“A gathering of international chatterers for the purpose of chattering.” The birth of the OECD’s Committee on Fiscal Affairs.

In my previous post I explored the United Nations’ brief post-war flirtation with a Fiscal Commission, which came stuttering to a halt in 1951 due, it seemed, to the lack of a compelling purpose that might have motivated states to fight to retain it. The United Kingdom had supported a Russian proposal to wind up the UN’s tax work, a position that seems consistent with its subsequent opposition to the creation of what is now the UN Committee of Experts on International Cooperation in Tax Matters two decades later. It’s perhaps more surprising that, as we will see, the British were initially opposed to the creation of a Fiscal Committee at the Organisation for European Economic Cooperation (OEEC), the predecessor of the OECD, as well. Today the UK is a strong supporter of the OECD’s position as the dominant site of international tax cooperation, but it did not start out that way.

We begin, as the League of Nations’ tax work did, with a resolution of the Executive Committee of the International Chambers of Commerce resolution, in 1954. The resolution identified double taxation as a “serious obstacle” to trade and investment in Europe, and for OEEC members to take steps to relieve it. It asked for unilateral measures, bilateral treaties and, ideally, a multilateral convention. The OEEC’s secretary general was sceptical that the organisation could add any value here, especially given that the UN had not at this point formally dissolved its Fiscal Commission.

He also set out another surprising objection to the ICC’s proposal. It is often asserted that the OEEC picked up the League of Nations’ London draft model bilateral tax treaty, which favoured the interests of capital exporters, rather than the capital importer-favouring Mexico draft. While it is probably true that the eventual OECD model is closer to the London than the Mexico draft, the ICC’s proposal that the OEEC use the London draft was actually a problem for the OEEC, because not all of its member and associate countries had endorsed it. “If an approach of this kind were to be adopted by the OEEC, therefore,” concluded the Secretary General, “it would be necessary for the Organisation to set up an expert body charged with the duty of attempting to produce a more acceptable draft.”

Extract from OEEC Secretary General's memo, 12 November 1954

Soon after this, Switzerland and the Netherlands began to circulate proposals for a fiscal commission. In a curious echo of the current debate around digital taxation, these proposals all expressly mentioned turnover taxes, increasingly imposed by states on the rendering of services, as the main new problem motivating their concerns.

The Dutch note circulated in 1955 noted that “the number and extent of problems relating to taxation has been steadily increasing, not only in the national field but also and especially, in connection with the gradual intensification of international economic relations, in the international sphere.” It advocated work under the umbrella of the OEEC because it was consistent with the organisation’s mandate, and because of the need to discuss in “a smaller circle than the United Nations.” In December 1955 the Netherlands and Switzerland were joined by Germany, publishing a joint memorandum proposing the creation of a expert committee of “specially qualified high-ranking Government representatives,” and in January 1956 an ad hoc committee was created to conduct a study into the matter. The ad hoc committee immediately recommended the creation of a full committee, citing “ample evidence that there are cases of double taxation which constitute obstacles to international trade and investment, and that action to remove these obstacles should be possible within a group of like-minded nations such as the members and associated countries of the OEEC.”

Extract from Dutch memo to the OEEC, 11 July 1955

In March 1956, the Fiscal Committee was created, against the judgement of the British and Scandinavians. Britain’s attitude throughout had been sceptical, but acquiescent. The British representative, Sir Hugh Ellis-Rees, “criticised the memorandum for being vague and for not revealing what the usefulness of the study would be, nor what were its precise objectives.” On the other hand, he told the Inland Revenue, “I think that in our position in the organisation it would be tactically unwise to try to suppress at this stage a movement which has some support however ill-founded it may turn out to be.” Two handwritten notes in the Inland Revenue files are worth quoting at length here. One is from Alan Lord, who eventually sat on the Committee for the UK.

We regard the whole idea as, if I may borrow the FO [Foreign Office] words, “futile and unrewarding” or, in cruder terms, as a gathering of international chatterers for the purpose of chattering.

We must, in the interests of international unity, agree to attend a meeting, which is [illegible] but if anything on this should turn up with Mr Daymond and [illegible] you will no doubt determine your answer by reference to our Policy of being Against It.

The author of the second note is unidentified, but it shows how the UK viewed the Swiss and Dutch proposals, as well as – in the third paragraph – a pessimism that seems rather anachronistic when compared to the kind of work conducted by the OECD today.

