Martin Hearson

The Challenges for Developing Countries in International Tax Justice

Abstract Developing countries face three main challenges in international tax cooperation. The most widely known are the twin problems of tax avoidance by foreign investors and tax evasion by domestic actors, which have become a major focus of debate in international organisations and of civil society activism in recent years. The second problem, tax competition, incorporates a range of issues from the ‘prisoners’ dilemma’ facing countries competing for inward direct investment through to the harmful tax rules used by tax havens that enable tax avoidance and evasion. This article reviews four recent monographs that analyse these problems at an international level. While they contain much useful discussion of the problems and potential technical solutions, there remains a need for political economy research to understand why certain technical solutions have not been adopted by governments. A third challenge faced by developing countries, barely considered in the tax and development literature up to now, leads to a note of caution: international tax institutions tend to be designed in ways that place disproportionate restrictions on capital-importing countries’ ability to tax foreign investors.

Transnational expertise and the expansion of the international tax regime: imposing ‘acceptable’ standards

Abstract Global economic governance outcomes in areas such as corporate taxation may be influenced by transnational policy communities acting at national and transnational levels. Yet, while transnational tax policy processes are increasingly analyzed through the politics of expertise, national preferences have usually been derived from domestic interest group preferences. We know little about how technical expertise interacts with interest group politics at national level, an important deficit given the sovereignty-preserving, decentralized way in which transnational tax norms become hard law. This article examines the drivers of expansion of the UK’s bilateral tax treaty network in the 1970s, which cannot be explained solely through monolithic interest group politics. Evidence from the British national archives demonstrates how tax experts in the civil service and the private sector, members of a transnational policy community, used tax treaties to impose OECD standards for taxing British firms on host countries, at times overruling the preferences of other political, bureaucratic and business actors. Expertise politics and business power may shape the development of norms and focal points within a transnational policy community, but it is often their interaction at domestic level that determines the implementation of transnational norms as hard law.

Measuring tax treaty negotiation outcomes: the Actionaid tax treaties dataset

This paper introduces a new dataset that codes the content of 519 tax treaties signed by low- and lower-middle-income countries in Africa and Asia. Often called Double Taxation Agreements, bilateral tax treaties divide up the right to tax cross-border economic activity between their two signatories. When one of the signatories is a developing country that is predominantly a recipient of foreign investment, the effect of the tax treaty is to impose constraints on its ability to tax inward investors, ostensibly to encourage more investment. The merits of tax treaties for developing countries have been challenged in critical legal literature for decades, and studies of whether or not they attract new investment into developing countries give contradictory and inconclusive results. These studies have rarely disaggregated the elements of tax treaties to determine which may be most pertinent to any investment-promoting effect. Meanwhile, as developing countries continue to negotiate, renegotiate, review and terminate tax treaties, comparative data on negotiating histories and outcomes is not easily obtained. The new dataset fills both these gaps. Using it, this paper demonstrates how tax treaties are changing over time. The restrictions they impose on the rate of withholding tax developing countries can levy on cross-border payments have intensified since 1970. In contrast, the permanent establishment threshold, which specifies when a foreign company’s profits become taxable in a developing country, has been falling, giving developing countries more opportunity to tax foreign investors. The picture with respect to capital gains tax and other provisions is mixed. As a group, OECD countries appear to be moving towards treaties with developing countries that impose more restrictions on the latter’s taxing rights, while non-OECD countries appear to be allowing developing countries to retain more taxing rights than in the past. These overall trends, however, mask some surprising differences between the positions of individual industrialised and emerging economies. These findings pose more questions than they answer, and it is hoped that this paper and the dataset it accompanies will stimulate new research on tax treaties.