Developing Countries’ Role in International Tax Cooperation

Developing Countries' Role in International Tax CooperationOver the past year I’ve worked with the secretariat of the Intergovernmental Group of 24* on a paper that discusses how developing countries could engage with a range of international tax cooperation issues. The paper can be downloaded here: Developing countries’ role in international tax cooperation [pdf].

The G-24 plays a caucusing role for its members in the IMF and World Bank, and so tax cooperation is becoming increasingly important for it as those organisations’ profile in tax work increases. There were some interesting presentations at the G-24’s last technical group meeting in February, and its most recent ministerial communique [pdf] includes the following statement, a mix of welcoming current initiatives and noting areas where they are insufficient for emerging markets and developing countries (‘EMDCs’):

We welcome ongoing initiatives on international tax cooperation such as the Automatic Exchange of Information (AEoI) initiative and the Base Erosion and Profit Shifting (BEPS), and call for a framework that ensures effective participation of EMDCs. We support the development of a digital global platform with least compliance cost for implementation of AEoI. We appreciate the work of the UN Tax Committee and encourage multilateral support to upgrade the Committee to an intergovernmental body to enhance the voice of EMDCs on international tax policy matters. We also call for more attention to developing fair tax rules to guide the taxation of multinational corporations and for international cooperation to prevent harmful international tax competition, negative spillovers from shifts in tax policies in major countries, and illicit financial flows.

One of the interesting elements of this project was the diverse positions and interests within an equally diverse group of ‘EMDCs’. Below, for example, is a table showing participation in international tax organisations and institutions. This was such a moving target that we had to set a ‘freeze date’ of 25th May 2017.

G-24 participation in international tax initiatives, May 2017

I hope the report provides a good overview of the state of play and issues involved on that date. Below is the text of the recommendations section, which gives a flavour of the document.

The G-24 has highlighted the importance of effective international tax cooperation to support developing countries’ efforts to mobilise domestic resources, so that they can achieve their development goals.  It could build on this recognition by setting out to develop a pro-active agenda for international tax rule reform that meets the needs of developing countries, and identify different international forums through which to achieve it. G-24 members could work together within existing forums such as the UN tax committee and OECD to put their issues of concern on the agenda. The UN tax committee’s potential has yet to be fully realised by developing countries, and there may also be new opportunities created by enhanced participation in OECD initiatives. G-24 members could strengthen their engagement by enhancing national political oversight of UN and OECD tax work, as well as advocating a stronger, upgraded UN tax committee when the opportunity next arises.

On tax avoidance and evasion, G-24 members could consolidate their participation in multilateral conventions on information exchange and mutual assistance, and could share their knowledge and experiences in this area to build each other’s capacity to benefit from their participation, as well as to identify reforms to international tax standards that might reduce the administrative hurdles to benefit.  Where necessary, this could lead to alternative, but compatible, standards in areas such as transfer pricing and tax treaties that give a greater share of the tax base to developing countries.

As some G-24 countries are capital-exporters to other developing countries, they could take up the IMF and OECD’s recommendation to perform ‘spillover analyses’ of the main aspects of their tax systems that have the potential to adversely affect other developing countries’ tax revenues, whether by encouraging tax competition or increasing incentives for tax avoidance. Also with regard to tax avoidance, G-24 members could share experiences across regional economic groupings such as ASEAN and MERCOSUR to advocate codes of conduct on tax competition, as well as working through ECOSOC for the adoption of the UN tax committee’s proposed code of conduct on exchange of tax information.

Above all, the G-24 provides a political platform for forging common views on international development issues among developing countries, in which tax coordination is a main concern.  It is able to work with the OECD within its inclusive framework, and a number of G-24 members are now participating in many of its initiatives. It can also support the efforts of the UN and other forums in which developing countries can more actively engage so that they can benefit more effectively from international tax rule reforms and cooperation.  A sustainable approach to international tax cooperation in the long term requires international institutions that reflect the increasingly diverse needs of countries with an interest in international tax standards.

*Just as there are 19 countries in the G-20, and 134 countries in the G-77, there are now 26-and-a-half countries in the G-24. The ‘half’ is China, which has the status of ‘special invitee’.

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Three new publications

Summer in academia is a time for tidying up, so I have updated the page of this site with my publications. Here are three recently published items, with links to downloadable versions and their abstracts:

The Journal of Development Studies

The challenges for developing countries in international tax justice (link is to PDF of accepted version)

This is a review article to appear in the Journal of Development Studies, which was published online in May.

