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22 • Fifty Shades of Tax Dodging 3.5 Tax treaties The UN in 2015 warned that while tax treaties are “designed to avoid or to mitigate the effect of double taxation” they have instead “resulted in many instances of double nontaxation.” 146 That this real danger to developing countries was reaffirmed when ActionAid in 2015 released a report that showed how an Australian mining company operating in Malawi was able to reduce its tax contributions by financing its investments through the Netherlands and thereby benefit from a zero rate withholding tax contained in a tax treaty between Malawi and the Netherlands (see more in box 6). 147 In order to avoid companies setting up subsidiaries in jurisdictions with the sole purpose of reaping a treaty benefit (so-called treaty shopping) it is vital that treaties with developing countries include an anti-abuse clause. 148 However, the ActionAid report shows the harmful impact of reduced withholding tax rates, which indicates that merely adopting anti-abuse measures is insufficient to protect a country’s tax base. Many treaties are based on the OECD model, which increases the problems with tax treaties for developing countries. 149 The challenge for developing countries is that by signing an OECD treaty they also sign away part of their rights to tax foreign investments at the source, e.g. in their country. The UN model generally distributes more tax rights to developing countries. 150 ‘‘ …the initiative for negotiating a DTA (Double Tax Agreement) comes from the multinationals.” Official at the Common Market for Eastern and Southern Africa (COMESA) 151 Table 5: Number of tax treaties in force between 15 EU Member States and developing countries Country Low Income Lower Middle Income Upper Middle Income Total Ireland 0 7 14 21 Slovenia 0 7 14 21 Luxembourg 1 10 15 26 Hungary 0 12 18 30 Czech Republic 2 13 22 37 Denmark 5 12 20 37 Poland 3 14 20 37 Average 41 Sweden 6 11 25 42 Netherlands 4 17 23 44 Belgium 3 18 26 47 Spain 1 17 29 47 Germany 5 17 26 48 Italy 6 17 26 49 France 11 18 33 62 United Kingdom 9 26 28 63 Table 4: The difference in withholding tax (WHT) rates in the OECD and UN model tax treaties Source: See Figure 4 56 216 339 652 Maximum WHT on dividends Maximum WHT on interests Maximum WHT on royalties OECD model treaty 5 to 15 per cent* 10 per cent Exempt from WHT UN model treaty No maximum limit No maximum limit No maximum limit Source: ActionAid 152 *the lower rate of withholding tax applies to dividends paid to a foreign company from a subsidiary in the source country in which it owns more than 25 per cent.
Fifty Shades of Tax Dodging • 23 Figure 4: Average rate reductions (%) in treaties between 15 EU Member States and developing countries Luxembourg Poland Ireland Belgium Italy Hungary Slovenia Average France Czech Republic Denmark Netherlands Germany Sweden United Kingdom Spain 0% 1% 2% 3% 4% 5% 6% Source: Eurodad calculations. 153 The average rate reduction covers withholding taxes on four income categories: Royalties, interests, dividends on companies and qualified companies. It does not cover tax rates on services or management fees due to the lack of data. The average rate reductions between the European countries covered in this report and the developing countries refers to the difference between the rates contained in the treaty and the statutory rates in the developing country for all four income categories. The figure for the overall average reduction is an un-weighed average for all of the 15 European countries covered in this report. Beyond challenges with treaty shopping and the distribution of taxing rights, tax treaties can further undermine the revenue base of developing countries through reduction of withholding tax rates. These often get reduced in negotiations between governments. The UN in a 2015 report notes that “many developing countries with weak tax collection capabilities have seen limits imposed on the use of a relatively effective tax collection mechanism (withholding taxes)” through treaties due to these reductions in rates. 154 Table 4 shows that this problem is again also related to the OECD model, which generally imposes low maximum rates of withholding taxes, while the UN model does not set such limits. ‘‘ …if you look at all these (treaties) that have been signed, you can probably link to a very major company that came into this country.” African Ministry of Finance official 155 Analysis of the 15 EU countries covered in this report show that most are quite active in reducing the withholding tax rates in their treaties with developing countries (see Figure 4).
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