Tax treaties in sub-Saharan Africa: a critical review

The report I authored for Tax Justice Network-Africa is now available. It’s based on field research done a year ago and has been a little while getting into print.

Here’s a link to read it online at

Here’s a link to download the PDF

Tax treaties in sub-Saharan Africa report cover

And here’s the introduction:

There is growing attention on the question of tax treaties signed by developing countries. The costs of tax treaties to developing countries have been highlighted in recent years by NGOs such as ActionAid and SOMO. During 2014, an influential IMF paper warned that developing countries “would be well-advised to sign treaties only with considerable caution,” and the OECD, as part of its Base Erosion and Profit Shifting (BEPS) project, proposes to add text to the commentary of its model treaty to help countries decide “whether a treaty should be concluded with a State but also…whether a State should seek to modify or replace an existing treaty or even, as a last resort, terminate a treaty.”

Meanwhile, some developing countries seem recently to have become concerned by the negative impacts of some of their treaties. Rwanda and South Africa have successfully renegotiated their agreements with Mauritius. Argentina and Mongolia have cancelled or renegotiated several agreements. Responding to this pressure, two of the developed countries whose treaty networks have raised concerns, the Netherlands and Ireland, have begun a process of review.

To investigate this apparent shift in opinion among policymakers, and to see what lessons can be drawn by other developing countries, Tax Justice Network Africa commissioned this study of current policy towards tax treaties in Uganda and Zambia, two countries that appear to be questioning past decisions. Fieldwork, which consisted of interviews with government officials and private sector tax advisers, took place in Kampala and Lusaka in September 2014.

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.” Officials are also concerned about the taxation of technical services provided by professionals in the oil industry, and are asking questions about the relatively poor deal Uganda got in its as yet unratified agreement with China.

Zambia, it seems, is keen to update very old treaties that were negotiated on poor terms by over-zealous officials in the 1970s. But a recent treaty signed with China on poor terms has created a difficult precedent, dragging down the terms of its recent negotiation with the UK. Zambia is also encumbered with several colonial-era treaties that need urgent attention.

This report is divided into four following sections. Section 2 describes the historical development of sub-Saharan Africa’s tax treaty network, including some of the reasons given for its development. Uganda and Zambia are used as examples. Section 3 looks at some of the core vulnerabilities in the content of tax treaties signed by African countries, set in the context of weaknesses in their domestic laws. Section 4 provides a critical perspective on recent initiatives taken by individual countries, regional organisations and other international organisations.

Section 5 provides recommendations for African countries. In summary, they should:

  • 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.

Some follow-up on parliamentary scrutiny of the UK-Senegal treaty

As my last post anticipated, the ratification of the UK-Senegal tax treaty was debated in parliament last week. It was great that a debate on the impact of a tax treaty between the UK and a developing country happened at all. Some important issues came up:

  • What is the role of the Department for International Development in the UK’s treaty policy with respect to developing countries? None, on the basis of the reply from the minister, David Gauke.
  • Why is there no cost-benefit or development impact analysis of the UK’s treaties with developing countries? Mr Gauke said that it would not be possible to do this in a meaningful way, although as this post by Francis Weyzig points out, Ireland and the Netherlands have both now published analyses that do consider the effects of their treaties on developing countries.
  • Does the UK government bear any moral responsibility for the outcome of a negotiation with another sovereign state? That is certainly an interesting point for further consideration.

This was a good start in comparison to last year’s discussion of the UK-Zambia treaty, but these topics were still only skated over. The format of these ‘debates’ is always the same: the opposition shadow minister asks some questions, the minister responds from his briefing notes, and then the committee votes ‘yes’. It is near impossible to have a real discussion about substantive matters, such as the UK’s red line on a withholding tax clause for technical service fees (discussed below). This is partly because of the mountain of treaty detail within which substantive issues are hidden, but also because all parliament can do is vote ‘yes’ or ‘no’ after the treaty has been signed.

There are two things the UK could do about this, which other countries have done. First, it could commission a comparative review, along the lines of those that have now been conducted for Ireland and the Netherlands, which highlights the main distinctive features of its treaties with developing countries so that non specialist MPs can engage with them meaningfully. Second, it could publish its treaty negotiating position, as Germany and the US have both done, with an opportunity for public and parliamentary debate on this position in general terms.

