This report draws on Krishen Mehta’s first-hand experience of the complex issues that go into the tax decision making by the MNCs. These include risk of capital expropriation, repatriation of profits being challenged, foreign exchange risk, how future governments could view existing contracts, reputational risk, customers’ responses, and so on. Krishen explores what a Low Income Country (LIC) can do to take control of its own tax destiny. He warns that LICs should be wary about entering into tax treaty agreements that are biased in favour of protecting MNCs’ interests over the interests of LICs. The guidance includes a summary of various ‘traps’ of tax competition and tax incentives, and advises of measures that can strengthen the negotiating position of Low Income Countries.
Key findings
- In 2014 there were 3,000 bilateral tax treaties in existence, over half of them signed by Low Income Countries (LICs).
- Bilateral investment treaties are more often preferred over international trade models.
- The ‘race-to-the-bottom’ of tax competition, tax incentives, low or no tax rates, harm LICs and pit impoverished countries against each other, meanwhile benefiting multinational companies (MNCs) and their shareholders.
- Anti tax abuse provisions in treaties and targeted training for revenue administrators could mitigate against high risk, asymmetric tax treaties.
- Many of the concessions and incentives offer to MNCs are are available to domestic firms who are, as a result, competing on an unequal footing.
Key recommendations
- LICs should establish ‘safe harbours’ (putting caps on tax deductions).
- Resource rich countries should negotiate mining contracts judiciously to protect their tax bases; they have maximum leverage at the time of signing.
- LICs can protect their tax base by establishing anti-abuse clauses in their own tax legislation and create an opportunity to address tax avoidance.
- LICs should try to ensure ‘withholding taxes’ to payments to related parties.
- LICs can strengthen their negotiating position by fostering regional alliances on tax matters.