Via Martin Hearson’s website, here is a new report he authored for Tax Justice Network-Africa. As Hearson says, it’s based on field research done a year ago and has been a little while getting into print.
Among many other things, the report highlights the extent to which tax treaties — which have profound implications for how the tax revenues from cross-border investments are shared between countries (see here) — have been negotiated amid highly unequal power relationships:
“Uganda has announced a review of its policy towards tax treaties, while Zambia is renegotiating several of its treaties. The Ugandan review has several motivations, according to finance ministry officials. The lack of a politically enforced policy to underpin negotiations is one concern. “When I go to negotiate, all I have is my own judgement,” according to a negotiator. “We thought that cabinet should express itself.”
And the role of particular private interests in pushing tax treaties is of course crucial:
“According to an official in the COMESA secretariat, “the initiative for negotiating a DTA comes from the multinationals. It’s the large companies that are behind it. They are operating behind their government.” A finance ministry official agreed: “if you look at all these [treaties] that have been signed, you can probably link it to a very major company that came into this country.”
And of course there’s the now-standard view that tax incentives (via treaties or otherwise) don’t seem to be delivering the goods:
“There is a growing empirical evidence base questioning the effectiveness of tax incentives
. . .
There is, however, a significant volume of academic study on the effect of tax treaties on foreign direct investment, using increasingly sophisticated methods and data. Consistent with the views expressed above, many of these studies have failed to find a result for developing countries. The best we can say on the basis of current evidence is that tax treaties have a short-run effect encouraging investors to establish new companies in developing countries, but they do not affect the size of investments in the long run.
Importantly, however, even these studies struggle to distinguish between genuine increases in overall investment into a developing country, distortive competition effects that change the composition but not the total volume of investment into a country, and apparent changes in investment flows that are the result of tax planning structures.”
(Also see Lee Sheppard’s 2013 presentation on tax treaties.)
The new TJN-A report makes a number of important recommendations for sub-Saharan Africa:
- Review all their existing tax treaties and domestic legislation, to identify areas where they are most vulnerable to revenue loss. This should include permanent establishment definitions, protection from treaty shopping, and withholding and capital gains taxes.
- Formulate ambitious national models by applying a “best available” approach to existing models (EAC, COMESA, UN), current treaties, and domestic legislation, none of which are currently adequate.
- Identify red lines for negotiations from within these models.
- Based on investment and remittance data, request renegotiations of treaties that have the greatest actual (or potential in terms of capital gains) cost. These renegotiations should be conducted on the basis of an improved distribution of taxing rights, not a “balanced” negotiation.
- Cancel these high-impact treaties if the red lines cannot be obtained.
- Incorporate an assessment of tax foregone due to tax treaties into an annual breakdown of tax expenditures.
- Ensure that all tax treaties are subject to parliamentary approval as part of the ratification process.
- Ensure that future updates to provisions of the UN and OECD model treaties, or to their commentaries and reservations/observations, reflect the positions set out in their national models.
- Strengthen the African model treaties (EAC, COMESA, SADC) so that they act as opposite poles to the OECD model, rather than compromises between the UN and OECD models.
More on our tax treaties page, where this will be permanently stored.
See also 10 ways developing countries can take control over tax.