Now, some technical discussion. The night before the debate, I bumped into one of the British negotiators, who said he was “not very impressed” with my post on the treaty. The next day, the Labour opposition asked some questions based on input from ActionAid, which followed the same lines as my comments. The minister responded with much the same criticism I’d heard the previous night, so I’m going here to set the record straight on the technical points, insofar as I can from my non-technical background.

Technical service fees

I stated last week that “this treaty does not include a clause permitting Senegal to tax fees for technical services paid to the UK,” but this was imprecise wording. As Mr Gauke pointed out, the treaty does permit such fees to be taxed in Senegal, but with a major restriction. They can only be taxed in Senegal if the British recipient of the fees has a physical presence in Senegal for 183 days in a year. Even then, the fees can only be taxed as net profits, not gross fees as the standalone clause would have allowed for. The whole debate at the UN on this clause begins from the view that a physical presence is increasingly irrelevant in the 21st century economy, and that it is very difficult for developing countries to get an accurate view of a service provider’s net profits.

As the minister continued, “Senegal’s approach to the taxation of services differs from that of the UK,” and this is one area where the UK approach prevailed. This appears to be a red line for the UK now, but it’s worth noting that (on a quick count) Great Britain has nine treaties with sub-Saharan countries that do permit them to tax technical services without a physical presence. Senegal is arguably therefore disadvantaged relative to quite a few of its regional neighbours.

Supervisory activities

As I noted last week, the UK-Senegal treaty doesn’t follow the UN model treaty [pdf] wording on supervisory activities in connection with a building site, which states (my emphasis):

The term “permanent establishment” also encompasses: (a) A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months

I said in my post that this means “supervisory activities associated with a building site in Senegal conducted by a British firm will not be taxable in Senegal,” but as Mr Gauke clarified, the treaty “does allow that” in practice. This is because the commentary to the OECD model tax treaty has been amended to incorporate it. It states in paragraph 5.17:

On-site planning and supervision of the erection of a building are covered by paragraph 3. States wishing to modify the text of the paragraph to provide expressly for that result are free to do so in their bilateral conventions.

The International Bureau of Fiscal Documentation (IBFD), in a commentary on the differences between the UN and OECD models, seems to concur that there is no longer any substantive difference between the two on this point:

According to the UN Model, supervisory activities are covered by this provision, irrespective of whether they are performed by the main contractor or subcontractor. The OECD Model does not include these activities in the text of the construction clause. According to the OECD Commentary, supervisory activities were, until 2003, explicitly subsumed under the construction clause provided the work was performed by the main contractor itself. Supervisory activities performed by a subcontractor were not, however, considered to be covered by this provision. This difference between the OECD and UN Models disappeared due to the changes to the OECD Commentary in 2003. The supervisory activities of a subcontractor were then also considered to be covered by the provision.

But the difference does seem to be important to many countries. They prefer to take the UN option of explicitly providing for the taxation of supervisory activities, rather than leaving it to a clarification in the commentary on page 101 of the 496-page model treaty. Turning to the reservations and observations published alongside the OECD model, twenty countries, including six OECD members, have made an official note along the lines that they reserve the right to have the supervisory activities wording included in their treaties. They are: Australia, Korea, Slovenia, Slovak Republic, Mexico, Portugal, Albania, the Democratic Republic of the Congo, Hong Kong, Serbia, Argentina, Malaysia, the People’s Republic of China, Singapore, South Africa, Thailand, Vietnam, India, and Indonesia. There is also the following anomalous note:

Bulgaria does not adhere to the interpretation, given in paragraph 17 of the Commentary on Article 5, and is of the opinion that supervision of a building site or a construction project, where carried on by another person, are not covered by paragraph 3 of the Article, if not expressly provided for.

Royalties for TV and radio broadcasts

I also pointed out that the treaty was unusual in not including a reference to TV and radio broadcasts in its definition of royalties. The UN model states (my emphasis):

The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting,

Again, I said that this meant such payments could not be taxed by Senegal. The minister responded that, “the OECD commentary on the provision makes clear that cinematographic films include material for TV broadcast.” It does indeed state at paragraph 12.10 that:

Rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in cinemas or on the television.

But this is a little more restrictive than the UN wording, as there is no mention of radio. Of course, this may be splitting hairs, especially as only Argentina and Vietnam have observations in the OECD model on this point. But this time the IBFD discussion seems to support the view that there is a substantive difference here:

As the OECD Model does not include, in the definition of the term “royalties”, payments made as a consideration for the use of, or the right to use, films or tapes used for radio or television broadcasting, the UN Model deviates in this respect from the OECD Model.

