From Martin Hearson, a (somewhat wonkish) post about tax treaties and developing countries, entitled The tax treaty arbitrators cometh:
“There are lots of reasons why eliminating all forms of double taxation faced by cross-border investors is a sensible thing to try to do. It is what tax treaties are supposed to be for. But sometimes governments, especially in developing countries, might deliberately choose to prioritise the maximisation of their tax base even when that leads to some double taxation. This is, arguably, what China, India and Brazil have done by adopting their own approaches to transfer pricing.”
Which is a very important point to consider. Countries sign tax treaties to facilitate investment flows: notably to find ways for corporations not to be taxed twice on the same income. Getting rid of double taxation used to be an overwhelming priority: what was too often ignored was that these treaties, especially if signed with tax havens like Switzerland or Liechtenstein, ended up facilitating double non-taxation: where the corporations didn’t get taxed anywhere. (See our generic section on tax treaties here.)
Developing countries among others are wising up to these issues, as the paragraph above notes. (And for a more general look at how developing countries can protect their tax systems, see Krishen Mehta’s July 2014 article How Developing Countries can take Control of their own Tax Destinies and the subsequent Developing countries and corporate tax – ten ways forward.)
Hearson’s post notes that “arbitration provisions in treaties with developing countries are on the march” and adds that this poses dangers for developing countries, particularly if this ties them into a ‘golden straightjacket’ reducing their room for manoeuvre when tax treaties frustrate policy goals. Now read on.