As the new academic year gets underway, it’s time for me to promote a review piece that Rasmus Christensen and I published over the summer. We provide a framing of current developments in global tax governance from a political economy perspective. The piece is written at introductory level and fills the gap for an overview reading in university courses. It is framed as a review of four interdisciplinary books, all of which we recommend. Oh and it’s open access, thanks to EU funding!
Here’s the abstract:
The financial crisis of 2007–2009 is now broadly recognised as a once-in-a-generation inflection point in the history of global economic governance. It has also prompted a reconsideration of established paradigms in international political economy (IPE) scholarship. Developments in global tax governance open a window onto these ongoing changes, and in this essay we discuss four recent volumes on the topic drawn from IPE and beyond, arguing against an emphasis on institutional stability and analyses that consider taxation in isolation. In contrast, we identify unprecedented changes in tax cooperation that reflect a significant contemporary reconfiguration of the politics of global economic governance writ large. To develop these arguments, we discuss the links between global tax governance and four fundamental changes underway in IPE: the return of the state through more activist policies; the global power shift towards large emerging markets; the politics of austerity and populism; and the digitalisation of the economy.
This table sets out the trends we identify, and our explanation of how they are affecting tax politics.
We are living through a period of instability and change in the international tax regime, perhaps unprecedented in its depth and duration. It’s driven by economic and political changes, such as austerity politics, the digitisation of the economy, and the rise of China and other emerging powers. To understand the impact of these pressures on the institutions of tax cooperation, we need to know how the politics at international level works, and we have two complementary lenses to do so. One focuses on conflicts and alliances between states with different preferences: developed versus developing, offshore versus onshore, US versus Europe, and so on. The other takes a sociological approach, studying the transnational policy community that makes international tax rules and its interactions with other actors such as politicians and campaigners. To explain why the OECD, G20, EU or UN have reached a particular conclusion, we probably need to use both of these lenses.
But how do states arrive at their national positions? Those positions set the parameters for subsequent transnational discussions, but they also determine if and how states will implement international agreements. For example, with whom will they negotiate bilateral tax treaties, and on what terms? The same sociological lens is important here, because national tax policy is made by a community of people, many of whom are also involved in tax standard-setting at the OECD and elsewhere. At both national and international levels, international tax has historically been an obscure topic, the preserve of this small community of experts. Every so often – as in recent years – the community faces a conflict with others who aren’t steeped in the principles underlying the tax system, nor its technical details. Such conflicts can play out at the national level, as well as in the transnational sphere.
Often it was the UK, rather than its developing country negotiating partner, that initiated and drove forward negotiations. The UK’s aim was to reduce the tax paid by British businesses abroad, making them more competitive in comparison to firms from other countries. So we can’t explain the expansion of the international tax regime into developing countries solely through a focus on developing countries’ actions.
Tax experts, from the Inland Revenue and the business community, dominated policy formulation. They saw tax treaties as a means to lock developing countries into ‘acceptable’ OECD tax standards, a long game designed to protect British businesses from anything unconventional. Meanwhile, their non-expert counterparts in other government departments and businesses had different priorities derived from a focus on short-term tax gains. They were mostly unable to influence policy, however, indicating that business power over tax policy depends a lot on expertise.
First, Alan Lord, Deputy Chairman of the Board of Inland Revenue, sets out the tax expert view in 1976:
Here is an extract from the minutes of a typical meeting between the Inland Revenue and tax professionals from British businesses. As can be seen, businesses are being consulted not just about which countries to negotiate with, but also about the sticking points in individual negotiations – in this case Malaysia.
Below is one of my favourite exchanges, from a few months later. In contrast to the open attitude to the CBI tax committee, the same Inland Revenue civil servant (Ann McNicol, now Ann Smallwood) refuses to share even a list of current negotiations with other departments.
Smallwood’s letter provokes a round of very angry memos within those departments, of which this is a good example.
A particular bone of contention between the two groups (Inland Revenue and the CBI tax committee on the one hand, Foreign Office, Departments of Trade and Industry, and their business interlocutors on the other) was the stalemate in negotiations with Brazil. In the paper I show how the tax experts in business and the Inland Revenue did not want to set what they saw as a bad precedent by caving in to Brazilian demands to sign a treaty that contravened OECD standards. They came under strong pressure to sign a treaty “at any price” from business lobbyists who thought UK firms were losing out to German and Japanese competitors that did benefit from treaties with Brazil. The consequence, as Smallwood put it in 1975, was that business “spoke with two voices”.