Developing countries face three main challenges in international tax cooperation. The most widely known is the twin problems of tax avoidance by foreign investors and tax evasion by domestic actors, which have become a major focus of debate in international organisations and of civil society activism in recent years. The second problem, tax competition, incorporates a range of issues from the ‘prisoners’ dilemma’ facing countries competing for inward direct investment through to the harmful tax rules used by tax havens that enable tax avoidance and evasion. This article reviews four recent monographs that analyse these problems at an international level. While they contain much useful discussion of the problems and potential technical solutions, there remains a need for political economy research to understand why certain technical solutions have not been adopted by governments. A third challenge faced by developing countries, barely considered in the tax and development literature up to now, leads to a note of caution: international tax institutions tend to be designed in ways that place disproportionate restrictions on capital-importing countries’ ability to tax foreign investors.

Studies in the History of Tax Law, volume 8

The UK’s tax treaties with developing countries during the 1970s (link is to PDF of accepted version)

This is a chapter in Studies in the History of Tax Law, volume 8, edited by Peter Harris and Dominic De Cogan. It’s been published today by Hart Publishing.

Tax treaties between developed and developing countries impose considerable costs on the latter, in the form of curbs on their right to tax investment from the former. Existing research assumes that such restrictions are accepted as a quid pro quo for resolving the problem of double taxation, which might act as an obstacle to inward investment. This paper uses archival documents to examine treaty negotiations between the United Kingdom (UK) and developing countries during the 1970s, focusing on contentious provisions concerning ‘tax sparing’, the taxation of shipping, and withholding taxes. Consistent with critical literature on tax treaties, it finds that neither side was concerned about the double taxation problem, which was resolved unilaterally by the UK’s tax credit. Rather, developing countries were primarily focused on obtaining matching tax credits in the UK to maximise the benefits to investors from their tax incentives. UK priorities, meanwhile, were to bind developing countries into OECD-type tax treatment of British firms. Negotiated outcomes did not reflect the true balance of costs and benefits to each side, but their different negotiating capacities, the political salience of particular taxes, and the precedent certain concessions might set for future negotiations.

WIDER working paper front coverWhat makes countries negotiate away their corporate tax base? (link is to published pdf)

This is a working paper for the United Nations University World Institute for Development.

Qualitative case studies suggest that the outcomes of tax treaty negotiations are determined by power politics and negotiating capability. In contrast, quantitative studies have tended to depart from a model that implies absolute gains, full rationality, and perfect information on the part of both treaty signatories. This paper bridges the gap by replicating two existing quantitative studies, introducing new, more sophisticated data. New fiscal data are drawn from the ICTD Government Revenue Dataset, while treaty content is measured using the ActionAid Tax Treaties Dataset. It finds that developing countries that raise more corporate income tax are more likely to sign tax treaties with wealthier countries, and more likely to negotiate higher withholding tax rates in those treaties, but not more likely to obtain a better negotiated result overall. In contrast, developing countries that raise more revenue in total are more likely to negotiate better outcomes in other clauses of the treaty that are more obscure and technically complex. There is also a strong learning effect, with better outcomes across the board as a developing country gains experience of signing tax treaties. Finally, greater asymmetries in investment stocks and material capabilities lead to worse outcomes for developing countries.

Certainty in the tax treaty regime

Here’s the text and slides of a talk I gave yesterday at an event called Harnessing the Commonwealth Advantage in International Trade.

I want to talk today about issues related to tax treaties in developing countries, and their impact on tax certainty for multinational investors. To do this I think we have to consider two aspects of the tax treaty regime: the multilateral norm-setting processes at the OECD and United Nations, and the individual bilateral treaties negotiated by pairs of countries. The key point I want to make is that, at both these levels, the elaboration of a regime that constrains developing countries’ source taxation rights in ways that risk being seen as excessive is not sustainable in the long term.

Consider first the multilateral level. Last week I was reading a PWC document, ‘Navigating the Maze: Impact of BEPS and Other International Tax Risks on the Jersey Funds Industry [pdf].’ It notes that:

Countries are already diverging from suggested guidance from the OECD, which was meant to bring coherence and consistency.

This does not only apply to developing countries, but there is plenty of evidence to suggest that in emerging markets there is a growing dissatisfaction with the OECD approach, as illustrated by the ongoing row over the status of the UN tax committee, and India’s recent financial contribution to its trust fund, which until then had been empty for over a decade.

Here are two quotes that illustrate this sentiment further:

“For developing countries the balance between source and residence taxation [is] very crucial. International tax rules with its preferences for residence based taxation [are] not in interest of developing countries.”

