How can the UK guarantee a fair tax deal for Malawi?

The country's colonial era tax treaty is currently being renegotiated

out of use ambulance at Rumphi District Hospital

 

“I am angry, really really angry that there are big companies coming to Malawi and not paying tax here. I don’t know how they sleep at night. I don’t know their conscience.”

Those are the words of Bubbily Silingwe, 22, a student in Lilongwe. She is furious that UK companies are able to work in Malawi, yet could be paying barely any tax because of a 60 year old tax treaty.

ActionAid’s ‘Mistreated’  report revealed how the UK’s global network of tax treaties facilitates so-called ‘aggressive tax planning by multinational corporations and deprives the world’s most impoverished communities of vital revenues.

Malawi, the poorest country in the world with a GDP per person of just $255 per year, is particularly badly affected. The colonial-era UK-Malawi tax treaty makes it possible for UK companies operating there to avoid paying their fair share of tax.

The tax treaty is so old that it was signed by the British Governor on behalf of the British colonies of Southern Rhodesia, Northern Rhodesia and Nyasaland.

It is so out of date that not only does it not deal with the taxing of digital goods, it does not even cover the taxing of TV-related products.

More importantly it stops Malawi collecting ‘withholding taxes’. This means big British companies could cut their tax bill in Malawi by sending money to the UK through untaxed management fees and dividends.

That money is desperately needed to pay for public services. Schools and hospitals don’t have the money to pay staff, buy medicine or books, or even to fix the roof.

When it’s hard to get an education it is girls who lose the most, and when healthcare is unavailable it is women who are most at risk – so there is a clear gender equality dimension to this problem too.

But thanks to public support for ActionAid and the Malawian National Tax Justice Platform’s campaign for a better deal for Malawi,  the UK government has confirmed this unfair treaty is being renegotiated.

This is good news. But it’s vital that the new treaty is much fairer than the old one. A new treaty which is still a bad deal for Malawi is not good enough.

A fair treaty would set an important benchmark for the numerous other UK treaties which unfairly disadvantage poorer countries.

What should a new treaty look like?

UK companies had investments worth US$157 million in Malawi in 2010, making the UK the third largest investor in the country after Switzerland and South Africa.

ActionAid believes we need three things to get a fair treaty for Malawi:

  1. The treaty negotiation must be transparentthe UK and Malawian Governments must publish the details of the treaty and the impact of the treaty on the people of Malawi should be assessed by experts.
  1. Prevent treaty shopping which could deprive Malawi of tax revenue – the new treaty must contain strong and effective anti-abuse clauses to stop companies using it to avoid tax.
  1. Malawi must have the ability to tax UK companies – Malawi must be able to fairly tax money being sent out of the country and have more power to tax UK companies operating there:
  1. a)    Withholding tax – power to levy withholding tax on outwards payments such as as interest, dividend and management fee payments.  
  2. b)   Capital gains tax – the power to tax gains made by UK corporations on valuable infrastructure and when they sell shares in local companies.

Tax treaties ties the hands of governments and helps make it possible for big companies to pay minimal amounts of tax in poor countries.

Malawi has a unique chance to secure a fairer treaty. The UK government must honour its pledges to tackle tax avoidance and negotiate a fairer deal.

By securing a better treaty there is an opportunity to ensure all future treaties take account of their impact on poorer countries and the people who live there.

Making tax fair is a huge job. But this could be a vital step forward.

Charlie Matthews is tax justice advocacy adviser at ActionAid

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