Questions the opposition should ask about the new UK-Senegal tax treaty

Back in February, the UK and Senegal signed a bilateral tax treaty. The treaty is up for ratification this week, so I thought it time to take a look. Ratification happens through the delegated legislation committee, and entails very little debate. The last time a treaty between the UK and a developing country was ratified, I thought it was a shame that there had not been more discussion, which is why I’m writing in advance this time. I’ve also commented in the past, as did ActionAid and Mike Lewis, on the Danish treaty with Ghana.

So what questions might an interested Shadow Financial Secretary ask during this ratification debate? Here are three suggestions.

First, they might ask about a few of the provisions within the treaty that disadvantage Senegal and that seem to go against modern negotiating trends. The table below shows some provisions within the UK-Senegal treaty that follow the OECD model (which favours the developed country) rather than the UN model (which is supposed to reflect a good balance in a negotiation between a developed and a developing country). The first of the three percentage columns shows that these are all provisions that have been included in the majority of treaties signed by developing countries in recent years; the second shows that they are included in the majority of Senegal’s treaties; the third shows how often the UK has conceded them to developing countries.

Selected provisions from the UK-Senegal tax treaty in context

Data source: ActionAid tax treaties dataset, forthcoming

The treaty is particularly unusual in that supervisory activities associated with a building site in Senegal conducted by a British firm will not be taxable in Senegal, nor will royalties paid to the UK for radio and TV programmes broadcast in Senegal. Both of these provisions are included in around 90% of tax treaties signed by developing countries, but are omitted from this one. It would certainly be interesting to ask why.

Second, it is notable that this treaty does not include a clause permitting Senegal to tax fees for technical services paid to the UK. This is something that Senegal’s chief negotiator has for years advocated strongly for, including in this submission to the UN tax committee [pdf]. The UK has many older treaties with developing countries that include this provision, but more recently it seems to have changed position, opposing them. In this negotiation, it looks like Senegal made a concession on this point. This is a contentious issue at the UN tax committee, but the committee – which has members from the UK and Senegal – looks to be heading towards including it within its model treaty. It would therefore be very interesting for politicians to debate the UK’s position.

Third, the ratification debate on this treaty could be an opening for a broader discussion of what the UK aims to achieve through its tax treaties with developing countries. To set this in context, in the chart below, every point represents a tax treaty signed by a developing country, with the vertical axis showing how source-based it is (that is, how much its content permits the developing country to tax investors from the treaty partner). The higher the point, the more the balance of the treaty tends towards the developing country’s favour. There’s a leisurely upward trend.

Source/residence balance in tax treaties: UK and Senegal highlighted

Data source: index based on the forthcoming ActionAid tax treaties dataset

The UK’s agreements with developing countries are in red, while Senegal’s are in blue. The UK-Senegal treaty is purple. While it looks to be about average for both countries, it is certainly one of the more restrictive (“residence-based”) treaties signed by developing countries in recent years. This seems to be typical of treaties signed recently by the UK, but a worse deal for Senegal than it has obtained for a few years. The implication that the UK is one of the toughest tax negotiators with developing countries is surely worth political interrogation, at a time when its Department for International Development is urging developing countries to improve tax collection.

The tax treaty arbitrators cometh

Next month sees the results of the OECD’s Base Erosion and Profit-Shifting project, as well as a discussion at the UN tax committee on alternative dispute resolution in tax treaties. India has apparently vetoed the inclusion of mandatory binding arbitration by default in the OECD model tax treaty, and it remains an optional provision within the UN model too. This post will show that arbitration provisions in treaties with developing countries are nonetheless on the march, and it will discuss some of the issues that this raises. It is taken from some comments I submitted alongside Todd Tucker on a draft paper for the UN committee’s discussion.

I’ve just returned from a field visit to, among other countries, Vietnam. With around 60 tax treaties in force, it’s been one of the most enthusiastic concluders of tax treaties over the last two and a half decades. It’s also quite clear that the General Department of Taxation regrets some of the things that the country gave away in its early negotiations. It is endeavouring to apply some provisions of these treaties in unconventional ways, and coming under pressure from foreign businesses who say that by doing so it is breaking with international norms. I sat in on a large meeting between the Vice Minister of Finance and Vietnam Business Forum (VBF) members, at which these concerns were raised. According to a typical statement from the VBF [pdf], Vietnam’s interpretations have “made the application of DTA[s] of foreign enterprises impossible, effectively it obliterate[s] the legitimate benefit of enterprises.”

