Wednesday, October 22, 2014

Daurer and Krever on Tax Treaties; one line summary: Them that's got shall have, them that's not shall lose

Veronika Daurer and Rick Krever recently posted Choosing between the UN and OECD Tax Policy Models: An African Case Study on SSRN, of interest. Here is the abstract:
This paper reports on a study of the tax treaty policy of a group of eleven East African countries. African tax treaties tend to follow one of two model treaties, an OECD model treaty that favours the interests of capital exporting nations and a United Nations model treaty that allows capital importing countries to retain more taxing rights. The study compares the policy outcomes in treaties signed by these countries with African nations, with relatively wealthy OECD countries, and with non-African countries that are not members of the OECD. It also compares selected outcomes in African–OECD treaties with those results in treaties between a group of Asian countries and OECD members to see whether African countries have been more or less successful at wringing preferences from wealthier nations. The study suggests the African countries studied have not been as successful in retaining taxing rights in treaties with OECD countries as have Asian countries. On the other hand, OECD countries are often more generous to African countries than are other African countries.
The paper notes that the data on the connection between tax treaties and foreign investment is still inconclusive, so we can't say that what countries lose in tax revenue given up in the treaty they gain somewhere else. The data being inconclusive is consistent with my research on this some years ago, and what I've kept up with since. Although the authors are very careful in their claims, the overall message is pretty clear: powerful nations systematically use their economic clout to gain advantage over less powerful nations in tax deals. Countries share the global tax base through tax treaties. The OECD model treaty overwhelmingly designs how they do so. So this is international tax relations as the OECD has crafted it, very carefully and deliberately, over the span of decades.

Here is Daurer & Krever's conclusion:
The jurisdictions reviewed in this study are found in the same part of Africa and have histories that share many features. The similarities in their backgrounds are not reflected in their networks of tax treaties with wide variations in the features of their treaties and sometimes significant differences in the extent to which they rely on OECD model treaty or UN model treaty precedents. 
The extent to which jurisdictions choose to forgo taxing rights may depend on relative bargaining powers vis-à-vis treaty partners or domestic ideology regarding possible direct economic benefits from increased investment or indirect consequential benefits from enhanced relationships that might follow a retreat from taxing rights. As a general rule, larger and more economically advanced economies tend to retain more taxing rights in treaties than smaller, less advanced economies. Considered as a group, these African countries appear not to have been as successful as Asian countries in retaining taxing rights. Regional countries may find it beneficial to review each other’s treaty policies and consider whether the revenue costs of less reliance on the UN model and more reliance on the OECD model might outweigh the perceived investment or ancillary benefits that they hope will flow from the transfer of taxing rights to capital exporting nations. 
Regional countries might also wish to look at why OECD countries are often more generous in agreeing to greater retention of taxing rights by African countries than neighbouring African nations. 

No comments:

Post a Comment