Double tax treaties: a poisoned chalice for developing countries?

It’s been an interesting couple of days here at Strathmore University Business School in Nairobi. I’m at a conference to launch the School’s new Tax Research Centre, which has brought together tax officials, tax practitioners and academics to address some critical issues for Kenya, including anti-avoidance, taxing multinationals and tax treaties. The quality of discussion is very high, and certainly banishes the notion that there is no technical expertise in developing countries.

I was asked to speak on the title above, and my presentation is below. There was a fascinating exchange when I put up the slide showing Kenya’s current treaties. Not one person, including the tax advisers in the room, thought Kenya should ratify the treaties it has signed with Mauritius and the UAE.And nobody was even aware that a treaty had been signed with Iran! Interestingly, in contrast to the academic literature, the participants here took it as self-evident that tax treaties have no impact on the levels of inward investment into a country. But now Kenyan companies are starting to expand abroad, some people did advocate treaties to encourage this outward investment.

Link to presentation on


  1. Interesting presentation. But slide 31, on transfer pricing…. Should tax system (corporation tax on profits) really be used to take account of externalised costs ‘like environmental damage and exploitation of low-skilled labour’ ??

    It seems to be pilling way too many objectives into a bit of the tax system whose job is to work out where to tax profits in order to raise government revenues (which is hard enough).

    Tax can be a tool for internalising the cost of negative environmental impacts but then that has to be a targeted fuel tax, or carbon tax etc .. surely, not a general profit tax – since different companies and sectors make the same profit with different levels of externality.

    As for exploiting low skill labour- are you suggesting the corporation tax system should be able to distinguish between companies that are employing low skill labour (creating jobs, building skills) and one that is exploiting low skill labour (abusing labour rights, running unsafe workplaces etc..). That is the job for the labour inspectors not the tax system.

    Overall the priority for countries with lots of low-skilled labour is to have more companies investing, employing and training them. Thats not an externalised cost, its an externalised benefit.

    1. I (and, as I understand it, the Chinese government) am not arguing that corporate income tax should be used to internalise these externalised costs. It’s not that a larger share of income tax would compensate for e.g. environmental damage.

      Rather, the argument is that profit distribution in the value chain under simulated market conditions (i.e. the arm’s length principle) is an imperfect measure of the value added by a particular country to an MNE’s global profits (which is how the tax base is allocated). This is because it is distorted by factors such as those mentioned in the presentation. Hence, the idea is to remove distortion.

      As for “the priority for countries with lots of low-skilled labour”, we’ll have to agree to disagree (which I do) as that’s off-topic for this blog…

  2. Hi Martin,

    Thanks for responding, and sorry for jumping on one bullet point of your presentation.

    I had understood China’s use of Location Specific Advantages as a methodological adjustment to the arms length principle, rather than a completely different approach…
    Anyway, here, in talking in terms of externalised costs & exploitation, it did seem like you were proposing something different – using CT as a tool for ‘taxing bads’, rather than a convenient way of raising revenues.Perhaps it is just the difficulty of reading off from the bullet point, but I do wonder if it is seen this way in the tax-and-development debates ? i.e. Is the reason there is so much focus on MNCs versus other areas of revenue collection that may be in a worse state because MNCs are seen as exploiting developing countries by definition.

    It may be off topic for this post, but the question of whether busineses investing, employing and training people is a benefit for development (or negative, irrelevant? – not sure what we are agreeing to differ on?) seems central as a starting point for thinking about priorities and policies.

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