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Tax treaties contribute to fuelling inequality in the world's poorest countries

24 February Feb 2016 1520 24 February 2016
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Inequality is one of the buzzwords of 2016, and tax treaties are contributing to global inequality. By using this little-known mechanism, richer countries and multinationals rob poor and developing countries of valuable tax revenue that could otherwise go towards funding healthcare and education, especially for women and children.

From Bernie Sanders, to the SDGs and the post-2015 development agenda, fighting inequality is high on the list of priorities in 2016. Inequalities in income and wealth cause a great number of problems: from economic instability, to health and social problems, and difficulty in adopting pro-environment strategies and behaviour.
This week, Action Aid have published their report on how tax treaties are contributing to fuelling inequality in the world's poorest countries, by depriving them of vital revenue that should be going towards the funding of public services like healthcare and education that would promote development.

In their latest report entitled "Mistreated: the tax treaties that are depriving the world's poorest of vital revenue", Action Aid commissioned original research on tax treaties, and how they are contributing to fuelling global inequality.

What is a tax treaty?

Tax treaties are defined as "agreements between countries that carve up tax rights". Practically speaking, this means that tax treaties decide how much, and even if, countries can tax multinational companies and other crossborder activity.

Bangladesh is losing approximately US$85 million every year from just one clause in its tax treaties that severely restricts its right to tax dividends. With an annual total health expenditure of approximately US$25 per capita, remedying this alone could pay for health services for 3.4 million people.

Action Aid - 2016 Report

In the overwhelming majority of cases, tax treaties override any national law. So, if a tax treaty rate is lower than the national rate, companies using the tax treaty route very often pay less tax than similar local companies. As a result, vital tax revenue is lost.
In cases such as that of Uganda, which signed a tax treaty with the Netherlands in 2004, Uganda lost the right to tax certain earnings paid to owners of Ugandan corporations, if the owners were resident in the Netherlands. A decade later, as much as half of Uganda’s foreign investment is owned from the Netherlands, at least on paper.

The Ugandan case is not an isolated one however. The report found that that "the United Kingdom and Italy are tied as the countries with the largest number of very restrictive treaties with lower income Asian and sub-Saharan African countries, followed by Germany. China, Kuwait and Mauritius."

Some statistics

-In 2011, developing countries lost €770 million as a result of treaties with the Netherlands

-According to IMF estimates, US tax treaties cost non-OECD countries around US$1.6 billion in 2010

Tax treaties are contributing to fuelling inequality in the world's poorest countries, by depriving them of vital revenue that should be going towards the funding of public services like healthcare and education

Action Aid - 2016 Report

-A 2014 study estimated that worldwide, average tax rates that global businesses face when repatriating income are reduced by 9% because of tax treaties

- British owned corporation Zambia Sugar generated profits of US$123 million in Zambia, though the company admitted to paying “virtually no corporate tax” in the country between 2008 and 2010


Tax treaties are voluntary, and they can be re-negotiated, or cancelled. "Frequently, developing countries commence negotiations for a tax treaty primarily because they feel pressured to do so by another country." according to Arianne Pickering, former Australian tax treaty negotiator.
Nigeria, Rwanda, South Africa, Zambia, Malawi and Mongolia have all recently either cancelled or renegotiated tax treaties. Rwanda especially successfully renegotiatied with Mauritius in 2013, whereby it re-established Rwanda’s rights to tax construction sites, business services, interest and royalty payments.

Some solutions proposed by Action Aid include governments reconsidering the treaties that restrict the tax rights of low and lower-middle income countries most. They also suggest subjecting treaty negotiation, ratification and impact assessments to much greater public scrutiny, and taking a pro-development approach to the negotiation of tax treaties, by adopting the UN model tax treaty.

Multinational corporations also need to be more transparent on tax treaty terms, and should stop pressuring governments to conclude tax treaties that are advantageous to the business but disadvantageous to the developing country.

To read the full Action Aid report, click here.

Photo credits: Getty Images

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