By Chisomo Manthalu, ActionAid Malawi & Andrew Chikowore, ActionAid Tanzania.
Many Double Taxation Treaties are leading to the loss of potential tax revenue because they excessively limit developing countries’ rights to tax, often assigning more taxing rights to high income countries. In several cases, tax treaties are helping money to flow untaxed from developing to rich countries, making the world more unequal and exacerbating poverty. At a time when most developing countries are struggling to fund public service delivery for their citizens, they cannot afford any more bad deals that increase inequality and poverty.
This is exemplified by a case in Nigeria where Abebi, who teaches in a primary school which has no electricity or water and no working toilet. Children often miss school because they do not have any food or are sent by their parents to farm and conduct other family chores. This is exacerbated by poor roads and communication networks that has resulted in some of the school-age children not making it to school because of lack of public transport.
Funding shortfalls for public services mean, according to Abebi, that “Even children that are in school can’t adequately learn because of lack of learning material and infrastructure. This has seen teachers improvising on how to teach the students because of lack of necessary material such as school books, pens or paper and the government keeps saying there is no money.”
This should not be the case with our education systems.
A new report from ActionAid, entitled The impact of tax treaties on revenue collection: A case study of developing and least developed countries, shows significant potential tax revenue losses due to Double Taxation Treaties for countries such as the Philippines (US$509 million) and Pakistan (US130 million) in 2015 alone. These losses are generated only from the limitations on withholding taxes on outgoing dividends and interest payments; inadequate data prevented us from assessing losses due to the treaties’ provisions on capital gains and profit or corporate income tax. The report finds that Japan, the Netherlands, Switzerland and Singapore are the investor countries together responsible for more than half of the estimated losses.
It is often said that tax treaties will stimulate increased foreign investment and will therefore be a net positive to a nation’s economy. However, the available evidence suggests that any benefits that tax treaties might bring cannot be guaranteed. Tax treaties always have costs and as a result they should be approached with caution, particularly by developing countries.
Therefore, developing countries should;
- Urgently reconsider their treaties that restrict their tax rights
- Subject treaty negotiation, ratification and impact assessments to far greater public scrutiny
- Adopt the UN model tax treaty as the minimum standard.