Paper titled 'converging or diverging policies?' presented at the critical tax conference in April 2013.

1. Converging or diverging policies?
Developing countries and the social
nature of international tax
Martin Hearson, London School of
Economics and Political Science
Critical Tax Conference, UC Hastings,
April 2013

2. A simplified model of
international tax institutions
OECD United Nations
Model TIEA Transfer pricing Model treaties
guidelines
Tax information
exchange Domestic law Double tax treaties
agreements

3. Double tax treaties:
conventional understanding
• Purpose of treaty is primarily to alleviate double
taxation, also to aid cooperation on tax evasion
• Developing country gives up tax revenue, but is
compensated through greater inward investment
– Some argue the treaty causes reallocation of capital from
residence to source country
– Others describe it as a competition effect – treaty gives a
relative advantage over other source countries
• Hence developing countries seek tax treaties
• Evidence for effect on investment is mixed, because it’s
hard to isolate the effects of individual tax treaties

4. Double tax treaties:
critical understanding
• Treaty is unnecessary to alleviate double taxation,
as residence states do so unilaterally
• Primarily a political settlement through which
taxing rights are transferred from source to
residence country
• A ‘badge of respectability’ to show that countries
are part of an international economic club
• No evidence that they increase overall levels of
investment in a country

5. Policy diffusion as a
framework of analysis
• Defined as when policy in one country influences that
in another
• Four diffusion mechanisms:
– Competition
– Learning
– Emulation
– Coercion
• Neumayer & Barthel (2012) find a role for competition
in driving tax treaty diffusion.
• Emphasis now is on explaining heterogeneity:
– National-level scope conditions
– Regional variation
– Non-linear patterns of diffusion

6. Double tax treaties:
questions that are rarely asked
The literature tends focus on rationalist explanations, which
assume country preferences are fixed. I consider the role of
intersubjective understandings in preference formation.
• How are tax treaties understood by policymakers in
developing countries?
• What motivates their tax treaty policymaking?
– Almost certainly depends on the treaty partner
– Do outcomes correspond to a clearly defined policy?
• Which stakeholders are involved in the decision?
– Officials/ministers? Tax or investment promotion?
– Role of business?
– Outside organisations e.g. OECD, IMF?
• What is the role of the treaty partner (instigator/reactor?)
and what are their preferences?

7. What am I trying to explain?
(1) sub Saharan Africa
Source: author’s own analysis, based on IBFD data

8. What am I trying to explain?
(2) Ghana
Average
Treaty partner Year WHT rate
United Kingdom 1947
Denmark (not in force) 1954
United Kingdom (renegotiated) 1977
France 1993 9.4
United Kingdom (renegotiated) 1993 10.6
Serbia (not in force) 2000
Germany 2004 7.8
Italy 2004 8.8
South Africa 2004 8.8
Belgium 2005 8.8
Barbados 2008
Netherlands 2008 7.3
Switzerland 2008 7.8

9. What am I trying to explain?
1. A large number of tax treaties are not signed with
major sources of investment
2. The role of domestic political and administrative
factors
3. Different policy towards (and of) different kinds
of treaty partners
4. Variations in treaty content: preferences versus
negotiating capability
5. Triggers for new treaty signings - often in groups
6. Renegotiation, repudiation, stalemate

10. A word on transfer pricing and
institutional reform
• Brazil, India, China have made unilateral moves.
What do they want from OECD &UN?
– Institutional reform versus content reform
• How does this change the context for smaller
developing countries?
– Is the dividing line OECD v non-OECD, or large
economy versus small economy?
• What is driving the trend towards TP adoption?
• Why is there no heterogeneity in Africa?

11. Conclusions
• A lot has been written about developing
countries’ international tax policy…but it’s rarely
based on actually asking them.
• International relations research suggests that a
model of policymaking should take into account:
– Emulation, bounded learning, socialisation, coercion
– Tax/investment policy may not always be the right
lens through which to understand tax reforms
• Policymaking should also be seen in the light of
unstable international institutions.