Double taxation conventions are a recondite subject. They shouldn’t be. They’re the plumbing of the international tax system: the unremarked conduits through which income and profits are shifted across borders, and by which governments negotiate away fiscal protections and defences. Tax treaties (for short) are the globalising legal mechanisms which, in large part, have made almost all of the major corporate tax controversies of the last decade actually work. Writing about Google’s ‘Double Irish’ or Amazon’s ingenious tax shelter (other ingenious tax shelters are available) will always, of course, be more relatable than trying to describe the effects of the UK-Luxembourg Convention for the Avoidance of Double Taxation With Respect to Taxes on Income and Capital, or the EU Council Directive on a Common System of Taxation Applicable to Interest and Royalty Payments Made Between Associated Companies of Different Member States. Nonetheless it is these international agreements, and others like them, that make possible both Amazon’s and Google’s previous international tax strategies, and almost all of the similar tax behaviours called out in the Paradise Papers or the recent Mauritius Leaks.
In most cases the fiscal effects of these treaties haven’t arisen by accident — though you wouldn’t know it from much of the reporting and analysis of corporate tax scandals, which have a tendency to portray Pooterish government fiscs scrambling to catch up with the nimble tax lawyers of U.S. tech giants. The reality is that the same governments which have railed against Amazon’s and Google’s tax behaviour have themselves consciously dismantled fiscal barriers between their jurisdictions and low- or no-tax environments through such agreements, often in the theological pursuit of greater FDI. Though concealed behind the rhetoric of eliminating double taxation (which is a real thing, of course), in fact in an age of increasingly territorial tax systems and unilateral foreign tax credits, shrinking ‘single taxation’ on the fruits of investment from or through tax treaty partners is the whole point of many tax treaties, particularly those between capital-exporting and capital-importing economies. As Ainsley Harriott never said, it’s not so much “can’t tax” as “won’t tax”.
Given this cognitive dissonance — between governments’ post-crash rhetoric about tax avoidance and tax havens, and the reality of their international tax treaty-making — it’s little wonder that governments choose to make tax treaties in private. Such secrecy is long-standing convention, but it has never been more politically expedient. The existence of tax treaty negotiations is usually only announced once they have begun, and they take place entirely behind closed doors. And even when, fully-formed, the finalised treaties reach legislatures, their parliamentary review and ratification has historically passed without significant debate in almost every country, except the USA. Here, for instance, is Canada’s senate ratifying two new tax treaties in 2016:
Hon. Stephen Greene moved third reading of Bill S-4, An Act to implement a Convention and an Arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and to amend an Act in respect of a similar Agreement.
He said: Honourable senators, I have nothing more to add at this time. I think it’s a marvellous bill. It’s a continuity-of-government bill. It does wonderful things for Canadian industry and consumers alike, so please continue.
Hon. Scott Tannas: I intend to break Senator Greene’s record. This is a no-brainer, as my kids would say. Thank you.
The Hon. the Speaker: On debate, Senator Day.
Hon. Joseph A. Day (Leader of the Senate Liberals): Thank you.
Hon. Senators: Question.
Senator Day: Should I tell anybody what this bill is about?
Some Hon. Senators: No.
Senator Day: It’s about double taxation and avoiding it, and I agree with my honourable colleagues that this is pretty straightforward. It tends to reflect standard clauses. There are about 92 of these agreements around the world at the present time, and the bill is following the OECD standard clauses.
I would recommend that we pass this Bill S-4 and send it over to the House of Commons.
Hon. Donald Neil Plett: I’d like to add my voice and simply say that this, again, is clear evidence that occasionally a good biscuit can be found in a garbage can.
The Hon. the Speaker: Is it your pleasure, honourable senators, to adopt the motion?
Some Hon. Senators: Agreed.
This combination of secrecy and legislative torpor means that the political stories behind these treaties — the commercial and economic interests, the lobbying, the choices and decisions by ministers and officials that are inscribed in any piece of law-making — very rarely get told. Tax treaties are somehow naturalised as the inevitable, technical fabric of the international tax system, when in fact they’re created by human initiatives and interests — and in fact vary quite significantly as a result of these contingent political processes. Given that even the usually liberal IMF has advised that “developing countries…would be well advised to sign [tax] treaties only with considerable caution” because of their fiscal risks, I think the political and bureaucratic stories that underlie their ongoing proliferation deserve scrutiny.
Today the development charity Christian Aid publishes a short case study about a new tax treaty, signed last year between Ghana and Ireland, and today’s Irish Independent has some more detail. Ghana has a lot at stake here: according to (slightly puzzling) Ghanaian statistics, over a third of Ghana’s FDI comes from or via Ireland, more than from any other country. Combine that major economic linkage with the fact that Ireland continues to be by far the world’s leading destination of shifted corporate profits, according to Gabriel Zucman et al; and that Ireland is in particular one of Europe’s biggest royalties conduits; and the fiscal risks to Ghana from an incautiously drafted treaty with Ireland are potentially enormous.
