Tax treaties are international agreements between countries that share out taxing rights between countries when there’s cross-border investment between them. The international tax treaty system is strongly based on models created by the OECD, a club of rich countries, and it shouldn’t be a great surprise that developing countries often find themselves losing out in terms of how the cross-border tax pie is shared out when an OECD-based multinational makes profits in a developing country. (See, for example, U.S. tax expert Lee Sheppard in fiery form on OECD tax treaties, highlighting some of the pitfalls.)
We’ve got a page dedicated to tax treaties, and a number of new country-specific studies have come out recently highlighting some of the problems. The latest is a report by ActionAid Denmark on Denmark’s tax treaties with various countries. As it notes:
“Tax treaties are a remarkably under-scrutinised part of the international economic architecture. Their ongoing proliferation and amendment go largely undiscussed by publics and legislatures. Where tax treaties have gained limited public attention in developed countries like Denmark, such attention has tended to focus on ‘loopholes’ – like the tax treatment of Danish employees of Irish airlines – perceived to deprive those developed countries themselves of revenues. It is time for the Danish government and the Danish people to look hard their tax treaties and make sure that, however well-intentioned, they are not tying the hands of governments in some of the world’s poorest countries too. “
- Undertake an impact assessment of Denmark’s existing and prospective treaties with developing countries, as the Netherlands has done and Ireland is planning;
- In the meantime, delay ratification of unratified treaties like the Ghana-Denmark treaty, which reduces Ghanaian taxing rights on cross-border income in some areas further than any of Denmark’s other tax treaties with developing countries, and all but two previous Ghanaian tax treaties;
- Offer the opportunity for a fair, comprehensive and inclusive renegotiation of Denmark’s 14 treaties with developing countries, including the Ghana-Denmark treaty.
This latest report is a most useful contribution to the growing literature on this topic, with lots of useful details, context and analysis about the topic in general, such as this:
“Denmark’s treaties with Kenya, Kyrgyzstan, Indonesia, Morocco, Sri Lanka, Tanzania, Uganda and Zambia deny those countries the right to tax the gains made by a Danish investor selling assets in those countries, if those assets are owned by another (offshore) company.”
“Denmark’s tax treaties with developing countries have increasingly driven down the tax rates that those developing countries can levy on cross-border income (withholding taxes).”
or this context, from an earlier ActionAid report:
“ActionAid’s 2013 study of tax treaty abuse in Zambia found that since 2007 a single multinational company’s exploitation of Ireland’s uniquely imbalanced tax treaty with Zambia – one of Ireland’s nine ‘development partners’ – may have deprived the Zambian government of revenues equivalent to one in every €14 of Irish development aid provided to Zambia during that time, from the tax practices of one company alone.”
Just for example. Now read on.