In 2013 Bangladesh lost US$14.5 million as a result of a single clause in its UK treaty
ActionAid’s new ‘Mistreated’ report has for the first time revealed how the UK’s global network of tax treaties ties the hands of governments and helps make it possible for big companies to pay minimal amounts of tax in poor countries.
Tax treaties – agreements between countries that carve up tax rights – play a role in many tax dodging schemes. No one has been talking about tax treaties but that needs to change.
They facilitate tax avoidance and have been used in the most well-known cases of aggressive tax planning, including Google and Amazon.
Shockingly, ‘Mistreated’ has revealed the UK jointly tops a global league table ranking countries according to the number of troubling tax treaties they have with low and lower-middle income countries. These treaties severely limit the ability of poor countries to collect taxes from multinational companies.
In 2013 Bangladesh lost US$14.5 million as a result of a single clause in its UK treaty. This is a country where 66 million people live in extreme poverty – on less than US$1.90 a day. ActionAid would rather see this money invested in Bangladesh’s woefully underfunded public services to help tackle poverty.
The UK has 13 ‘very restrictive’ treaties with poorer Asian and sub-Saharan African countries such as Bangladesh, Zambia and Uganda. The figure placed the UK top of the table alongside Italy and ahead of countries such as China, USA, Russia and Germany.
Bangladesh is the country with the most treaties with richer countries – 18 – which are ‘very restrictive’. It has given up more taxing power through these agreements than any other country.
[These two lists from ActionAid’s new ‘Mistreated’ report reveals how many very restrictive tax treaties that each country has signed. To find out more about these treaties, visit www.actionaid.org/tax-power.]
Our analysis shows that these treaties restrict the taxing power of poorer countries in three key ways:
- Profit tax: Some treaties set a high bar before poorer countries can tax the profits of foreign multinationals making money in their countries. For example, a Chinese company on a new building site in Mongolia would have to be there for 18 months before Mongolia had the right to tax its profits.
- Withholding tax: The rights of poorer countries to tax e.g. royalties and dividends have been declining over time as a result of tax treaties. Restrictions on Bangladesh’s ability to tax dividends, money paid by companies to overseas shareholders, results in a total estimated revenue loss of US$85 million annually.
- Capital gains tax: More than 70 per cent of tax treaties with poorer countries prohibit those countries from taxing gains made by foreign corporations when they sell shares in local corporations.
This is the first time a systematic analysis of the global tax treaty network and its impact has taken place. The findings are truly shocking.
On a global level it is clear that treaties with richer countries are often a bad deal for poorer one. All tax treaties restrict the rights of poor countries to tax foreign companies making money on their soil, but some treaties take away far more tax power than others.
Treaties that low and lower-middle income countries have with OECD members take away more tax rights than treaties with non-OECD countries. Worryingly, the deals struck with OECD countries are getting worse over time (see figure 1).
Tax treaties signed by low and lower-middle income countries in sub-Saharan Africa and Asia, by type of treaty partner
[The analysis of tax treaties that ActionAid has commissioned combines the content of a treaty into an overall estimate of its impact. It provides each treaty with a score between 0 and 1, where a higher number indicates that the poorer country has kept more tax rights in the settlement.]
Tax rights are consistently being skewed in favour of wealthier countries and tax treaties make it possible for multinational companies to lower their tax bills in poor countries. It is women and girls living in poverty who suffer as schools and hospitals are starved of funding.
Tax revenue is one of the most important, sustainable and predictable sources of public finance there is. It is a crucial part of the journey towards a world free from poverty – funding improvements in public services such as health and education.
The communities that ActionAid works with around the world are demanding increased public funds to promote development – particularly for the realisation of women and girls’ human rights.
ActionAid is calling on the UK government and governments around the world to revise these unfair treaties – which date back over a period of 50 years – to ensure multinational companies pay their fair share of tax in poor countries.
Poorer countries must be given the tools they need to raise taxes and find a sustainable route out of poverty. It’s time to make tax fair, everywhere.
Savior Mwambwa is the Tax Power campaign manager at Action Aid
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