Skatteudvalget 2014-15 (1. samling)
SAU Alm.del Bilag 156
Offentligt
Trends in the conclusion of tax
treaties by developing countries
Martin Hearson
London School of Economics
(PhD candidate)
Fiscal Affairs Committee of The Danish Parliament, April 2015
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
3. Evidence on the effect of tax treaties
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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A political science perspective on tax
treaties
Tax treaties are political settlements which
settlements,
divide the fiscal gains from cross-border
investment between two countries.
They bind future governments into specific tax
policy decisions, including certain tax rates.
Legislative scrutiny of tax treaties is usually
either a formality or, especially in developing
countries, non-existent.
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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A political science perspective on tax
treaties
There are three sites of impact for this committee to
consider:
Constraining effect of
international treaty norms
Impact of
treaty on
Denmark
Impact of
treaty on
partner
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
State of play
Historical trends
Trends in treaty content
3. Evidence on the effect of tax treaties
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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State of play
Based on IBFD data
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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State of play
Number of tax treaties signed by income group
Low
Low
Lower-middle
Upper-middle
Upper
61
173
178
372
134
305
606
151
646
629
Lower-
middle
Upper-
middle
Upper
Based on IBFD data
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
1524576_0008.png
Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
State of play
Historical trends
Trends in treaty content
3. Evidence on the effect of tax treaties
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Historical trends
sub-
Treaties signed by sub-Saharan African countries
Based on IBFD data
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Historical trends
sub-
Treaty partners of sub-Saharan African countries
Number of treaties signed
Based on IBFD data
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Historical trends
Cumulative renegotiations
Selected recent cancellations (C)
and/or
and/or renegotiations (R):
Mongolia-Luxembourg 2012 (C)
Argentina-Spain 2012 (C,R)
Rwanda-Mauritius 2012 (C,R)
South Africa-Mauritius 2014 (R)
Malawi-Netherlands 2014 (C)
Zambia-UK 2014 (R)
Based on IBFD data
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
1524576_0012.png
Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
State of play
Historical trends
Trends in treaty content
3. Evidence on the effect of tax treaties
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Trends in treaty content
The two main models for tax treaty conclusion are:
The OECD model, originally intended for treaties between
developed countries.
The UN model, explicitly designed for treaties between
developed and developing countries.
Despite this, most clauses of most treaties between
developed and developing countries follow the OECD
model (IBFD, 2013).
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Trends in treaty content
Clauses favouring developing countries are becoming more
common on average
Preliminary results, funded by ActionAid
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Trends in treaty content
Declining withholding tax rates are balanced by more expansive
definitions of permanent establishment
Preliminary results, funded by ActionAid
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Trends in treaty content
It is becoming more common for developing countries to retain
the right to tax services
Danish treaties in this
dataset:
Services PE in 4 of 16.
Services WHT in 5 of
16.
The most recent two
treaties (Ghana and
Uganda) permit a
services WHT.
Preliminary results, funded by ActionAid
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Trends in treaty content
Implications:
The major part of treaties signed by developing
countries are with traditional capital exporters,
although there is a growing trend towards treaties with
emerging economies.
Much investment into developing countries is taxed
under treaties negotiated decades ago.
Treaty norms have changed significantly since then, in
some ways in developing countries’ favour.
Denmark went through a generous phase, but has
become less so since the mid 1990s.
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
3. Evidence on the causes and effects of tax
treaties
Legal analysis
Econometric evidence
Political science
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Legal analysis of tax treaties
There is a strong seam of critical analysis in the academic legal
literature
(eg Irish, Brooks, Dagan, Thuronyi, Avi-Yonah, Christians)
:
Most developed countries (including Denmark) take unilateral
steps to alleviate double taxation.
The main effect of treaties is to shift the burden of double tax
relief onto the developing country.
Strategic interaction between countries leads to tax competition.
Treaties also export tax concepts to developing countries that
may not be appropriate for them (e.g. dispute settlement,
transfer pricing rules).
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Legal analysis of tax treaties
“The present system of tax agreements creates the anomaly of aid in
reverse— from poor to rich countries.”
– Charles Irish, 1974
“In treaties between developing and developed countries…re-allocating tax
revenues means regressive redistribution - to the benefit of the developed
countries at the expense of the developing ones.”
– Tsilly Dagan, 2000
“Developing countries…would be well-advised to sign treaties only with
considerable caution.”
- IMF, 2014
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Legal analysis of tax treaties
Tax treaty advocates argue that they:
mop up outstanding double taxation
standardise definitions
guarantee tax stability
reduce certain tax rates overall
create a framework for cooperation/dispute resolution
send a signal that a country is open for business
Treaties clearly have benefits for businesses.
The question is whether they outweigh the costs.
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
3. Evidence on the causes and effects of tax
treaties
Legal analysis
Econometric evidence
Political science
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Econometric evidence
Do tax treaties increase foreign direct investment (FDI) into
developing countries?
Until recently, the evidence suggested not
(Sauvant & Sachs 2009)
.
Newer studies find a positive effect. Eg Swedish firms 0.7% more likely
to establish a new affiliate if there is a treaty
(Davies, Norbäck & Tekin-Koru, 2009)
.
Methodological problems mean this evidence should be interpreted
with caution:
Poor data coverage of developing countries
Distinguishing cause from effect
Treaty shopping
More bilateral FDI =/= more total investment or growth
(cf Klemm & van Parys
2010)
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Presentation outline
1. A political science perspective on tax treaties
2. The diffusion of tax treaties to developing
countries
3. Evidence on the causes and effects of tax
treaties
Legal analysis
Econometric evidence
Political science
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Political science
“Most of the time developing countries are disadvantaged by
treaties. Treaties do not attract investment. It is other factors.”
“I know there’s empirical evidence that it [a treaty] has no effect on
investment, but the reality country-to-country is that there’s a bluff
goes on, and countries don’t want to take the risk of losing big
investments.”
“There is currently no evidence to show that tax treaties have helped
to attract investment…In my personal view one of foremost reason
for signing tax treaties is to signal that [the country] is open to
inward investment and bilateral economic cooperation .”
“We are thinking we should have a policy.”
- Officials involved in treaty negotiation
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
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Political science
How do developed-developing treaties come about?
Treaties sometimes requested by developing countries,
sometimes by developed countries.
Developed countries: clear benefit from a tax treaty - fiscal gain
to government and/or reduced costs to outward investors.
Developing countries: cost/benefit less clear.
Most treaty negotiators, most investment promotion officials,
and many tax advisers do not expect treaties to attract new
investment (although some individual cases).
Poor policymaking and poor negotiating by developing countries
over several decades has created treaty networks whose costs
probably outweigh any benefits.
SAU, Alm.del - 2014-15 (1. samling) - Bilag 156: Præsentation fra Skatteudvalgets åbne høring om Danmarks indgåelse af dobbeltbeskatningsoverenskomster med fokus på udviklingslande og mellemindkomstlande den 29. april 2015 fra Martin Hearson, doctoral researcher at London School of Economics
Thankyou
[email protected]
martinhearson.wordpress.com