Nick Shaxson ■ How Finland’s tax treaties contradict its development policies



Update for tax treaty aficionados: we are reminded that the Vienna Institute for International Dialogue and Cooperation (VIDC) published this study of Austrian tax treaties in April: Austrian Tax Treaties signed with Developing Countries – a Legal and Economic Analysis.

From Finnwatch, a report on Finnish double taxation treaties (DTTs) which analyse how fair and beneficial they are for developing countries. The report was inspired by SOMO’s similar report on Netherlands’ DTTs, published last year, although the Finnwatch report’s scope is somewhat larger, in that it includes also treaty policies on harmful tax competition.

The key findings of the report are that Finland has agreed on relatively low withholding tax (WHT) rates with some developing countries without any adequate explanatory statement of reasons and impact assessments. This is presumed not to be in the interest of developing countries.

The erosion of developing countries’ tax bases is worsened by the fact that Finland has entered into DTTs with some tax havens (see here for illustrations why it’s generally a bad idea to enter DTTs with tax havens). The Finnish treaties also mostly lack essential anti-abuse provisions, and with some tax havens and conduit countries Finland has agreed on a zero per cent WHT rate on passive income, opening a channel for Finnish multinationals to engage in treaty shopping, profit sifting and other international aggressive tax planning to avoid paying taxes in developing countries where they have economic activities.

The main report is in Finnish, but it does contain several pages of summary in English. We paste a section from the English part, very slightly edited by TJN, to add a few words of appropriate background; check against the original to be sure:

“Finland has entered into income tax treaties with 75 countries and the autonomous Faroe Islands. Of Finland’s treaty partners, 2 are considered low-income countries, 16 are lower middle-income countries and 16 higher middle-income countries.

Finland’s Double Tax Treaty (DTT) impact assessments are inadequate and cover impacts on Finland only. The impacts on the economies of developing countries and the wellbeing of their citizens are not assessed. Alternative solutions for DTTs are not evaluated in the government bills.

Finland has not declared a public tax treaty policy. Finland’s Ministry of Finance emphasises that the tax treaties are interlinked with trade policy: treaties are an instrument for ensuring companies a secure operating environment for long-term business in target countries. According to the Ministry, treaties must be competitive with regard to the Finnish economy.

A link to Finnish development policy is lacking. Finland’s Development Policy Programme places an emphasis on the development of tax systems and tax administration in developing countries and the importance of increasing a country’s taxing capacity. Finland generally favours the OECD’s tax treaty model, but the UN model has been used as a “compromise” with developing countries. However, although Finland has agreed on a higher maximum withholding tax (WHT) rates with developing countries than with high-income countries on average, WHT rates in Finland’s tax treaties with some developing countries are very low. For instance, Finland has agreed with Zambia on 5 per cent WHT rate on dividends as for with Tanzania the rate is 20 per cent. The government bills do not explain the reasons for the differing decisions made on the maximum level for WHTs.

Finland has also entered into income tax treaties with tax havens, such as Barbados, Cyprus, Malta, Ireland, Luxembourg and Switzerland, which engage in harmful tax competition. The premise for treaty policy with tax havens should be that only tax information exchange agreements, TIEAs, are concluded with them. With low tax countries the risk for double taxation is low as for the risk for double non-taxation is high.

According to statistical data, the Netherlands, Belgium, Switzerland, Ireland, Luxembourg, Singapore and Hong Kong are the most used conduit countries for direct investments by Finnish companies. Finland has a tax treaty with each of these countries. It is alarming that the treaties often lack effective key provisions to prevent treaty abuse. In some cases, these treaties also include provisions on 0 percent WHTs for dividends, interests or royalties, in a larger scope than EU directives require between EU member states.”

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