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UN tax committee suggests measures to curb capital flight from developing countries

28 January 2010

By Marta Ruiz

In a note to the UN Committee of Experts on International Cooperation in Tax Matters entitled “Treaty process for developing countries”, Mr. Victor Thuronyi, senior counsel to the International Monetary Fund, puts forward key proposals for ensuring that developing countries benefit from information exchanges and avoid tax evasion and double taxation. Among these, he identifies two key proposals that have also been put forward by civil society organisations a multilateral tax treaty and automatic information exchange, as being the most beneficial for developing countries.

Tackling double non-taxation by OECD countries
One of the first concerns the note raises is the difficulty for developing countries in negotiating double taxation treaties with developed countries (member countries of the Organisation for Economic Co-operation and Development). The note suggests that some guidelines should be put in place in order to prevent treaties where “some OECD countries negotiate provisions that allow their companies to escape source country taxation (perhaps escaping taxation altogether)”, therefore enhancing the competitiveness of OECD based companies and giving them the opportunity to reach double non-taxation.

 
Enhancing negotiating capacity
The note also stresses the need for developing countries to enhance their negotiation capacity and asks whether the UN tax committee might provide advice on this point.

Undertaking unilateral measures
The note explains a series of unilateral measures that developing countries could implement domestically, such as unilateral provisions for taxing non-residents on capital gains, following the UN Model Convention, identifying in their domestic law a list of countries or jurisdictions to which certain provisions would apply. Regarding the application of a withholding tax on dividends or royalties, the note suggests that in order to avoid competition, a floor limit could be internationally coordinated.

Developing a treaty strategy
The note acknowledges the huge disparities among developed and developing countries and stresses that “it would take a life time for most developing countries to negotiate a substantial number of treaties”. It therefore concludes that “it makes little sense to envisage substantially expanding the treaty networks of most developing countries” which, in other words, would mean the implementation of a multilateral treaty.

A multilateral “light” treaty
This is the last and most interesting element. The note summarises that, the bilateral format being overly long and complex, the multilateral approach would minimise this risk and provide a better basis for developing countries, even at a smaller level such as regionally. Such a treaty would address the following issues:
- exchange of information;
- administrative cooperation in tax collection; 
- non-discrimination;
- residence tie-breaker rule (exclude dual residence for tax purposes) and
- a mutual agreement procedure.

Regarding the first point, on exchange of information, the multilateral treaty would replace the current Tax Information Exchange Agreements (TIEAs). The note explains that this would be “a much better course of action than bilateral TIEAs”, and adds that “it would seem far more preferable to negotiate a single universal agreement with a standard for and a single meaning”.
The note also suggests that the treaty should “provide a framework for developing countries receiving assistance from developed countries by facilitating exchange of information and by enforcing tax claims”.

Most importantly, in order to tackle the administrative burden when exchanging information upon request, the note proposes that information would be provided automatically by financial institutions (on the basis of the European Savings Tax Directive), adding that “Automatic provision of information could substantially benefit developing countries since it would provide them with the information even in the absence of an investigation”.

The OECD meets this week to discuss domestic resource mobilisation for developing countries and the taxation challenge. CSOs have recently sent a letter to the OECD secretary General with demands along the same lines as those outlined in the UN note. If the OECD is serious about tackling these issues they should seriously listen to these proposals and work towards a multilateral agreement for automatic information exchange- the best solution for developing countries to fight tax evasion.