Nick Shaxson ■ New paper: tax treaties a ‘poisoned chalice’ for developing countries

Lee Sheppard

Lee Sheppard: truth to power

Update, Jan 20: this blog has now been adapted and expanded in a post on Naked Capitalism.

In 2013 we published an article entitled Lee Sheppard: Don’t sign OECD model tax treaties! which looked at a presentation by one of the U.S.’ top experts in international tax. Her fiery presentation contains gems such as:

“The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals”. . . The international consensus is “basically a load of nonsense that protects multinationals. . .The OECD primarily protects the interests of the United States and the United Kingdom. Even Germany doesn’t get a look in.”


“When you sign an OECD model treaty, you say there is no withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign that?”

And some developing countries, as we’ve noted before, seem to be breaking away from the consensus.

Well, now a new(ish) paper makes the case in rather more academic, but equally powerful terms. Jan Van de Poel reviews the paper, by tax scholars Kim Brooks (Dalhousie University) and Richard Krever (Monash University).

Guest blog: tax treaties may be “a true poisoned chalice for developing countries

Jan Van de Poel

In a globalised economy, more than 3000 bilateral tax treaties determine how and how much tax developing countries are able to collect from profits that are shifted across borders by multinationals. Whether these treaties support developing countries’ capacity to finance their development needs is subject to intense debate in the development community. In a July 2015 contribution to IMF’s Victor Thuronyi and Geerten Michielse Series on International Taxation (published by Wolters Kluwer), tax scholars Kim Brooks and Richard Krever provide convincing arguments that such treaties ‘may be a true poisoned chalice for developing countries’.

Brooks and Krever’s paper reads as a comprehensive ‘myth buster’ on tax treaties and cannot be underestimated as a resource for activists and other experts on the matter.

The orthodox rationale for tax treaties is to prevent “double taxation” of multinationals by reallocating taxing rights between an investor’s home jurisdiction and the host jurisdiction, and to allow for effective cooperation between countries in tax matters. Any foregone tax revenue resulting from the ‘reallocation’ of taxing rights is said to be offset by other benefits such as additional inward investment or ‘strategic benefits’ such as access to development aid or security services.

Brooks and Krever’s paper tears these pro-tax treaty arguments apart, making the case these benefits can be better achieved by unilateral action by the source state without giving up taxing rights and losing much needed revenue. Their paper reads as a comprehensive ‘myth buster’ on tax treaties and cannot be underestimated as a resource for activists and other experts on the matter. As it is incredibly rich with arguments and ideas, referring to the most recent literature and political events in the field, I will limit myself to just a few that I found particularly refreshing, as they do not come up often in discussion.

Brooks and Krever tackle the persistent myth that tax treaties are an essential driver for inward foreign direct investment in developing countries. Previous econometric analysis has shown only a very weak direct relation between treaties and FDI, and suggest most of the additional investment is ‘virtual’ as it reflects the routing of income through tax havens as part of multinationals’ tax planning strategies. Brooks and Krever even go one step further arguing that reducing withholding taxes on business income earned in a host jurisdiction may affect investment negatively.

Given that a witholding tax is not a tax on current profits and can be deferred indefinitely by firms willing to reinvest in the jurisdiction, higher withholding tax rates might actually encourage investment: a fascinating point.

Another myth that both scholars address is developing countries cannot do without tax treaties. After developing countries have made their cost-benefit analysis and have decided whether it is appropriate to sign a treaty or not, a second question needs to be answered. Are these benefits possible without signing a treaty? Ensuring exchange of information or dispute resolution through arbitration requires state-to-state cooperation of some sort, but not necessarily a full-blown tax treaty. Increased investment and trade or non-discrimination between foreign and domestic investors is probably best done by building effective tax administrations and domestic legal measures. So, in most instances, the answer is yes: most benefits can be achieved by unilateral measures and do not require the revenue losses associated with signing a tax treaty.

For those who have developed a (dis)taste for all things BEPS (“Base Erosion and Profit Shifting,” the OECD’s project to tackle international tax avoidance) over the past two years, the paper provides additional arguments for not buying into the story that BEPS has fixed the international tax system. Tax treaties make it nearly impossible for source countries to tax business profits derived by a non-resident with no enduring presence or high profile in the jurisdiction.

[A TJN aside: Sheppard explained it like this: “When you sign an OECD model treaty you also sign onto a concept called Permanent Establishment. “It is a rather nonsensical concept that says, ‘well, if you, multinational, are operating in a country and making money in a country, but you have any presence that is short of, oh, a full automobile assembly plant, then you are not taxable in that country at the level of the owner of this plant. This thing has a little circle drawn around it, and it cannot be taxed in a normal way. . . . you do not want to sign a document that has got that in it.?”]

The BEPS proposals attempts to revisit the concept of ‘permanent establishment’ but only marginally addresses this problem. Again, Brooks and Krever, conclude this issue is ‘best adopted through unilateral measures that set boundaries based on source country’s actual tax administration capacity’.

A must-read for everyone interested in the relationship between tax treaties and development, download the full paper here.

The Troubling Role of Tax Treaties, by Kim Brooks (Dalhousie Dalhousie University – Schulich School of Law; Monash University – Faculty of Law; and  Richard Krever, Monash University – Department of Business Law & Taxation, July 1, 2015. In Geerten M. M. Michielse & Victor Thuronyi, (eds.), Tax Design Issues Worldwide, Series on International Taxation, Volume 51 (Alphen aan den Rijn: Kluwer Law International, 2015), 159-178.


The notional purpose of tax treaties is to prevent double taxation and tax evasion. The actual purpose is to reallocate taxing rights between an investor’s home jurisdiction (the residence state) and the host jurisdiction (the source state). The effect is to reduce or remove the taxing rights of a source state (a capital importing state) to leave more room for tax in the residence state (a capital exporting state). The revenue costs of agreeing to reduce taxing rights in a treaty are thought to be offset by other benefits. The benefits may be exaggerated. To the extent they may actually be realized, all can likely be achieved more efficiently through unilateral action by the source state.

Jan Van de Poel

Policy officer at 11.11.11, the Belgian development NGO network

Brooks Klever

See more on our Tax Treaties page, or on our Tax Treaties tag.




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