Tax Treaties

When a business from one jurisdiction invests in another, the question then arises as to which jurisdiction gets to tax which bits of the income that the investment generates. So countries sign Double Tax Treaties or Double Tax Agreements (DTAs) with each other that sort out these and other questions. A key aim is to prevent the same income getting taxed twice: so-called ‘double taxation’.

Three main concerns stand out here from a tax justice perspective.

First, underlying the system of international tax treaties has been an overriding focus on preventing ‘double taxation’ – but this has, in practice, led to a world of widespread double non-taxation – that is, where income effectively gets taxed nowhere.

Read more:

Mistreated: the treaties that cut taxes in poor nations, ActionAid, Feb 2016

TJN-A report: Tax Treaties in Sub-Saharan Africa (Nov 2015)

US tax expert Lee Sheppard: Don’t Sign OECD Model Treaties.
 
TJN-Africa takes Kenya to court over Mauritius treaty.
 
Ten ways developing countries can take control over tax
 
ActionAid policy brief on tax treaties

Second, should it be the jurisdiction that is the source of that income (i.e. the one that hosts the inward investment) which taxes the income, or the jurisdiction where the investor is resident: the capital-exporting country? (See our briefing paper on this, and see more below.)

DTAs generally tend to follow two models. The first, dominant model is overseen by the OECD, a club of rich countries. This model is generally more favourable to rich countries, where most multinationals are resident. The second is the UN model, which gives somewhat greater taxing rights to “source” countries, typically developing countries receiving inward investment, but only up to a point: the UN has unfortunately been pressured by OECD countries to modify its model in their favour.

A third is question is: how does enough information get exchanged under the agreements to allow tax authorities to get the information they need? DTAs contain protocols for information exchange, but there is another class of tax treaties too: Tax Information Exchange Agreements (TIEAs). These are narrower in scope and concern only information exchange. Generally, countries ought only to sign TIEAs, not DTAs with tax havens, unless they want to see their tax dollars leak offshore through treaty abuses.

Key problems

Tax treaties restrict the right of states to tax foreign investors and foreign-owned companies. The idea is to encourage international investment between the countries concerned, but since developing countries are generally only importers of capital, the relationship is unequal.

In many cases, treaties also do not provide an adequate basis for a adequate tax information exchange between developing and developed countries, and in particular with secrecy jurisdictions. Some, such as Switzerland, have forced developing countries into making large tax concessions in their treaties, in exchange for (often minimal) information exchange.

In addition, multinationals usually channel investments through intermediary companies formed in convenient jurisdictions so they can take advantage of `treaty-shopping’, which helps them structure low-tax (or zero-tax) pathways through the international tax system. Some countries deliberately facilitate these pathways by setting themselves up as `conduit’ countries. They do this principally by signing many treaties favourable to multinationals, and also passing laws that encourage the formation of ‘holding companies’ or ‘international business corporations’. Common conduit countries include Luxembourg, the Netherlands, Switzerland, and Mauritius.

OECD nations have inserted various anti-abuse clauses into their treaties with such countries, but developing countries generally have not: however some are now beginning to challenge OECD model treaties, partly due to pressure from tax justice activists.

The OECD has also produced a report with recommendations on anti-abuse measures, under its so-called “Base Erosion and Profit Shifting (BEPS)” programme, its flagship global project to tackle multinational tax abuses. There has been some progress, but far too little, in our view. We believe developing countries should suspend any new tax treaty negotiations until the current reforms ensure that multinationals can be taxed `where economic activities take place and value is created’ as called for by the G20 world leaders in the St Petersburg Tax Declaration of 2013.

Latest Blog Posts

Tax treaties: story highlights

June 2013 – Dutch tax treaties lead to huge revenue losses in developing countries. Original here.

May 2013 – Lee Sheppard: Don’t sign OECD model tax treaties! Original here.

Aug 2012 – Highlight: Tax Analysts, Is Transfer Pricing Worth Salvaging? Lee Sheppard’s devastating critique of global transfer pricing rules. Original here.

March 2012 – India slams OECD’s arrogance on international tax. Original here.

July 2011 – AllianceSud on how Swiss tax treaties harm developing countries.  See also Mark Herkenrath’s article in Tax Justice Focus.

Mar 2011 – US, UK, OECD oppose developing countries having stronger voice on international tax

Nov 2010 – India: don’t sign with Liechtenstein on why countries should sign TIEAs, but not DTAs, with tax havens.

April 2009 – The  The UN Model Tax Convention as Compared with the OECD Model Tax Convention, Michael Lennard, Asia-Pacific Tax Bulletin, reproduced with the kind permission of IBFD

2008 –  The Purpose and Current Status of the United Nations Tax Work Michael Lennard (and also with permission of IBFD) provides a shorter assessment of the differences between the OECD and UN models, along with some history.

See also our pre-2014 archive of tax treaty stories.

Tax Treaty stories before 2014

July 2013 – Mongolia and tax treaties: the mouse that roared

June 2013 – Dutch tax treaties lead to huge revenue losses in developing countries. Original here.

May 2013 – Lee Sheppard: Don’t sign OECD model tax treaties! Original here.

Feb 2013 – Mongolia kills tax treaties with Netherlands and others. Originals here and here.

Feb 2013 – Choosing between the UN and OECD Tax Policy Models: an African Case Study. Original here.

Aug 2012 – Highlight: Tax Analysts, Is Transfer Pricing Worth Salvaging? Lee Sheppard’s devastating critique of global transfer pricing rules. Original here.

March 2012 – David Spencer: Guest blog on rifts between the OECD and United Nations on international tax

March 2012 – India slams OECD’s arrogance on international tax. Original here.

Oct 2011 – Major new US IRS report uncovers tax treaty shortcomings. Original here

Aug 2011 – Swiss-German tax treaty on Aug 10 will undermine automatic information exchange

July 2011 – AllianceSud on how Swiss tax treaties harm developing countries.  See also Mark Herkenrath’s article in Tax Justice Focus.

Mar 2011 – US, UK, OECD oppose developing countries having stronger voice on international tax

Feb 2011 – The U.S. – Chile Income Tax Treaty: A Guide for other Developing Countries

Feb  2011 – Austria’s and Luxembourg’s Anglo-German fig leaf on how Switzerland is playing divide and rule within the European Union, to the benefit of Austrian and Luxembourgois secrecy.

Jan 2011 – US emerges as Swedish Tax Haven Sweden hasn’t received any information from the U.S. since 2005, despite a treaty oblighing information-sharing.

Dec 2010 – How corporate tax evasion can be tackled worldwide – an interesting letter in the FT looking at multilateral treaty approaches towards formula apportionment

Nov 2010 – India: don’t sign with Liechtenstein on why countries should sign TIEAs, but not DTAs, with tax havens.

Oct 2010 – Britain aligns with Switzerland in defence of secret wealth – on a proposed UK-Swiss treaty. See also this.

Oct 2010 – Tax Justice Focus – Swiss Double Tax Agreements: the Development Perspective. Mark Herkenrath explores how Switzerland is forcing developing countries into tax concessions in exchange for inadequate information exchange provisions.

2009 – Norwegian government commission on capital flight from developing countries,recommendations, explaining assymetries in power between developed and developing countries when treaties are negotiated.

April 2009 – The  The UN Model Tax Convention as Compared with the OECD Model Tax Convention, Michael Lennard, Asia-Pacific Tax Bulletin, reproduced with the kind permission of IBFD

2008 –  The Purpose and Current Status of the United Nations Tax Work Michael Lennard (and also with permission of IBFD) provides a shorter assessment of the differences between the OECD and UN models, along with some history.

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