As a consequence, Korean investors have recently begun to invoke the mutual agreement procedure (MAP) in the Korea-Vietnam tax treaty. Vietnam’s first ever MAP negotiation was taking place while I was there. MAPs, remember, do not require the two countries to reach an agreement, just to try their best. The resulting backlog of disputes among OECD countries is the reason why the OECD now seems to favour mandatory binding arbitration. Vietnam does not want to see mandatory binding arbitration clauses in its tax treaties, having already had its fingers burnt with investor-state arbitration. I am informed that such a clause was proposed by the US and rejected by Vietnam when the two countries negotiated their new tax treaty.

Vietnam said no, but others have not. One outcome of the Netherlands’ programme of renegotiations with developing countries, which is supposed to be about adding anti-abuse clauses, has been the insertion of binding arbitration clauses in several treaties with African countries. Here are all the arbitration clauses in African tax treaties to date (based on searching the IBFD tax treaties database for the term ‘arbitration’). They key column to look at is “how triggered”. Whereas the Canadian and Italian arbitration clauses require both countries’ consent before the case enters arbitration, all the others, following the OECD and UN model provisions, are binding on the developing country and can be triggered by either the other country or the taxpayer. The rest of the typology indicates that, as per usual, OECD-type provisions are more common than UN-type ones, even though the latter are supposed to be better for the developing country.

Arbitration clauses in African tax treaties

If we search for the term ‘arbitration’ in the IBFD tax treaties database, there are 219 results (caveat: not all of these references might be to ‘an arbitration clause’ as such, and some foreign-language treaties may have been missed). As the table below shows, arbitration clauses are of particular importance to jurisdictions whose treaty networks are used as part of tax planning strategies. By far the most arbitration clauses are in the treaty networks of the Netherlands and Switzerland, although the presence of Liechtenstein and Luxembourg in the top 10 list may also be indicative. At least two of the Swiss clauses, in its treaties with Peru and Argentina, are actually Most-Favoured Nation clauses triggered if the Latin American countries agree to binding arbitration with a third country. This suggests that, for Switzerland at least, arbitration clauses are important for its competitive position.

List of countries by number of tax treaties with some kind of arbitration clause

Here are a few issues that are presented by the spread of arbitration provisions that are binding on developing countries:

  1. There is barely any MAP experience in many developing countries. Interviews with revenue authority staff across numerous developing countries indicate that, outside perhaps the BRICS, many countries have yet to enter into a single MAP. Vietnam is a typical example. So the case for arbitration based on the huge backlog in OECD and G-20 countries is simply not there in many other countries, and may never be. Furthermore, that developing countries do not have the same experience of MAP negotiations as developed countries is a further reason why they should wait before agreeing to mandatory binding arbitration. If arbitration is designed primarily to increase pressure for a resolution in MAP, then the pressure on a developing country to capitulate at this stage will surely be increased by its inexperience in arbitration as well as MAP.
  2. The current UN model provision does not provide for the possibility of optional arbitration. If arbitration helps solves a structural problem in tax treaties, it is good for developing countries to consider it. But one way for them to take it slow is to sign up for clauses that create the option of arbitration without forcing them into it, such as those in the Italian and Canadian treaties with African countries. With such a provision, developing countries could build up some experience before deciding whether mandatory and binding arbitration is right for them. Unfortunately, this is not the current path taken by the UN committee, and so there’s little chance of developing countries obtaining it in negotiations.
  3. Arbitration enhances the negative impact of negotiation oversights. We know that, as in the case of Vietnam’s early treaties, the present impact was often not anticipated at the time the agreements were signed. While this situation has improved in some developing countries, in others, treaties are still being concluded now without adequate awareness among all parties of how they will bind future governments. There are various reasons for this, including: lack of technical expertise at the time of negotiation; politically driven negotiations in which the content of these treaties is barely considered; changing tax systems and economic conditions, especially the growth of e-commerce and services; new tax planning mechanisms; the relative autonomy of a small set of negotiators; weak or non-existent parliamentary ratification processes. Binding arbitration will further enhance this ‘golden straightjacket’ impact of tax treaties, reducing room to manoeuvre in cases where latter day tax treaties frustrate present day policy goals. This would especially be the case if a multilateral instrument were used retrospectively to add arbitration provisions to existing tax treaties.