Eric Mensah, Ghana Revenue Authority, 2017 [pdf]

“The global tax system is stacked in favour of paying taxes in the headquarters countries of transnational companies, rather than in the countries where raw materials are produced.”

Francophone LIC Finance Ministers Network, 2014 [pdf]

It seems that, to maintain the integrity of the international tax system as emerging market voices become stronger, countries that favour residence-based taxation will need to accept greater flexibility within the instruments agreed at multilateral level.

Turning to the bilateral treaties that developing countries have negotiated, here I want to introduce you to some research I conducted at the LSE, funded by an NGO called ActionAid. ActionAid used it to inform a campaign that has targeted individual governments and treaties, calling for renegotiations.

Slide2

I took 500 tax treaties concluded by developing countries and had a group of LLM students code them for the main clauses that could vary on a source-residence axis, using an International Bureau of Fiscal Documentation analysis. We can use that data to plot each treaty along a simple axis from 0 to 1, where 0 means an overwhelmingly residence-based treaty, and 1 a more source-based treaty. Remember that 1 here represents the presence of the most source-based clauses within existing treaties, and doesn’t take into account the concerns about inherent bias in the parameters for those treaties set by the OECD and UN models. In this first slide you can see that treaties among developing countries, in light blue, are becoming marginally more source-based over time, while treaties between developing countries and OECD members are becoming more residence-based.

Slide3

The next chart shows some of the underlying drivers of those trends. You can see that permanent establishment definitions are becoming more expansive, perhaps reflecting changes to the model treaties, while withholding tax rates are trending downwards. There are diverse trends in different clauses within areas such as capital gains tax and taxation of services.

I want to talk to you about a few examples.

Slide4

Here we see Vietnam’s treaties taken from the same dataset. Vietnam has actually expressed a comprehensive set of observations on the OECD model convention, broadly following the UN model. So here a zero on the vertical axis means the treaty contains none of those positions and instead follows the OECD model, while 1 means it includes all of Vietnam’s observations. You can see that in the 1990s Vietnam signed a number of more residence-based treaties that are completely the opposite of its stated negotiating position. And of course, these are with many of its biggest sources of investment.

More recently, Vietnam has come to regret those earlier treaties, and has chosen to interpret certain provisions on PE and technical services in the way it wished it had signed them, rather than the way it did. Businesses are very unhappy, and in the words of the Vietnam Business Forum, it has:

made the application of DTA[s] of foreign enterprises impossible, effectively it obliterate[s] the legitimate benefit of enterprises.

The residence-based treaties that Vietnam signed when it was inexperienced and urgently in need of investment are creating uncertainty, rather than the stability that investors are looking for.

Slide5

You might be aware that a few years ago Mongolia tried to renegotiate a few of its treaties, and when it was unsuccessful it terminated them. They’re the treaties with the Netherlands, Luxembourg, Kuwait and the UEA, marked in black on here. But if you look on the bottom left, you see a number of treaties with OECD countries, including the UK and Germany, that have even more limited source taxing rights. Indeed, according to an IMF technical assistance report from 2012 [pdf]:

The Mongolian authorities are currently considering cancelling all DTAs and start building up a new DTA network with countries based on trade volumes and reciprocity in economic relations.

I’m told the IMF talked them out of this, but it is worth knowing that they considered it.

Slide6

Here is Zambia, a Commonwealth example. You can see the same pattern. Its earlier treaties were very residence-based. I did some archival and interview work on those early treaties, and you can see that when they were first signed, Zambia had a hugely under-resourced civil service, with no experience of negotiation, and other countries took advantage of this. The most egregious example is its treaty with Ireland, which had zero withholding tax rates on all types of payment. That’s in contrast to the East African community countries, which had very strong negotiating red lines, and as a result either walked away, or obtained more source-based treaties that today appear quite generous, but have stood the test of time.

Slide7

This chart shows a few renegotiations that have taken place in response to government and civil society concerns. You can see that Zambia’s renegotiations have focused more on updating treaties and closing loopholes, not dramatically shifting the balance of taxing rights. In contrast, Pakistan and Rwanda have both negotiated big overhauls.

So in conclusion, as the politicisation of the international tax regime continues, especially in developing countries, I think we’re likely to see growing demands for a rebalancing between source and residence not just in the multilateral setting, but also in individual treaties. My advice to OECD governments, and businesses who engage with them, is that tax certainty in the future depends on an enlightened approach to the tax treaty regime that leaves more developing country taxing rights intact.

European Economic and Social Council hearing on tax treaties and development

I’ve posted below the slides I just used for a presentation here at the European Economic and Social Council. The EESC has formed a study group to consider the question of “EU development partnerships and the challenge posed by international tax agreements.”