1. Insofar as I can discover from this rather Crazy Going file, the pace is being made by: (i) the Dutch, who seem to be resentful about the liquidation of the Fiscal Commission of UN (which we ourselves regard as a Good Thing) and so want to set up a new Committee or Commission to discuss, inter alia, fields, spheres and bases, & (ii) the Swiss, who seem to be engaged in a private brawl with the French.[…]

2. If this be so, the answer to (i) is that we regard this exercise, to use the FO phrase, as “futile and unrewarding” and (ii) that this is a private fight in which we do not wish to join.

3. There seems to have been later on a ganging up of Germans, Swiss and Dutch to give a regrettable academic flavour to the whole thing and to discuss domicile, “classification of income” and “localisation of income”, whatever these terms may mean. Presumably some attempt to reach, for example, agreement on whether interest should be charged by reference to origin or residence, an exercise which long experience has shown to be pointless.

The British concerns were, I think, unfounded, as the new committee raced through a list of five thorny areas within a year, finding consensus on topics such as permanent establishment and the taxation of shipping and airlines, which are recognisable today as core components of the OECD model convention.

The most recent document in this particular file is an interim report from the Fiscal Committee in 1957. It shows how within 18 months the committee was already consolidating its ways of working (Working Parties on each specific issue, just as the OECD has today) and forming a clear raison d’être. In the excerpts below, I’ve picked out three things that struck me from the committee’s interim report. First, how forcefully it began to make the case for tax cooperation, as European economies became more integrated. Second, the recognition that other countries might be incentivised to follow Europe’s lead, because of its “placement in the world economy.” It is interesting to reflect on how much this echoes the EU’s tax cooperation efforts today, perhaps more so than the OECD, for which the economic power of its members complicates its authority.

Extract from interim report of the OEEC Fiscal Committee, 3 July 1957

Finally, the committee members had already begun to “harmonise their views”, perhaps the first conscious expression of what would become a powerful driver of successful tax cooperation: the formation of a consensus about how to do tax among an international community of practitioners.

chattering4

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“Futile and unrewarding”: the wilderness years of the international tax regime

Almost all histories of the international tax regime begin with the League of Nations: from the model conventions issued by its Fiscal Committee in 1928, to the Mexico and London draft model conventions.  The latter was agreed by a group of primarily European countries in 1946 at Somerset House, just across the road from where I am now. The League never reconciled the differences between the two conventions, and so the modern history of the regime is usually dated from 1963, when the OECD’s Fiscal Committee first agreed an OECD model bilateral tax convention. For the last 50 years, the OECD model has been the foundational text of the international tax regime, even forming the template for its United Nations equivalent.

While I knew that the United Nations initially tried and failed to pick up the League’s work, the interregnum between 1946 and 1963 is often raced over quite quickly in tax history stories: Sol Picciotto devotes five pages to it in his magisterial International Business Taxation [pdf]. So I decided to sit down in the British National Archives to see what I could find out about this intervening period. The transition from the League to the OECD is important because it is often stated that the OECD picked up and ran with the London Draft, which suited the interests of its members. The Mexico draft, largely agreed among developing countries, fell to one side, according to this account, paving the way for an international tax regime that has a bias in favour of capital exporting states. While I will shed a bit of (sceptical) light on this in what follows, I am mainly going to tell the story through some of the more colourful excerpts from the archives. Today we will look at the UN Fiscal Commission, and I’ll follow this up next week with the OEEC (later OECD) Fiscal Committee to which the baton passed.

Part 1: The “Imperialist” powers’ efforts fail at the United Nations

The sense one gets from both the official reports of UN Fiscal Committee meetings between 1947 and 1951, and the British participants’ own readouts, is that political divisions between groups of states were less problematic than the lack of a clear and compelling mandate to achieve anything in particular. In the committee’s first session, it was the participant from the United States who drafted the proposals for further work that made their way into the final draft, even though he also initiated a protracted (and familiar) discussion about being realistic given limited secretariat resources. Indeed, at the second session, “the secretariat work had been unevenly done and was on the whole badly presented”, said the British participant, WW Morton, who regarded the secretariat’s approach as “over-academic”. (There is a theme of hostility towards things being ‘academic’ in these Inland Revenue files, which I am not taking personally).

By this point, cold war divisions had already emerged, although the sense from the British accounts is that they were not insurmountable, since the Soviet group was content on occasions to make its statements and then abstain from votes, or else be outvoted. Still, here is a flavour of the kind of thing, taken from Morton’s readout. He describes the member from the USSR stating that international work on double taxation put “pressure on the under-developed countries to the advantage of highly developed countries” since it primarily reduced the taxation of their investors.