Ultimately, as the absence of a UK-Brazil treaty today underlines, it was the tax experts who won the day. This illustrates that, while businesses have certainly helped shape the design of the international tax regime, the corporate lobby is far from monolithic in its preferences and its ability to influence. A lobbying position stands more chance of success if it is coherent with the underlying design principles of the international tax regime, and articulated by members of the community of tax professionals at its heart. Whether this conclusion still holds in an era of politicisation and rapid change perhaps merits some further investigation…
Yesterday a report I wrote for the European United Left/Nordic Green Left (GUE/NGL) group in the European Parliament was published. It was used as input for a hearing of the Parliament’s TAX3 committee, at which Hannah Tranberg from ActionAid, Eric Mensah from the Ghana Revenue Authority and UN Tax Committee, and Sandra Gallina of DG Trade spoke. (This link is to a video of the hearing, which begins with Margaret Hodge and Tove Ryding discussing Brexit, then moves on to the tax treaties discussion at around 16:30).
When the GUE/NGL approached me about working with them on this report, I jumped at the chance. It uses the Tax Treaties Dataset, a project funded by ActionAid and launched in 2016. Earlier this year I had used much of the same analysis in a European Commission workshop for treaty negotiators, and the comparative element certainly caught some of their attention. Just last week I used the dataset at a workshop of African treaty negotiators organised by the Organisation Internationale de la Francophonie, at which it helped them to begin the process of analysing their treaty networks and developing renegotiation strategies.
But the EU is partiuclarly important. Most of the world’s tax treaties – and 40% of those with developing countries – have an EU member as signatory. Combined with its commitment to policy coherence for development, this makes the EU uniquely placed to ‘lead by example’. Indeed, the European Parliament has already called for “Member States to properly ensure the fair treatment of developing countries when negotiating tax treaties, taking into account their particular situation and ensuring a fair distribution of taxation rights between source and residence.”
The report has two main messages, from my perspective. The first is that, while the recent attention paid to treaty shopping is most welcome, the basic balance between ‘source’ taxing rights – which allow countries to tax inward investment from the treaty partner – and ‘residence’ taxation in tax treaties with developing countries is also a problem.
The dataset, which includes over 500 tax treaties signed by developing countries, includes a measure how much of a developing country’s source taxing rights each treaty leaves intact. It turns out that EU treaties remove more source taxing rights than average, even when compared with other OECD members.
What’s more, the difference is growing.
Source/residence has been the elephant in the room in the debate over international tax rules in recent years, as we saw when it was dropped from the BEPS process at an early stage, only to re-emerge in the context of digital taxation. Countries conducting ‘spillover analysis’ or otherwise analysing their treaty networks need to take this into account.
The second message is that there’s a great deal of variety within and between countries’ treaty networks. There’s loads of variation within each EU Member’s treaties, and between the average values for EU members. The same is true when drilling down to individual provisions. So there is plenty of potential to ‘level up’ based on precedent
The report echoes the European Parliament in arguing that, if the EU wants to be a leader on policy coherence for development, Member States need to level up the source taxing rights across the different provisions of their treaties with developing countries. Simply saying that on balance their treaties are no worse than anyone else’s – a point the report questions when looking at the EU as a whole – is not enough. The four summary recommendations are for Member States to:
Conduct spillover analyses incorporating reviews of their double taxation treaties, based on the principle of policy coherence for development and taking into account guidance from the European Commission and other bodies.
Undertake a rolling plan of renegotiations with a focus on progressively increasing the source taxation rights permitted by EU members’ treaties.
Reconsider their opposition to a stronger UN tax committee, as the Parliament has previously requested.
Formulate and publish an EU Model Tax Convention for Development Policy Coherence, setting out source-based provisions that EU member states are willing to offer to developing countries as a starting point for negotiations, not in return for sacrifices on their part.
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
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.
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.
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.
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.
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.
Above: All treaties in the dataset (red=residence-based, green=source-based)
Above: Asia (red=residence-based, green=source-based)
Above: Africa (red=residence-based, green=source-based)