Interesting discussions included the evidence base for the effect of tax treaties on investment into developing countries. Here I think the key question is what provisions of tax treaties are relevant to investment flows, and in what circumstances, rather than simply whether tax treaties per se attract investment.

Tax certainty is the new buzzword, and it was interesting to think about how it applies here. On one hand, a treaty provides greater certainty because it commits its signatories to tax investors in a certain way as long as the treaty is in force. But that certainty relies on ongoing support for tax treaty norms. Developing countries feel unhappy with the content of the international tax norms on which bilateral treaties are based, as well as the institutions that develop those norms. (Here, for example, is a recent presentation by Eric Mensah from the Ghana Revenue Authority that makes these points). Countries such as Mongolia, Vietnam and Uganda are beginning to question the constraints imposed on their tax policy by treaties signed in the past. There is perhaps a trade-off between developed countries’ desire to defend the content of existing norms and the role of the OECD, and developing countries’ willingness to abide by those standards in the long term.

Link to presentation on Slideshare

Tax: an international political economy reading list

It’s been a while, but I’m back. One thing I did while the blog was silent was give a couple of lectures on tax and offshore, as part of broader courses I taught on international political economy and finance. In doing so I realised that the literature on international tax relations is not as sparse as it sometimes feels. Here is a selection of pieces that I included on my reading list for students. This should be a place to start if you’re a political scientist interested in learning about international tax, or from an economics or law background seeking different perspectives; if you’re from business, government or campaigning, see if these papers ring true to you. I have stuck strictly to publications in academic journals and academic books, but if you don’t have access to a university library, I’ve included links to any versions of the papers that are freely available.

This will be a living page, so please get in touch to point out anything I have missed, especially if you wrote it! The aim here is not to be comprehensive, but to provide an entry point. Apart from the law articles at the end, this is a disappointingly pale male list, and I hope over time to find some articles from a more diverse background!

Introductory articles

Gabriel Zucman, 2014. Taxing across Borders: Tracking Personal Wealth and Corporate Profits. Journal of Economic Perspectives 28(4): 121–148

The first piece on this list is actually by an economist. I like it because as well as bringing new data to the discussion about avoidance and evasion, it also explains the way the international tax system works pretty well and is a good entry level reading. I set it for my undergraduates in a general course on international political economy.

Thomas Rixen, 2011. From double tax avoidance to tax competition: Explaining the institutional trajectory of international tax governance. Review of International Political Economy 18(2): 197-227.

Rixen is probably the best known scholar writing on international tax in the rationalist, liberal institutionalist tradition, and this article encapsulates his powerful argument about path dependence in the development of the international tax regime: a system developed to tackle double taxation doesn’t have the institutional properties needed to handle harmful tax competition.

Jason Sharman, 2010. Offshore and the New International Political Economy. Review of International Political Economy 17(1): 1-19

This was a core reading for my postgraduate students, who enjoyed getting their teeth into it. The article sets out some of the main ways in which offshore is used in the global political economy – beyond just tax – organised around the concept of ‘calculated ambiguity’.

Ronen Palan, 1998. Trying to Have Your Cake and Eating It: How and Why the State System Has Created Offshore. International Studies Quarterly 2(4): 625–643

The oldest reading on the list, predating even the harmful tax practices project. It’s one of two articles by Ronen Palan that establish his concept of ‘commercialised sovereignty’, wrapping it up in an analysis of the political economy of the state under globalisation that helps explain why the state acts as it does. This was the other core reading for my postgraduates, because it explains the development of offshore within the evolution of the financial system more broadly.

Tax havens, coercion and information exchange

Lukas Hackelberg, 2016. Coercion in international tax cooperation: identifying the prerequisites for sanction threats by a great power. Review of International Political Economy 23(3): 511-541 

I came across Hackelberg’s work recently, and I think he does a great job of applying some classic rationalist international political economy theories to international tax. This article looks in particular at the nature of US financial hegemony in terms of internal and external factors, through the lens of the fight against tax havens.

Richard Eccleston and Richard Woodward, 2014. Pathologies in International Policy Transfer: The Case of the OECD Tax Transparency Initiative. Journal of Comparative Policy Analysis 16(3): 216-229

OECD-bashing is a favourite hobby of international tax watchers, right through from NGO campaigners to the offshore industry. But those engaging in the practice rarely make their analysis of how the OECD works rigorous or explicit, whereas this paper tries to do so through the lens of bureaucratic politics.

