Using our analysis of more than 500 tax treaties, ActionAid's new report, 'Mistreated', shows how these agreements negatively affect a developing country's ability to tax the profits from foreign owned companies who operate within their borders. Along with Italy, the UK has 13 of them! Here we take a look at what the research shows, as well as what this means for countries that are bound by them.
What are tax treaties?
The row over the tax affairs of big companies like Google and Starbucks shows how strongly the British public feels that multinationals aren’t paying their fair share. Not enough people are aware of how these opaque systems such as tax treaties that enable companies to not pay their fair share of tax.
A tax treaty is an agreement between two countries that decides where a company who operates in both those nations should pay tax. For example, if a UK company were to operate in Malawi, where should the said company pay what taxes - Malawi or the UK? A tax treaty sets rules to decide this.
It makes sense that a company shouldn't pay tax twice on the same profit. But it isn't as simple as it sounds.
What does our research show?
The pitfalls of tax treaties are known about. In 2014 the International Monetary Fund stated that: "the use of tax treaty networks to reduce tax payments is a major issue for many developing countries, who would be well advised to sign treaties only with considerable caution." However, until now nobody has undertaken detailed research into how exactly tax treaties affect developing countries.
As part of the research for our 'Mistreated' report, ActionAid analysed over 500 tax treaties that have been signed since 1970.
Upon analysis, this research showed that just two rules set in tax treaties cost developing countries billions of US dollars each year. These two rules concern dividend and interest payments and how they are taxed when a payment is made between two countries. Furthermore, the research showed that some tax treaties completely ban a country from being able to tax an interest payment from one country to another.
There are also other losses caused by tax treaties, though the amount that is lost is currently unknown. The other losses caused are through, for example:
- Lost profit taxes - this relates to the amount of profit that can be taxed.
- Capital gains taxes - this is tax levied on profit from the sale of e.g. a property or investment.
- Royalties - this is the sum that is paid to the originator of a work when someone other than that person uses or exploits their intellectual property.
- Service fees - this is a sum of money that is paid for the use of a service.
Why do tax treaties matter?
On a wider level tax is vital because it is a sustainable source of funding for development. Money collected from tax could pay for hospitals, roads, schools, streetlights and a whole host of public services. When foreign companies don’t pay their fair share in developing countries, women and children living in poverty who suffer the most as a result.
In some cases, the poorer country loses the right to tax to the company from the wealthier country, yet the developed country chooses not to tax the company either!
Our research shows that along with Italy, the UK has 13 of these unfair treaties with developing countries in force - the highest number of restrictive and unfair treaties out of any country. Some of these treaties stop the developing country from taxing UK companies fairly.
For example, in 2013, just one clause in the tax treaty between the UK and Bangladesh cost Bangladesh $14.5 million. This is money lost to a country in which 66 million people live on under $1.90 a day.
To put this into perspective, it's estimated that $14.5 million is enough money to pay the annual starting salary for an extra 18,000 Bangladeshi teachers in a country where more than 4 in 10 girls are not in secondary school.
If just one clause in the UK-Bangladesh treaty changed, it could make a significant difference to the people of Bangladesh.
What you can do to help?
If you follow our tax campaign, you’ll know that we’ve been working to get the tax treaty between the UK and Malawi changed so that it is fairer for the people of Malawi. Our Make Tax Fair, Everywhere campaign aims to do this not just for Malawi, but exactly what it says in the name. Everywhere.
Tax treaties are voluntary; they can be renegotiated and cancelled. It is within the power of our Government to reform all our tax treaties, to ensure poorer countries have the power to collect a fair amount of tax from UK companies operating on their territory.
We'll be working hard to make sure all tax treaties are made fair. If you want to join us in this fight, please sign the petition to David Gauke.
This project is funded by the European Union
Photo credits: ActionAid
Graphics credits: Emma Amato
The analysis is based on data and indices produced by consultant Martin Hearson, the producer of the ActionAid tax treaties dataset. Analysis of the data and statements based on the data are ActionAid’s own.