A final thought. 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. Perhaps it is good if tax treaties leave sufficient space for this, so long as countries take seriously the repercussions of making use of that space.

British tax treaties with developing countries, 1970-1981

It’s been quiet on here because of a field trip in Thailand, Vietnam and Cambodia, of which more anon. In the meantime, I’ve been given the opportunity to present a paper based on a chapter of my thesis several times this autumn. It’s a historical study of the politics of Britain’s tax treaty negotiations. I presented it at the excellent African Tax Research Network conference earlier this month, where a few treaty negotiators told me it was interesting to see what goes (well, went) on behind the scenes on the other side. I’ll be giving it again at the Oxford University Centre for Business Taxation’s doctoral workshop, and as the papers there are posted online, I thought it might be time to post it here, too.

Here’s the abstract:

Why have developing countries concluded so many double taxation treaties with developed countries? Much existing research assumes that this diffusion results from the active pursuit of such treaties by developing countries, which have been willing to give up considerable taxing rights through them, in order to attract inward investment. This paper uses archival documents to examine treaty negotiations between the UK and developing countries during the 1970s. It finds that in many cases negotiations were in fact driven by the UK as a means of increasing the competitiveness of British firms in developing country markets. It also reveals a divide between the tax specialist community, for whom tax treaties were a project to export ‘acceptable fiscal standards’, and generalists in business and government, for whom they were a means of securing lower effective tax rates. When these two groups’ objectives came into conflict, it was generally the experts who determined the UK’s policy objectives.

Here’s a link to the PDF.

“We have some doubt whether it would really prove useful.” The origins of UK opposition to a Global Tax Body.

As OECD and G-77 countries debate the status of the UN tax committee at the Financing For Development conference in Addis Ababa, the finger has once again been pointed at the UK and US.

This is from today’s Guardian:

The UK joined the US and several other wealthy countries at the UN financing for development conference in Addis Ababa in a manoeuvre to limit discussions on tax policy at the UN, arguing that the Organisation for Economic Cooperation and Development (OECD) was taking the lead on tax issues.

This is from the Guardian in 2008, at the time of the last FFD conference in Doha:

The Observer has established that the UK is lobbying to remove paragraph 10 from the draft Doha Outcome Document…Paragraph 10 focuses on fighting tax evasion. It aims to encourage global tax information-sharing and simplified tax laws. Most crucially, it wants to upgrade the UN’s tax-expert panel to intergovernmental status, elevating the importance of the issue of individual and corporate tax avoidance and evasion. The UK, together with the US, Canada and Australia, are opposed to the measure, according to sources in the UN.

These positions are hardly new. As the memo reproduced below shows, the UK was opposed to the creation of the original ad hoc group of experts, which became the current UN committee, way back in 1967. The UK view then was that this “technical matter” was better discussed in a “more homogenous group” (the OECD), rather than risking “confrontation” between capital-exporting and capital-importing countries.

The current OECD member state argument is mostly about the cost of a parallel bureaucracy at the UN (see, for example, this EU position statement [pdf]). While that was also present in 1967, it’s interesting that today the UK’s main concern, about confrontation at the UN, is no longer articulated by the UK.

Link to the memo on Slideshare.

A global tax body for what?

The global tax body

It’s only a few days until the start of the Third UN Financing for Development summit in Addis Ababa. This is the key crunch point for discussions on if and how the international tax architecture might change to better accommodate developing countries in decision-making. Although the debate about strengthening the UN tax committee (UNTC) from its current impoverished and non- governmental status has been simmering for years, developing countries and NGOs seem to be throwing themselves into it this time round with more enthuisiasm than in the past. Yet the most recent draft of the Addis outcome document has only two modest commitments:

To this end, we will increase the frequency of its meetings to two sessions per year, with a duration of four working days each. We will increase the engagement of the Committee with the Economic and Social Council (ECOSOC) through the Special Meeting on International Cooperation on Tax Matters with a view to enhancing intergovernmental consideration of tax issues.

Over on his ever-insightful Uncounted blog, Alex Cobham points to three possible outcomes: the OECD retaining leadership, a shift towards the IMF, and the creation of the intergovernmental tax body that campaigners want. This builds on the analysis put together by Eurodad [pdf], summarised in a short post. What I intend to do here is to step back a little from the advocacy messages and think both concretely and theoretically about what that ‘stronger UN’ option really is.

