Survival of the Richest

Europe's role in upholding an unjust tax system
One might have thought that the LuxLeaks scandal would
have led to a reduction in the number of APAs between
governments and multinational corporations. However,
official data from the European Commission indicates quite
the opposite – it seems that these ‘sweetheart deals’ are
becoming a rapidly growing trend in Europe (see Table 1 and
Figure 2). At the end of 2014, the total number of APAs had
grown to 972 from 547 in 2013 – an increase of 78 per cent. 97
At the end of 2015 – one year after the LuxLeaks scandal –
that number had grown to 1,444, an additional increase of
49 per cent since 2014. 98
One question that remains unanswered is how many of
these APAs are simply legitimate agreements to ensure tax
certainty for multinational corporations, and how many are
the type of instruments of large-scale tax avoidance that
have been exposed in the LuxLeaks scandal and the state
aid cases. Meanwhile, the ongoing state aid court cases
show that there is clearly no consensus on what is legally
acceptable in terms of tax advantages given to multinational
corporations through APAs.
It is clear that APAs – or secret sweetheart deals – remain
an issue of great concern in Europe.
Tax treaties
A tax treaty is an agreement between two countries that
aims to create a framework originally intended to prevent
companies or individuals that are operating across borders
from having to pay tax twice on the same income (also
known as double taxation). One of the main reasons for
developing countries to sign on to these agreements is
that they are expected to increase foreign investment.
However, empirical evidence does not support this. 99 Rather,
the global network of more than 3,000 tax treaties poses
several challenges from a developing country perspective,
since many of the agreements have been designed in a way
that deprives poor countries of tax revenues. 100
Civil society organisations are also very alert to the potential
risks with tax treaties, and there is particular awareness
about the risks associated with tax treaties signed with
countries that have high levels of financial secrecy or low
levels of taxation. Tax Justice Network Africa (TJN-A) has
filed a law suit on behalf of Kenyan taxpayers against the
Kenyan government, challenging the constitutionality of the
tax treaty signed between Kenya and Mauritius. 101 Whilst
the treasury defended the tax treaty in court as a way to
attract investments, 102 TJN-A argues that the agreement
‘significantly undermines Kenya’s ability to raise domestic
revenue to underpin the country’s development by opening
up loopholes for multinational companies operating in the
country and super-rich individuals to shift profits abroad
through Mauritius to avoid paying appropriate taxes’. 103 The
court case is still pending.
Another key concern related to tax treaties is that they
often include provisions to lower - or remove - withholding
taxes on cross-boundary financial flows, and thus can lead
to lower tax income in the countries signing on to such
treaties, including developing countries. For example,
research by ActionAid shows that a tax treaty between
Uganda and the Netherlands, signed in 2004, completely
takes away Uganda’s right to tax certain earnings paid to
owners of Ugandan companies if the owners are resident
in the Netherlands. Ten years later, half of Uganda’s foreign
investment is owned from the Netherlands, at least on
paper, which means Uganda will not be able to tax it. 104
Uganda has since announced its intention to renegotiate
unfavourable tax treaties. 105 Figure 3 provides an overview
of which European countries that have ‘very restrictive’ tax
treaties with developing countries in Asia and Africa.
However, it is not only the worst tax treaties that have
negative impacts on developing countries. Tax treaties that
are less extreme also contain reductions of developing
country tax rates.
Table 2 and Figure 4 provide an overview of the total
number of tax treaties between developing countries and
the European countries covered by this report, as well as
the average reduction in withholding taxes in developing
countries that has been introduced through these treaties.
Survival of the Richest • 21