For Global Tax Reform, the Devil Is in the Details
While the technical details of international agreements may seem arcane or even trivial, they often commit governments to policies that have major economic consequences. This is especially true for low- and middle-income countries, which have long been on the receiving end of unfair treaties. International tax agreements are a case in point. Bilateral tax treaties are rife with inequalities. They tend to be more advantageous for the home countries of multinational companies (MNCs), diverting muchneeded resources from developing to developed countries.
Multilateral agreements are not much better. The OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), for example, was supposed to ensure that MNCs could be taxed in countries where they operate (as opposed to shifting profits to low-tax jurisdictions). After nearly eight years of tedious negotiations, however, the process has yielded only modest results: a global minimum corporate tax rate of 15%, well below that of most countries. According to the South Centre, developing economies will derive few gains from this global minimum tax, which will benefit mainly tax havens.
And now, developing countries must decide between two different versions of a subject-to-tax rule (STTR), a provision that will be added to existing tax treaties to combat tax-base erosion and profit shifting. The first is from the OECD, with advanced economies leading discussions as part of the BEPS process, while the second is from the United Nations Committee of Experts on International Cooperation in Tax Matters (UNTC). An STTR is an obvious way to eliminate the “double non-taxation” of certain intra-group payments, including interest, royalties, and fees for services. Most tax treaties restrict the source country’s right to apply a withholding tax to these payments, which are generally deductible from the payer’s business income. This in effect erodes the source tax base. MNCs can then channel this income to affiliates that act as conduits and are resident in a country that applies low or zero taxes to such income and, crucially, is a treaty partner with the source country. Including an STTR in all treaties would allow the source country to tax a recipient of such income if the other country does not tax it at an agreed-upon minimum rate.
This may seem like a