The case study draws on some research I undertook in 2017 and 2018. Rather than simply running a rule over the treaty text and prognosticating about its possible fiscal effects, I wanted to try to tell the political story behind the treaty: how it came about, and how it ended up in the form it has (removing a number of Ghana’s domestic defences against profit-shifting). We interviewed civil servants and businesses involved with the treaty and its negotiation in Dublin and Accra; and through freedom of information laws we obtained a raft of (quite heavily redacted) documents and emails from the Irish Department of Foreign Affairs and Trade and the Revenue. These papers provide, to my knowledge, the first published documentary record of a recent tax treaty negotiation. For those interested in the nuts and bolts of this kind of thing, I’ve uploaded here a fuller (unedited, draft) paper that sets out what we found.
The tale that emerges is not one of conspiracy or impropriety. It is, though, at odds with the story that Irish ministers told in public and parliament when the treaty came to be ratified late last year — almost unprecedently, with some committee scrutiny and Dáil debate, thanks to advocacy from Christian Aid. Ministers insisted that the treaty was Ghana’s initiative, a fact they were particularly emphatic about, repeating it, falsely, five times in parliament. And they claimed that the balance of the negotiating outcomes had leant towards magnanimous Irish concessions for Ghana’s development interests: permitting Ghanaian tax on technical services provided by Irish firms, and tax-exempting Irish academics in Ghanaian colleges and universities “to encourage the development of education in Ghana”.
The Irish negotiators did indeed make some concessions of these kinds. But overall, the story that the Irish government’s own internal documents and our interviews told was somewhat different. It showed that:
- The Irish government set out unilaterally to target four developing African economies, including Ghana, for new tax treaties with Ireland (when Christian Aid pointed this out late last year, the government eventually apologised to the Dáil for having “unintentionally misinformed the House” on this point);
- The Irish government’s negotiating strategy disregarded warnings from some colleagues in the Department of Foreign Affairs that driving down Ghanaian withholding tax rates was “a practise which would clearly not be encouraged in relation to developing nations”, and could encourage multinational taxpayers to use the treaty to “channel money between jurisdictions to minimise tax payable”, instead making it one of their central objectives;
- Irish diplomats, indeed, wanted to drive down withholding tax rates so much that they sought to circumvent the Ghanaian negotiators’ resistance to this element of the proposed treaty by going around the negotiating team to lobby Ghana’s deputy finance minister;
- The two sides eventually broke the eight-month deadlock over treaty rates by locking Ghana into a Most Favoured Nation clause — the first ever in Ghana’s tax treaty network. This adds permanent risk and constraints to Ghana’s future tax treaty negotiations: if it agrees any lower rates with other treaty partners in the future it will automatically have to lower its withholding-tax defences against profit-shifting into Ireland, one of the world’s largest centres for profit-shifting.
It’s also worth noting that despite being signed nearly three years after the international agreement of the OECD’s ‘BEPS’ measures against tax avoidance and abuse, the new treaty is entirely non-compliant with these measures. It contains none of the “minimum standards” against tax avoidance that the Irish government committed at the OECD to introduce in full. Though the Irish government has since written to Ghana, offering to add these anti-abuse measures in a protocol to the treaty, they’ve nonetheless sought to ratify and bring the treaty into force without them, and without having received any response from the Ghanaians.
The Ghanaian government is responsible for its negotiating choices too. Its negotiating team was experienced, and included internationally-distinguished Ghanaian tax experts: led by the co-chair of the UN Tax Committee, and second-chaired by a member of the Steering Group of the OECD Global Forum. Ghana ultimately agreed to sign the treaty, and accepted the compromises that may in the future weaken its protections against profit-shifting.
Nonetheless, when an FDI fire-hose like Ireland comes calling for a tax treaty on a poorer, ambitious emerging economy like Ghana, the economic and political terrain on which they sit isn’t level. There are pressures to make treaties like this happen — possibly from big investors, at least one of whom we know corresponded with the Irish Ministry of Foreign Affairs about the treaty during its negotiation; possibly from other parts of the Ghanaian government. Without the corresponding documentary record from the Ghanaian Ministry of Finance we can’t see all these pressures, though the Irish lobbying of Ghana’s Deputy Finance Minister to break the negotiating impasse is suggestive.
I may not think it’s a good idea, but there’s nothing inherently illegitimate with bargaining away taxing rights for the promise of foreign investment. Equally, though I may not like it, it’s a legitimate political project for the Irish government to try to reduce tax burdens on Irish companies operating overseas in poorer countries. The dissonance between the public and private stories about this tax treaty suggests, however, that governments simply don’t like to admit that this is what they’re doing. Their efforts must instead be dressed up as technical measures against double taxation, or quasi-charitable development interventions. Telling political stories of this kind is, I think, important not because it reveals a great conspiracy to re-wire the international economic landscape; but because it shows what is actually at stake in these kinds of agreements, usually so carefully shielded from public view until they’re birthed into the world. Not a hidden scandal, but a self-interested economic negotiation that deserves an honest debate.
Postscript: Martin Hearson is of course one of the path-breakers here, whose archival work and interview-based studies of tax treaties ancient and modern in Africa and Southeast Asia provide a much richer set of stories than this one. Read his PhD (I imagine there’s a book on its way) and other publications here.