Are EU countries doing enough to avoid harming developing countries through their tax policies?

Friday, October 5, 2018 - 08:23

The topic of last week’s hearing at the European Parliament’s special committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) was how the EU has tackled tax evasion and avoidance in its relations with non-EU countries, and the ways to improve this policy - and Hannah Brejnholt Tranberg from ActionAid Denmark was invited to speak.

Her presentation focused on the potential impacts of European taxation policies, in particular tax treaties, on developing countries and their capacity to mobilise domestic resources - especially though the taxing of foreign companies. Hannah presented findings from ActionAid’s research on double taxation treaties, which shows that currently tax treaties between richer and poorer countries tend to severely reduce the taxing rights of the poorer countries. Furthermore, they are also used in tax avoidance schemes by multinational companies.

Imbalance in taxing rights

The imbalance of power between high and low-income countries during the negotiations of tax treaties has led to a situation where poorer countries, in most cases, end giving up more taxing rights than richer countries. As highlighted by Eric Mensah from the UN Tax Committee, this is exacerbated by the fact that a major part of the international tax rules are set by the OECD. This essentially means that global rules are made by rich countries with rich countries in mind. It is thus unreasonable to expect or require developing countries, who more often than not were not given a seat at the negotiation table, to follow those rules. This is one of the reasons why the UN model treaty, instead of the OECD’s, should be adopted as a minimum standard when negotiating tax treaties.

The spillover effects

Developing countries are losing significant sources of potential tax revenue due to the nature of the tax treaties: resources that are essential to fight poverty and inequality, fund gender-responsive public services such as adequate public schools and hospitals, and cities that are safe for women. One example in ActionAid’s research shows that Bangladesh loses an estimated US$85 million every year from just one clause in its tax treaties; a clause that severely restricts its right to tax dividends from multinational companies.

What we are asking of the European Member States

Because tax treaties are bilateral agreements, EU Member States have the power to influence them. The first step for European countries is to recognise the negative impact that their tax treaties with developing countries might have if certain safeguards and clauses are not included - the actual impact of these can be analysed through impact analyses or spillover analyses of tax policies on other countries. ActionAid has recently published a guiding framework Stemming the Spills, in which we suggest a framework for such spillover analyses. The EU Commission’s Platform for Tax Good Governance has also produced a Toolbox that outlines useful questions for EU countries to consider when analysing their tax policies in view of potential impacts on developing countries.

Based on the findings of these analyses, EU Member States should propose renegotiating very restrictive tax treaties – and in fact some EU countries have already renegotiated tax treaties with developing countries after conducting spillover analyses.

It is also key that the EU Member States ensure proper democratic and public scrutiny of tax treaty processes, including by making draft treaties public prior to signature, making sure tax treaties are debated and formally ratified by national legislatures, publishing impact assessments, and reviewing impacts of treaties every five years.

EU approach to fighting tax avoidance and evasion

One of the key points raised by the Members of the European Parliament was the question of whether the EU’s current framework can realistically and effectively curb tax evasion and tax avoidance. To this, ActionAid further highlighted the need for the EU and member states to:

  1. support better global tax governance – we would strongly encourage the creation of a global commission on tax under the UN.
  2. support unrestricted access for developing countries to information exchange frameworks and agreements.
  3. adopt public country-by-country reporting, requiring large multinationals to publicly report on profits made and taxes paid in each country in which they operate.

The hearing can be watched in full here. Hannah starts speaking at the 16:46:39 mark.

And a short interview on the Hearing can be watched here:

With thanks to Hannah Brejnholt Tranberg for her contribution.