SEATTLE — According to research done by ActionAid International, developing countries lose billions of dollars each year to more developed countries through tax treaties. If developing countries are to work toward poverty elimination, hunger eradication, and universal education, they require the necessary financial resources to fund infrastructure development. Tax treaties often divert these funds away from these countries who need it most.
Tax treaties are agreements between countries that define the taxation rights of each country and multinational corporations. An example of this is deciding when a government can or cannot tax a foreign-owned country. Once agreed upon, tax treaties are effectual until terminated or renegotiated. Of the approximately 3,000 tax treaties in force today, about half are between a developed and a developing country.
According to ActionAid’s 2016 report, tax treaties in their current form reduce the overall amount of tax payable in lower-income countries, create an unfair distribution of taxing rights and raise issues of double non-taxation, where neither government taxes a corporation because they think the other will.
The report cites many egregious examples of trade deals that take advantage of less-developed countries, such as a 2004 agreement between Uganda and the Netherlands that allows foreigners to do so tax-free and a colonial-era agreement between Malawi and the UK that allows for tax-free corporate payments.
In fact, Bangladesh loses $85 million every year due to a single clause in its tax treaties. The report estimates that the problem of sexual assault on buses in the capital of Dhaka caused by overcrowding could be solved in three years if this clause were eliminated.
While just one example, the case of Bangladesh demonstrates the way that these unfair tax treaties prevent developing countries from accessing funds that they could use to work toward sustainable development. Without these restrictions, developing countries would have more funds to spend on schools, hospitals and gender equality efforts.
Due to their limited access to resources overall, developing countries rely disproportionately on corporate taxes, which means that they disproportionately suffer when they are stripped of their taxation rights.
According to Erik Solheim, chair of the OECD Development Assistance Committee, “If we are to have any hope of meeting the world’s 2030 targets for sustainable development, tax systems will play a crucial role. In order to develop, countries need to have control over their own income through effective and predictable tax systems. […]
Multinational companies artificially shift their profits to countries with no or low tax jurisdictions. Developing countries’ reliance on corporate income tax means they suffer from this disproportionately.”
The OECD is working to increase the abilities of the tax authorities in developing countries to ensure effective taxation strategies, as well as to advocate for increased transparency between countries through measures such as automatic information exchanges. Many regional groups, as well as ActionAid also advocate for the renegotiation of unfair treaties to balance out the inequalities present within them.
If country leaders are truly committed to the sustainable development goals and tackling poverty, some changes must be made when it comes to tax treaties. Developed countries must allow developing countries the ability to tax within their rightful jurisdiction and accountability among multinational corporations must be better enforced.
– Adam Gonzalez