Alex Cobham, Petr Janský and Markus Meinzer, 2015. The Financial Secrecy Index: Shedding new light on the geography of secrecy. Economic Geography 91(3): 281-303.

The financial secrecy index is a political intervention by Tax Justice Network, and as such it will always attract strong reactions. This is a peer-reviewed paper (the link is to a working paper version of the journal article) that sets it in context and explains the methodology. The discussion of defining ‘tax havens’ is essential background, and it would be a good exercise for students to review and critique the authors’ approach to developing the index.

Jason Sharman, 2012. Canaries in the Coal Mine: Tax Havens, the Decline of the West and the Rise of the Rest. New Political Economy, 17(4), pp.493-513

This is another good piece for students wanting to relate offshore to broader themes in international political economy. It divides offshore financial centres into five groups, and discusses how they have positioned themselves in the shifting terrain of the 21st century economy.

Michael C. Webb, 2004. Defining the Boundaries of Legitimate State Practice: Norms, Transnational Actors and the OECD’s Project on Harmful Tax Competition. Review of International Political Economy 11(4): 787-827

This article predates Jason Sharman’s definitive book on this topic. Its story, which considers the OECD as an organisation and the role played by particular interest groups, can very much be set in contrast to Lukas Hackelberg’s state-centred discussion.

Multinational corporate taxation

Leonard Seabrooke and Duncan Wigan, 2015. Powering ideas through expertise: professionals in global tax battles. Journal of European Public Policy 26(3): 357-374

In contrast to the rationalist, state-centred view of international tax bargaining employed by Rixen, Hackelberg and others, this article shifts focus to the role of professional expertise in propounding ideas. It also focuses on country-by-country reporting, which makes it one of the few articles so far to engage in depth with the campaigning around corporate tax avoidance.

Stephen Bell and Andrew Hindmoor, 2013. The Structural Power of Business and the Power of Ideas: The Strange Case of the Australian Mining Tax. New Political Economy 19(3): 470–486.

This paper questions whether the pressures created by tax competition are a real thing, arguing that it’s how much people believe capital will respond to tax competition that matters, not the extent to which it really will.

Philipp Genschel and Peter Schwarz, 2011. Tax competition: a literature review. Socio-economic Review 9(2): 339-370

I haven’t included a great deal of literature on tax competition in this list, because that’s a more familiar evidence base, but this is a great review that considers the political science and economics literature, as it was in 2011 at least.

Roland Paris, 2003. The Globalization of Taxation? Electronic Commerce and the Transformation of the State. International Studies Quarterly 47(2): 153–182

An old article that came to my attention when a student dug it out in an essay. Like Palan’s piece, also in ISQ, this paper draws out implications for the state from the challenges of globalisation and international taxation. It also has the merit that we can compare its speculation against what has happened since 2003.

Legal scholarship that crosses into international relations

Sol Picciotto, 2015. Indeterminacy, Complexity, Technocracy and the Reform of International Corporate Taxation. Social and Legal Studies 24(2): 165–184.

This article takes a Bourdieusian perspective on the relationship between power and expertise, providing a fresh view of the politics of international corporate tax. It makes a careful, compelling argument that can be read in parallel with Seabrooke and Wigan’s paper above.

Itai Grinberg, 2015. Breaking BEPS: The New International Tax Diplomacy. Georgetown law working paper.

Grinberg, like Lukas Hackelberg, is doing interesting work drawing analogies across from other, more intensively studied areas of international financial law, in particular the Basel process. This working paper is a great summary of where a research agenda based on this analogy might go.

Allison Christians, 2012. How Nations Share. Indiana Law Journal 87(4): 1407-1452.

This is my go-to piece analysing the trajectory of legalisation and judicialisation in international tax disputes. While work on the division of the tax base in international relations has tended to be preoccupied by the conclusion of tax treaties, this is one of the few pieces to examine how they are applied and used in practice.

Diane Ring, 2010. Who is Making International Tax Policy? International Organizations as Power Players in a High Stakes World. Fordham International Law Journal 33(3): 649-722

Diane Ring is probably the lawyer who has gone furthest into international relations literature. She uses it here to discuss institutional arrangements for international tax cooperation, focusing on the different actors involved and how they engage with each other.

Eduardo Baistrocchi, 2008. The Use and Interpretation of Tax Treaties in the Emerging World: Theory and Implications. British Tax Review 28(4):352-390.

Love it or hate it, game theory is a big part of international relations. These last two articles are good examples of legal scholars using it in their own work to examine the relationship between developed and developing countries in the international tax regime. This paper analyses how the structural characteristics of the international tax system shape incentives for developing countries to conclude and apply tax treaties.

