Why unfair tax treaties hold back developing countries
High-income countries including the UK, Italy and the Netherlands all have very restrictive tax treaties with developing countries, such as Bangladesh.
This article titled “Why unfair tax treaties hold back developing countries” was written by Lovisa Moller, for theguardian.com on Wednesday 15th June 2016 14.03 UTCDeveloping countries lose out on billions of dollars each year (pdf) as a result of their tax treaties with wealthier countries. If countries are to raise more revenues to invest in eradicating hunger, giving all children a good education and eliminating all forms of violence against women and girls, then we need to make sure our tax treaties are in line with our development objectives. The UK has more work to do than most.
Did you know that foreign investors in Uganda (pdf) can get a tax free deal when they send payments to shareholders via the Netherlands? Or that many corporate payments to the UK are tax free in Malawi (pdf) due to a colonial-era tax agreement? Or that Chinese construction projects in Mongolia are often out of reach of local tax collectors (pdf)?
This is all made possible by tax treaties. They set the rules of the game. Tax treaties between countries define when multinational corporations can, and can’t, be taxed. They play a facilitating role in many well-known tax avoidance schemes and often make it possible for big business to significantly reduce the tax they pay in the countries where they make their profits. High-income countries including the UK, Italy and the Netherlands all have very restrictive tax treaties with developing countries, such as Bangladesh.
Bangladesh gives up around USm (£60m) a year as a result of a single clause in its tax treaties. In the capital Dhaka, there is a severe shortage of public transport and women repeatedly experience sexual assaults on the overcrowded buses (pdf). It is estimated that another 3,000 buses are necessary to meet the huge needs of the city’s population, which would get Bangladesh one step closer to the sustainable development goal ambition to “make cities inclusive, safe, resilient and sustainable”. Dropping just this clause from Bangladesh’s tax treaties would raise enough public funds to cover the cost of purchasing about 1,000 new buses each year.
The poorest people in the world lose out the most when ineffective global tax rules make it possible for big business to cut their tax bills. Public services like schools and hospitals are left desperately underfunded and when essential public services are absent or inadequate, women and girls pay the highest price. On top of that, spending to combat gender inequality is falling dramatically short.
Erik Solheim highlights the need for tax transparency, capacity building and OECD-driven reforms. If we’re serious about addressing the sustainable development goal funding gap, we need to go further. We need to take a look at the full set of tax rules in place and question if they’re fit for purpose. Tax treaties are a good place to start.
The IMF’s experts have found that (pdf) “treaty shopping” – 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.”
It’s time for developed countries, which have far more resources to evaluate the impact of these treaties, to start taking responsibility for their involvement. Developed countries should review their tax treaties with developing countries to ensure they prioritise the fight against poverty.
Some tax treaties, like the UK’s treaty with Malawi, are old and outdated. Others, like the Netherlands’ treaty with Uganda, illustrate the race to the bottom in some taxing rights that is prominent in recent treaties. These powerful agreements are negotiated behind closed doors and receive minimal scrutiny from our parliaments before they enter into force. This has to change.
Tax treaties can be re-written. The rules of the game can change. This week, tax justice activists in Uganda finally heard from their government that all double taxation agreements are going to be renegotiated to reach more favourable terms. Activists in Malawi and the UK are currently campaigning for a fairer new treaty between our countries, which is now under negotiation.
If country leaders are serious about their commitment to the sustainable development goals and tackling poverty, they need to make the impact on development financing a top priority when tax rules are agreed. Ensuring that tax treaties don’t block developing countries from collecting a fair share of tax from multinational corporations is a good place to start.
Lovisa Moller is policy adviser at ActionAid UK.
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