Extract from British participant's report of the UN Fiscal Committee's second session

Of the second session, Morton observed that “the session was not very productive” but was keen to support anything that might allow the UK to conclude more tax treaties with developing countries. Everyone could agree to support information gathering and dissemination, and the translation of the secretariat’s compendium of international tax agreements into Spanish was something the British supported enthusiastically, keen as they were to obtain tax treaties with Latin American countries (more on that here).

Extract from British participant's report of the UN Fiscal Committee's second session

 

It is in the Commission’s third session that we can first see a divide between developed and developing countries. The International Civil Aviation Organisation (ICAO) had brought a proposal for reciprocal exemption of airlines, by which companies operating flights would be exempt from taxation in the countries to which they fly, paying it only in the country where they were based. India, Pakistan, Venezuela and Cuba raised objections, pointing out that if only one country signing the treaty had an airline, “reciprocal exemption is quite unfair.” The ICAO proposal was, however, consistent with the treaty policy of the UK, and other countries with their own airlines. The ICAO proposal fell after a vote in which the developing countries were joined by the Soviet group, but Morton attributed this to a “procedural tangle” and poor chairing, rather than an insurmountable division. “As will be observed, the work of the Session was only modestly productive. Nevertheless, it is probably worth holding.”

When the Commission’s work reached the ECOSOC, however, it appears that sentiment had changed. Morosov, the Russian participant (also its representative on the Commission itself) expressed his familiar objection that the Commission’s work on double taxation “was in reality intended to promote economic conditions favourable to the activities of British and American monopolies,” concluding that the Commission “was engaged in futile operations, and that it was therefore useless to keep it in existence.” According to his Polish counterpart, “the majority of the Commission had, by certain of the recommendations adopted by that body, tried to exploit the authority of the Economic and Social Council to relieve investors from the highly-industrialised capitalist countries of the taxation which those less highly developed countries were entitled to enforce.”

Extract from ECOSOC discussions of the report of the third session of the UN fiscal commission

 

Morton, the British representative on the Commission, had previously reported an informal conversation with Morosov from which he concluded that this language was more of a formality, and that Russian objections were far from fatal to the Commission. It was thus the British who really plunged the knife in to the Commission, responding that the UK was “in agreement with the Soviet Union and Polish delegations as to the desirability of winding up the Commission’s activities, although for other reasons than those advanced by them.” The UK wanted to see preparatory work for ECOSOC discussions carried out by “small groups of experts with the assistance of the Secretariat,” rather than by a permanent functional commission serviced by a dedicated secretariat. This would appear to have been the death knell for the UN Fiscal Commission, which was wound up in 1954.

So in this quick look through the archives, we’ve seen that the demise of the UN Fiscal Committee was not only a product of inter-country rivalry (though that produced some entertaining diplomatic fireworks). Perhaps more significantly, it was a matter of failure to gather institutional momentum, in part due to the lack of effective secretariat support, and lukewarm support from across the board. The UK and US were never strongly in favour of a permanent international committee examining taxation issues. As we will see in part 2 next week, this was not merely scepticism of the UN: the British also opposed the creation of a “gathering of international chatterers” at the OEEC, which eventually became the OECD Committee on Fiscal Affairs…

 

The Colombia UK tax treaty: 80 years in the making

Today at 2.30pm, the UK parliament’s Third Delegated Legislation Committee will debate tax treaties with Lesotho and Colombia. It will be interesting to see how much debate really takes place, a matter on which I’ve commented before once or twice.

The hearing gives me a chance to plug my article in the British Tax Review last year [pdf], which traced the UK’s attempts to obtain a tax treaty with Colombia over 80 years. Its overtures were frequently rejected, at first because Colombia was not interested in tax treaties, then because it was bound by the terms of the Andean pact, and finally because it could not agree on terms with the UK, especially over technical service fees, an area where the UK position has changed. Since the article was published I had the chance to speak with a Colombian tax official, who told me that Colombia’s change of heart on technical service fees is a change of view about tax policy, rather than a concession forced by OECD membership, as I speculated in the article. Of course, the two developments might not be totally independent.

Here is how the article concludes:

The demands of OECD membership, combined with the unusually liberal use of MFN clauses during an era of less-than-strategic negotiation, seem to have backed a country once insistent on a “red line” over technical service fees, and before that sceptical of accepting the limitations on its taxing rights that come with a tax treaty, into a corner. Having been constrained in its negotiating position by the pro-source taxation stance of the Andean community, Colombia now finds itself pulled in the other direction by the OECD. Is this further proof that the world is moving inexorably towards an OECD-type tax system? The gradual but steady expansion of the OECD, given a fillip most recently by the announcement that Brazil would begin accession talks, might lead us to such a conclusion. In contrast, however, the continued expansion in the use of the technical service fees Article by developing countries, together with its imminent introduction into the UN Model Treaty, point towards a growing divide between states on this topic.