Tsilly Dagan, 2000. The Tax Treaties Myth. New York University Journal of International Law and Politics 32:939-1175

This article has a kind of totemic status within the critical legal literature on tax treaties, and it’s the starting point for much of my own work. It all comes down to a bit of game theory that would not be out of place in an international relations article, which questions the prevailing logic behind tax treaties. While Baistrocchi, above, focuses on the system level, this paper concentrates on the bilateral relationship a developed and developing country.

Books and journal special issues

  • Revenue Mobilization in the Developing World: Changes, Challenges and Chances. 2016. Review of International Political Economy, 23(2).
  • Peter Dietsch, and Thomas Rixen (eds), 2016. Global Tax Governance : What is wrong with it and how to fix it. Colchester: ECPR Press.
  • Tasha Fairfield, 2015. Private wealth and public revenue in Latin America : business power and tax politics. New York: Cambridge University Press.
  • Jeremy Leaman and Attiya Waris, 2013. Tax Justice and the Political Economy of Global Capitalism, 1945 to the Present. New York: Berghahn
  • Ronen Palan, Richard Murphy and Christian Chavagneux, 2013. Tax havens: How globalization really works. Cornell University Press.
  • Richard Eccleston, 2012. The Dynamics of Global Economic Governance: The OECD, the Financial Crisis and the Politics of International Tax Cooperation. Cheltenham: Edward Elgar.
  • Thomas Rixen, 2008. The political economy of international tax governance. New York: Palgrave Macmillan.
  • Reuven Avi-Yonah, 2007. International Tax as International Law. New York: Cambridge University Press.
  • Jason Sharman, 2006. Havens in a Storm: The Global Struggle for Tax Regulation. Ithaca: Cornell University Press.
  • Ronen Palan, 2003. The offshore world : sovereign markets, virtual places, and nomad millionaires. Ithaca: Cornell University Press.
  • Sol Picciotto, 1992. International business taxation : a study in the internationalization of business regulation. London: Weidenfeld & Nicolson.

Visualising Uganda’s (and others’) tax treaties

Interesting news from Uganda, where the government announced in its latest budget that it has finished formulating its new tax treaty policy, and will be renegotiating treaties that don’t comply. Seatini and ActionAid Uganda will no doubt chalk this up as a success! The news report linked to above also states that the the government plans to amend the awkwardly-worded anti-treaty-shopping clause in its Income Tax Act, although there are clearly still doubts about its application. According to a report in Tax Notes International, there’s an ongoing mutual agreement procedure between the Netherlands and Uganda to try to settle the ongoing Zain capital gains case, which turns on the applicability of that clause. 105_screen_shot_2016_04_29_at_6_11_10_am

So this is good timing for my working paper with Jalia Kangave, based on a submission we made to the Ugandan government’s review, to have been published by the International Centre for Tax and Development.

Here’s a link to that paper on Researchgate

When writing that paper, I thought that Uganda had a pretty good record of tax treaty negotiations, but some new visualisations of the ActionAid Tax Treaties Dataset suggest otherwise. For these I am indebted to Zack Korman, and to tax twitter for introducing me to him. Below are some maps Zach has made using the ‘source index’ I developed for the dataset (read more about that here). Red means a residence-based treaty that gives fewer taxing rights to the developing country, while green means a source-based treaty that gives it more taxing rights.

This slideshow requires JavaScript.

Links to high-res versions of individual images: Uganda map, Uganda bar chart, Vietnam, Mauritius, UK, Nordics

Uganda’s treaties are pretty red, meaning that most of its treaties restrict its taxing rights much more than average. Looking at the breakdown of the index shows that Uganda has some above-average withholding tax provisions, but its treaties are quite a lot worse than average in other areas. The slide show also gives some other countries for comparison. Vietnam’s treaties are mostly green, while Asian countries have got better deals from Mauritius (an offshore financial centre, not a developing country, in this context) than African ones. The UK’s treaties are pretty red, while the Nordics are very interesting: diverse in content, but consistent among themselves, giving good deals to Kenya and Sri Lanka, and worse ones to Tanzania and Bangladesh. This suggests that more source-based treaties with Nordic countries have been up for grabs for tough-negotiating developing countries.

Below I’ve posted some of Zach’s animated maps, on which it’s easier (and interesting) to follow the developments at earlier stages. There’s lots to comment on, but mostly I just keep watching them. The technical service fees map, at the bottom, is especially interesting, as it shows how countries have changed attitudes over time: watch how Pakistan suddenly changes position in the mid 1980s, for example.