What we have

To begin with, there are no binding global tax rules. There are standards and models, but they only have legal force when countries use them as the basis for national law or bilateral treaties. (Although in some instances international tax rules do arguably have a ‘soft law’ role, such as the way courts may refer to the model commentaries when interpreting treaties, or the way a Kenyan court upheld the OECD transfer pricing guidelines in the absence of national guidance [pdf]). But international norms do have two important strengths:

  1. A significant moral weight. It is easier to justify a new law that might otherwise scare investors, or a tax treaty negotiating position, if it complies with international norms.
  2. Technical sophistication. For a developing country with a small bureaucracy, taking an ‘off the shelf’ set of transfer pricing rules is much easier than developing your own.

In the area of information exchange, there is the Global Forum peer review process, which relies on the threat of counter-measures, and there is the Multilateral Convention on Mutual Assistance, which is binding, but far from universal.

Campaigners want to change this situation, I think, in two ways. First, they want non-binding standards that better suit the needs of developing countries. This might mean, for example, transfer pricing rules that are easier to enforce, model treaties that give greater scope for source taxation, or a country-by-country reporting standard that entitles all countries in which a multinational operates to the information. Second, they want to create or expand the category of binding global conventions that would force developed countries and tax havens to comply with developing countries’ preferences. This would include for example mandatory global automatic information exchange, mandatory public country-by-country reporting in the home country of a multinational company, and perhaps some kind of mandatory approach to CFC rules that shields developing countries from profit shifting. You can see these two themes in the Eurodad Q&A document:

The overall purpose of the intergovernmental UN tax body should be to ensure that countries do not erode each other’s tax bases, and that the international tax system is transparent, coherent and supports equality and development. In order to do this, the body would have to address a number of different issues, including base erosion and profit shifting, tax and investment treaties, tax incentives, progressive taxation, taxation of extractive industries, harmful tax practices, beneficial ownership transparency, public country by country reporting, automatic exchange of information for tax purposes and alternatives to the arm’s length principle. In order to ensure that the mandate of the tax body is broad enough to tackle all these issues – as well as new issues that might emerge – it’s important that the mandate is not too narrow and specific.

In the longer run, and with a view to ensuring implementation of the decisions of the tax body, we should have a legally binding UN Tax Convention. Developing such an agreement should therefore be one of the key tasks of the intergovernmental body

Why we have it

In international relations thinking, there are broadly three themes that different scholars use to analyse what international institutions are and what function they serve. They boil down to power, preferences and ideas.


From this perspective, international institutions are merely tools through which dominant states exert their power. This would lead us to conclude that any realignment in the politics of international tax will (or will not) happen regardless of what goes on at the UN next week. An upgraded UN committee wouldn’t create change, rather it would simply reflect a shift in the underlying power dynamics. The annex to the UN transfer pricing manual, and the participation of developing countries in the BEPS project, already illustrate this. The way to get better outcomes for developing countries would be to bolster their capabilities, rather than to realign institutions, which would play no causative role in itself.


A second way of looking at things is to put power to one side and think about collective action problems. In this view, states create institutions because they need some kind of coordination mechanism to help overcome the natural incentives that make cooperation difficult. Cooperation to deal with double taxation is described by game theorists as a coordination game (also known as a ‘battle of the sexes‘ or ‘Bach or Stravinsky’): everyone wants to reach an agreement, the difficulty is just finding a ‘focal point’ around which to converge. The model treaties are focal points that represent the widest possible agreement at international level, but leave the hard bargaining on non-consensual issues to the bilateral setting.

If this is the case, international tax institutions’ most important roles are entrepreneurship and signalling. They create focal points around equilibrium solutions from which everyone will benefit. Critics of the current regime argue that even when using the UN model treaty, the resulting treaties benefit capital exporters more than developing countries, who have to make most of the sacrifices of taxing rights. They want to see a more radical (or stripped down) UN model. But if the role of the UN model is to signal an equilibrium point, making it more radical might mean that it ceases to play this important role, because in fact it doesn’t represent a possible equilibrium between different groups of countries any more. This might come at the same time as the OECD instruments cease to play that role because developing countries are also beginning to deviate from them. The goal here would be to find a new equilibrium, from which developing countries benefit more, but on which everyone (or enough countries) can still agree.