The long history of negotiations between the UK and Colombia perhaps demonstrates more than anything the extent to which the tax treatment of international transactions today is a product of historically specific events. Each side’s positions changed radically over time, from a refusal to accept each other’s terms to a willingness to concede them outright. The UK’s constant enthusiasm for a treaty with Colombia stands in contrast with the latter’s oscillation between hot and cold. If Colombia turns cold again, however, it will be left with a fossilised relic of its negotiating position in 2016. Given the rarity with which tax treaties are terminated or their terms substantially renegotiated, treaty networks are collections of these fossils. Hence Colombia is stuck with its MFN [most favoured nation] clauses, regrettable outcomes of its negotiating spree in the 2000s. The biggest irony, however, is reserved for the UK. Despite its apparent willingness in the 2000s to forgo a treaty with Colombia over withholding taxes on technical service fees, Britain retains, as a legacy of its negotiations from 1973 until the turn of the century, the largest number of treaties of any OECD Member containing just such a clause

Who will chair the new UN tax committee?

As I write this post, the new UN tax committee is in closed session, choosing its new chair. This first act of the committee feels like it will have an important tone-setting impact. There is much speculation about who is the preferred candidate among members from OECD countries, and an assumption that those members will have arrived with a pre-agreed nominee. In contrast, while one name in particular among the members from developing countries is being mentioned in informal chat, there does not seem to be a consensus, a consequence perhaps of politics and of the fact that these members do not know each other so well. This dynamic is especially important, because the composition of the committee has changed, with members from the OECD now significantly outnumbered for the first time.

The last committee was finely balanced, with 12 members from OECD states and 13 from outside the OECD. Having said that, four more were G20 members, meaning that 16 of the committee came from countries that had seats at the high table of international tax rulemaking, while only nine were outside that particular tent. Looking at it by country income group, 13 were from high income countries, despite the UN tax committee’s developing country remit.

Captureold

If we consider the members personally, eight of them were officers of an OECD tax committee, including the chair and vice-chair of Chair of OECD Working Party 1 on Tax Conventions and Related Questions, two bureau members of OECD Working Party No. 6 on the Taxation of Multinational Enterprises, and two bureau members of the OECD’s Committee on Fiscal Affairs itself. Many of these eight were among the most vocal and active members, chairing the UN tax committee itself and several of its subcommittees.

This time around, I can count only eight members from OECD countries, and a clear majority of members from developing countries. There’s a caveat, however, which is that, as the OECD has invited more countries to participate in its Committee on Fiscal Affairs, a further seven members come from countries that are CFA participants or associates. There are now only five committee members who are officers on OECD committees, including both Vice-chairs of WP1 and two CFA bureau members. It’s a measure of how things are changing that one of these is from Argentina, which is not yet an OECD member. All of this means that, largely as before, only 10 of the 25 committee members come from countries that do not have a seat in the OECD and G20’s main tax discussions. Many of those ten, of course, are members of the Inclusive Framework and other OECD forums.Capturenew

So there is still some truth to the idea that the UN tax committee is essentially a forum in which many of the same people discuss many of the same topics, but with a different mandate and to some extent a different balance of power. For example, some UN committee members from OECD countries had reputations for actively supporting positions that differed from the OECD consensus, but were favoured by developing countries, in UN deliberations.

How ‘equal’ the ‘equal footing’ granted by the OECD is in practice is a question often raised. But it is also worth noting that at the UN committee, not all members have equal influence. Much of this variation is due to the personal capacity in which members attend. As a result, outcomes are a product of, among other things, their experience in international negotiations, how much of a mandate they have from the country that nominated them to adopt contentious positions, the strength of their informal relationships, their fluency in English, and how effectively they caucus in blocs. There is often a trade-off, for example, between seniority and technical knowledge.

This feels like a critical moment for international tax governance. The BRICS (or at least China and India) are becoming increasingly confident in articulating an autonomous position that diverges from that of the OECD, and many other developing countries are becoming more confident and experienced in international tax policy. The OECD’s offer of limited but significant participation to developing countries might be seen as a threat to the UN. But with a growing rift between the US and Europe on digital taxation, as well as between the OECD and emerging markets, a committee without US and UK membership for the next four years will have a different centre of gravity, and may therefore be more likely to carve a different path. If these terms still mean anything, the UN committee is now much closer to ‘source’ countries and further from ‘residence’ countries.

Update: The committee elected two co-chairs: Eric Mensah from Ghana and Carmel Peters from New Zealand.

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’.

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