World2

Above: All treaties in the dataset (red=residence-based, green=source-based)


Asia

Above: Asia (red=residence-based, green=source-based)


Africa2

Above: Africa (red=residence-based, green=source-based)


Vietnam2

Above: Vietnam (red=residence-based, green=source-based)


UK2

Above: UK (red=residence-based, green=source-based)


Nordic2

Above: Nordic countries (red=residence-based, green=source-based)


Netherlands2

Above: Netherlands (red=residence-based, green=source-based)


Slow WHT

Above: Management, technical service and consultancy fees WHT (green=included, red=excluded)

 

The Panama papers and the OECD: re-reading Havens in a Storm

Last week I re-read Jason Sharman’s classic Havens in a Storm, described by Tax Analysts’ Martin Sullivan as “one of the best books out there for tax experts trying to make sense of big countries’ policies toward tax havens” (Sullivan’s review includes a length summary of the book). I was looking for a hook for this blog and, well, it was provided by Jürgen Mossack and Ramón Fonseca.

The OECD has published a curious Q&A on the Panama papers leak, according to which the problem is “Panama’s consistent failure to fully adhere to and comply with international standards”, which it contrasts with “almost all international financial centres including Bermuda, the Cayman Islands, Hong Kong, Jersey, Singapore, and Switzerland.” But the Panama papers story isn’t just about Panama, it’s about the other financial centres that were used by Mossack Fonseca (see the chart below), most of which are rated as “largely compliant” by the Global Forum, the OECD satellite body that peer reviews information exchange compliance.

panama

Arguably the OECD have a point: the Mossack papers show how the world was before the G20 got involved and these jurisdictions reformed, in which case there’s been a lot of unnecessary hot air on British TV news over the last few days. There is certainly some evidence on the ICIJ’s data page to support this view:

Mossack Fonseca’s clients have been rapidly deactivating companies since 2009, records show. The number of incorporations of offshore entities has been in decline for the past four years.

But the main groundswell of opinion, as anticipated by Rasmus Christensen (Fair Skat), is that it’s time to use some serious economic and (in the UK’s case) legal power to overturn haven secrecy. That’s Global Witness’s position. France has wasted no time in restoring Panama to its tax haven blacklist. According to Richard Brooks, with his typically powerful prose:

To tackle the cancer of corruption at the heart of the global financial system, tax havens need not just to reform but to end. Companies, trusts and other structures constituted in this shadow world must be refused access to the real one, so they can no longer steal money and wash it back in. No bank accounts, no property ownership, no access to legal systems.

Turn the clock to 1998…

Havens in a Storm gives us some important context about why we are where we are. The OECD’s Harmful Tax Competition project has come to be seen as the defining international political tax project of a generation of global tax actors – both OECD bureaucrats and governments – in the way that BEPS is for the current generation.  The initial 1998 report [pdf] is still a reference point, primarily for its classic definition of ‘tax haven’, and the list of ‘uncooperative tax havens’ published in 2000 has not ceased to be cited, even though the last jurisdictions were removed from it in a 2009 update.

The four characteristics of the OECD’s 1998 tax haven definition
1. No or only nominal taxes
2. Lack of effective exchange of information
3. Lack of transparency (i.e., bank secrecy)
4. No requirement that activities booked there for tax have economic substance

Yet the 1998 and 2000 reports are also anachronisms. They raised the spectre of sanctions against countries meeting the tax haven definition, but within a few years, the project had been dramatically scaled back and watered down. The initial threat of specific sanctions against jurisdictions that did not commit to comply by 31st July 2001 became a partnership approach accompanied by what Sullivan refers to as “a series of toothless pronouncements, a mixture of cheerleading and scorekeeping.” Furthermore, the OECD’s ambitious original aim of dealing with harmful competition for mobile capital was abandoned for a focus exclusively on the exchange of tax information on request.

According to Sharman, these failures came about because the OECD lost a battle of ideas and language, not an economic (or, for that matter, military) one. Central to this analysis is that “the technocratic identity of the OECD as an international organisation comprised of ‘apolitical’ experts” resulted in a battle waged in a rhetorical and normative space, rather than a political one dominated by the calculus of economic power. “The OECD made the struggle with tax havens a rhetorical contest, that is, one centred on the public use of language to achieve political ends.” The OECD is able to do this not because of the economic dominance of its members, but because of the secretariat’s use of “expert authority” to create influential regulative norms. The power of ‘blacklisting’ tax havens lies not in the economic might behind the implied threat of sanctions, but in the very act of labelling, with its reputational consequences (“the bark is the bite”).

