Tax treaties

Bilateral tax treaties, or ‘double tax agreements’, were originally conceived as a way to avoid taxpayers operating in more than one country being taxed twice on the same income. Through the treaties, two countries determine which country gets to tax what income, and how financial flows moving between the two countries should be taxed.

However, the treaties have also led to large-scale reductions in the level of tax that countries levy on financial flows such as royalty payments, interests and dividends. It is known that these types of flows are sometimes used by multinational corporations to move profits out of countries where they do business, and into countries where such types of income are taxed at lower rates (or not at all).

Thus, by lowering the tax rates of these cross-border flows (commonly referred to as ‘withholding taxes’), bilateral tax treaties have both reduced the amount of tax collected by governments, and created a potential instrument for tax avoidance. Furthermore, many treaties have strengthened the taxing rights of the home countries of multinational corporations at the expense of the countries where the corporation does business and generates profits.

Since the early 1990s, the number of bilateral tax treaties agreed globally has tripled, and now stands at more than 3,000. In particular, the number of treaties involving developing countries has increased significantly.

Yet more concern arises from individual tax treaties between developed and developing countries, because of the high level of restrictions these treaties impose on the taxing rights of developing countries (so-called very restrictive tax treaties). These treaties can come at a high cost for the developing countries that sign them.

However, it is not only the most harmful tax treaties that have negative effects on developing countries, since bilateral tax treaties in general contain clauses which reduce tax rates.

The report Tax Games – the Race to the Bottom analyses and rates 18 European countries based on the impacts of their treaties on developing countries. The report also rates the European Commission and Parliament based on their positions on the issue.

Click here to see a summary of the ratings.

The criteria for the rating can be found here.

To read the full report (including sources and references) click here.