Austria’s tax treaties: reducing developing countries’ revenues?

We’ve written a fair bit about tax treaties in the past few days, and have also updated and slightly expanded our tax treaties page. Now, in the spirit of the week, we offer a guest blog from Martina Neuwirth of the Vienna Institute for International Dialogue and Cooperation (VIDC,) highlighting a study of Austrian tax treaties by Julia Braun and Daniel Fuentes, published in April.

Guest blog: Austria’s tax treaties and developing countries

Austria has a wide network of nearly 90 double tax treaties (DTTs), of which around 40 are with developing countries.

Austria’s treaty network in Asia is quite narrow; there are only five treaties with countries in Latin America, and just one with a sub-Saharan country, South Africa. Austria’s focus is on the Central and Eastern European (CEE) region: over 1000 multinational enterprises coordinate their activities from Austria and 300 have established regional headquarters here. The country also seems to be a location of choice for Special Purpose Entities. Though only about a dozen exist, they made up about a third of Austria’s outbound and inbound FDI stocks in 2011.

The study concludes that Austria benefits from its DTTs disproportionally allocating taxation rights to “residence” countries (where multinational corporations are typically resident: in most cases we are talking about Austrian multinationals.) This potentially induces a loss in revenue for developing countries. Austrian treaties also limit developing countries’ access to satisfactory exchange of information.

The econometric analysis suggests that DTTs increase the number of Austrian FDI projects in developing countries. But it is not clear whether DTTs trigger more FDI or whether it is merely the case that Austria signs DTTs with countries where Austrian firms are already active. Austria’s policy to negotiate treaties mostly with countries with which it has close economic ties points to the latter. What is more, about a third of Austrian FDI projects in developing countries originate from third countries’ investors who use Austrian subsidiaries. And the results could capture some treaty shopping.

The authors’ general conclusion is that it would be advisable for developing countries to conduct tax treaty impact analyses in order to be able to estimate their potential effects.

Find the study and a summary here.