Opponents forced the OECD to abandon key planks of the project by turning its rhetorical weapons against it. First, they portrayed the idea of sanctions as a contravention of the principle of fiscal sovereignty, suggesting that by its implied advocacy of sanctions, the OECD secretariat was breaching norms of reasonable conduct. Second, they turned the term ‘harmful tax competition’ back on the OECD, forcing it to defend its pro-tax competition stance and eventually to replace the term with ‘harmful tax practices’. Third, they alleged hypocrisy among OECD countries, pointing to Luxembourg and Switzerland’s (and later Belgium and Austria’s) refusal to be bound by the project’s outcomes. In the world of rhetorical power, such ‘rhetorical entrapment’ is a powerful tool..

If the project had been primarily a manifestation of raw state power, these rhetorical skirmishes would have mattered little to the eventual outcome. Yet Sharman makes a powerful case that they were its main determinants. One important example is that he attributes the decisive intervention of the Bush administration not to its being ’captured’ by multinational businesses with material interests in the project being scaled back, but to the ideologically-driven machinations of lobbyists from the Center for Freedom and Prosperity.

So what does it mean that, in 2016, language continues to be the OECD’s main weapon? As its Q&A on the Panama papers makes clear:

As part of its ongoing fight against opacity in the financial sector, the OECD will continue monitoring Panama’s commitment to and application of international standards, and continue reporting to the international community on the issue.

On one hand, the OECD’s normative claims are more powerful because of its claim to be the custodian of ‘international standards’, a claim that probably has more weight as a result of the increasing involvement of some non-OECD countries in its various tax projects. On the other hand, the peer review approach seems to implicitly concede a conservative notion of procedural fairness (reasonable behaviour, again) towards secrecy jurisdictions.

And the allegations of hypocrisy among its members don’t help its authority: the US’ ambivalence [pdf] towards sharing tax information automatically on a reciprocal basis is the standout example; there is talk about the use of US states as tax havens by Mossack Fonseca; the list of non-compliant jurisdictions that marked the G20’s entry into tax information exchange in 2009 gave Hong Kong and Macao special treatment.   This is perhaps also one sense in which the UK’s actions towards its overseas territories could have some bearing on how Panama behaves.

…now turn the clock forward to 2013

To finish, the parallels between the Harmful Tax Competition project and the Base Erosion and Profit-Shifting (BEPS) project on multinational corporate taxation are worth pointing out. Consider: an initial ground-breaking report from the OECD secretariat that has become an intellectual reference point, a whittling away of that initial ambition in intergovernmental negotiations, and an inevitable feeling after the fact that the policy reforms agreed won’t quite fix the problem so eloquently framed by the OECD in the first place. It would be too soon, of course, to judge how successful BEPS has been in comparison to its predecessor.

But it’s more interesting, I think, to look at the rhetorical battle. In inventing a new term, ‘Base Erosion and Profit Shifting’, the OECD succeeded in owning the construction of the problem just as it did by defining ‘tax haven’. ‘BEPS’ refers simultaneously to a set of corporate practices that, because they are brought under this umbrella, are hard to define, but it also refers to the OECD’s own project to tackle them. In using the term, critics and supporters alike endorse the OECD’s intellectual leadership. The rapid and widespread adoption of the term illustrates that in 2013, just as in 1998, the OECD knew how to operate in a rhetorical battlefield.

The hypocrisy concern applies here too: for example, several OECD and EU members are in trouble for providing selective tax advantages to multinationals. It’s quite noticeable that, from the start, the OECD secretariat has tried to neutralise this problem by tackling it head on. For example, its tax chief, Pascal Saint-Amans, told the Financial Times in 2012:

The aggressive tax planning of the last 20 years was achieved with the complicity of governments themselves to cope with tax competition

An interesting research question is whether Sharman’s analysis of why the Harmful Tax Competition project struggled can still explain developments in its successor, the Global Forum, or indeed the outcomes of the BEPS project. Do OECD tax projects always stand and fall on the secretariat’s skill at owning the rhetorical space, or do we need to acknowledge governments’ material interests and incentives to fully explain outcomes? (In their commentary on the Panama papers, Len Seabrooke and Duncan Wigan, political scientists who believe in the causal role of ideas, seem to emphasise the latter, how “big, powerful states…themselves may benefit from sheltering other countries’ hot money.”) Answering that question might help us resolve a second, prescriptive one: can the problem of offshore tax avoidance and evasion ever be fully addressed on the technical, normative and rhetorical terrain occupied by the OECD, or does it require an institution with a more political modus operandi? This is certainly an interesting time to be studying the politics of international tax!