Nick Shaxson ■ Don’t sign OECD tax treaties: the case of Uganda


Airtel Zain

Update, Dec 9: Martin Hearson adds his own updated analysis of Uganda’s tax treaties in a Powerpoint presentation here.

A while ago we quoted U.S. tax expert Lee Sheppard excoriating OECD model tax treaties, in a fiery presentation which included such gems as:

For multinationals, “there are countries for which there is extraction, and countries where there are customers, and these are all countries from which income has got to be stripped. And the rubric that allows this is the international consensus. It is the whole treaty network. The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals”

Background on tax treaties: when a multinational from one country invests in another, and earns income from that investment, the treaty is the mechanism that decides which country gets to tax which parts of that income. The post-war international treaty network was basically designed by the OECD, a club of rich countries, and – surprise, surprise – these treaties tend to be favourable to rich countries.

Now Martin Hearson has an fascinating blog on this issue, entitled Capital gains tax avoidance: can Uganda succeed where India didn’t?

This concerns a case where a multinational sells an asset in a poor country, but instead of selling the asset in the country directly, triggering capital gains taxes, it owns the asset via a holding company in a tax haven – and they sell that tax haven holding company, theoretically not triggering those taxes because the tax haven doesn’t have a capital gains tax. This obviously harms poor countries, and some have tried to fight back with legal challenges – the India / Vodafone case is the best known – but the law here isn’t very clear, and of course the OECD treaty network doesn’t generally stack the deck in favour of poor countries.

Hearson writes:

“This post is about “indirect transfers” of assets, where a sale is structured to take place via offshore holding companies, thus escaping capital gains tax. It turns out there is an $85m tax dispute on this between Uganda and the mobile phone company Zain. This is just about the biggest issue in Ugandan tax right now: the tax inspectors are even tweeting about it.”

With total annual revenues of some US$2.5 billion, that $85 million from one single company shenanigan is a biggy for Uganda.

Hearson notes that the OECD highlighted “indirect transfers” in its recent Report to the G-20 development working group on the impact on developing countries of the OECD’s BEPS (Base Erosion and Profit-Shifting) initiative – which is its flagship project to address tax dodging by multinational corporations. We’ve written about that on several occasions, here.

Now the stinger. Here’s Hearson’s summary of how the G20 seems to be responding so far:

“Unfortunately, it is pretty lame on the solutions. As far as I can tell from the G-20 response [pdf], what is going to happen on it is this:

(deep breath…)

As part of its multi-year action plan, the G-20 development working group will consider calling on the OECD, in consultation with the IMF, to report on whether further analysis is needed.

(…and exhale)

I don’t hear the sound of tax positions response to that one.”

There is more.

“Just last week, an appeal court ruled that the Uganda Revenue Authority does have the jurisdiction to assess and tax Zain on the gain. Zain will now argue that the transaction was exempt. One of its core arguments is sure to be the Netherlands-Uganda tax treaty.”

We should add that public pressure has prompted the Netherlands to respond to criticisms of their treaties, especially the effects on developing countries (as pointed out in a report by our colleagues at SOMO last year), and they are now conducting a review of the issue. This Uganda case should, we hope, fuel the pressure to pay more than lip service to reforms.

The arguments in Hearson’s post get a little more complex after this: the blog is well worth reading, if this is a field that interests you, but there’s a fair bit of technical stuff to consider.

One more for our Tax Treaties permanent webpage.


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