The third lens we can use begins from a fundamentally different point of view: that the international context can change the preferences of diplomats, and hence of countries themselves.

As Sol Picciotto states, in International Business Taxation [pdf]:

Perhaps the most important outcome of the inter-war years was to begin to create a community of international tax specialists…a community within which ideas and perspectives as well as economic advantage could be traded. It was these direct contacts between specialists which filled the gap created by the difficulties of resolving by any general principles the issues of international allocation of the tax base of international business.

If this ideational process among tax diplomats is an important part of the puzzle, what role does the UN committee play? Is it a forum through which delegates from developing countries develop their own shared agenda, or one in which they become complicit in an OECD country-led agenda? Consider two pieces of evidence from British civil service files. This first, from a Ministerial briefing note in 1976 on the stalemate in tax treaty negotiations with Brazil, illustrates that some British officials saw the UN as a tool to ‘educate’ developing countries:

Our view, which is shared by the Americans and the Dutch, has been that it is of little use to try to “educate” developing countries – at the United Nations Expert Group on tax treaties and elsewhere – about acceptable international fiscal standards if, when it comes to the crunch, we are prepared to sacrifice principle in order to secure an agreement.

Here, in contrast, is how Kenyan negotiators used the knowledge they gained from attending UN meetings to bolster their argument for a management fees clause in their 1973 treaty with the UK, even though such a clause is only being added to the UN model some 40 years later:

Mr Cropper [from Kenya] said that Kenya’s proposal was only intended to close a loophole and he did not see why there should be any objection to it. It was a point which had been raised by a number of countries in the UN Group of Experts…Mr Cropper said that there had been a big change in developing countries’ attitudes in the UN Group of Experts…Mr Ihiga [also from Kenya] said that modern thinking was that a withholding tax on management fees was justified.

If ideas are important, the UN should be seen as a community of experts working not just to find solutions that fit the power balance and national preferences of UN member countries, but rather to change international norms and national preferences, towards a more pro-development orientation.

What we might get

How could a restructured UN Tax Committee achieve that? ‘Upgrading’ advocates generally name three categories of reform. Let’s consider each in turn, in the light of the above discussion.

Intergovernmental status

While it would have some effect on the UNTC’s prestige, funding and composition, the major change that this would create would be to politicise the UN committee. It would mean that national members were more accountable to their home governments and to civil society. Like other issues such as trade and climate change, the shifting balance of power between developed and developing countries would probably increase the areas in which there was a stalemate. Politicisation would also allow campaigners in developed and developing countries alike to work at that national level to act as allies of radically positioned developing country officials, potentially increasing their negotiating capabilities, but crucially also changing preferences at national level.

A second impact would be that it would allow countries to send the most relevant person for a given discussion, and so the UN committee could expand its work onto a wider variety of issues. I don’t believe that it would deliver an international convention that would bind developed countries and tax havens into new rules any time soon, because the power relations are not yet aligned in that way, and because it’s hard to see a solution around which national preferences are aligned.

Changed composition

With more members from developing countries, we might expect that majority opinions that suit developing countries could be forced through the committee more easily. Or, more practically, developing countries might be able to make their case more forcefully in deliberations. But if the aim is to find an equilibrium point that will work in the real world, simply outnumbering developed countries to produce a more radical set of UN instruments without changing the preferences of developed countries will be of limited effect. This is why “tyranny of the majority” is currently a last resort when the committee takes decisions.

More funding

This would create a more autonomous secretariat that might be able to compensate for developing countries’ more limited technical capacity in UN discussions, doing some of the work to assuage objections from developed countries and so find more developing country-friendly focal points. It would also make the secretariat more visible, enhancing the prestige of UN instruments, just as senior OECD secretariat staff travel the world promoting its instruments. More funding for more frequent meetings might allow the committee to work faster, keeping up with changes at the OECD, but this would depend in part on developing countries’ capacity to participate.

In conclusion, the development case for a better-resourced, more transparent UN committee is compelling. But the committee’s impact will continue to depend on the uptake of its instruments by countries in national laws, bilateral treaties, and adherence to any new binding multilateral convention. For this reason, ideas and preferences in developed and developing countries will need to change, alongside developing countries becoming more capable actors in international negotiations. A more dynamic, politicised UN committee might help to create those things over time, but in the meantime I think it is just as much at the national level that campaigners need to focus their attention if they want to change international outcomes.