crucial, but also long overdue.