THE EMPIRE ON WHICH THE SUN NEVER SETS:

INTERNATIONAL TAX TREATIES, POST-COLONIAL COUNTRIES, AND THE CONTINUING POWER IMBALANCE

Photo by Ibrahim Boran on Unsplash

BACKGROUND

Nyasaland was under the governorship of Geoffrey Francis Taylor Colby, the Queen appointed representative, when it signed a tax treaty with the UK in 1955. Under this treaty Nyasaland was to not charge any withholding taxes, i.e., taxes on money leaving a country. British companies could therefore move money out of Nyasa through any medium freely without paying any tax. 65 years since the signing of the treaty and 54 years since Nyasaland’s independence to become the Republic of Malawi, the treaty continues to exist. With all different strategies of tax avoidance not only the companies based out of the UK, but other European countries like the Netherlands continue to “unduly” benefit from this tax treaty which otherwise they would have been subject to Malawi’s 15% withholding tax rate. The UK remains Malawi’s third largest source of foreign funds flow and in such a situation renegotiating the treaty can have a significant impact on Malawi’s whatsoever small source of income. From an objective perspective, the only question remaining is “has the sun ever set on the empire?”

INTERNATIONAL TAX TREATIES vis-a-vis DEVELOPMENT: NEO-COLONIALISM?

The initial and sole purpose of Tax treaties under OECD mechanism was to augment economic activities by preventing double taxation on capital and income. But somehow they have become a new tool of colonialism where the developing countries give away their resources with insufficient returns and all this due to either archaic tax treaties which poses difficulty in renegotiation or strategic negotiations to have a willful tax treaty by a developed country.

LACUNA IN TREATY REGIME

However, for all the measures adopted, it has not reduced the disadvantages of the treaty based model of taxation. Though they are named “double taxation avoidance treaties”, they have rather become a source of credit input or gaining subsidies. Martin Hearson in his book “Studies in the History of Tax Law” writes:

CONCLUSION

Though the OECD model remains the churning inspiration for developed countries, the UN Model Tax Treaty is considered to be comparatively in favor of source countries i.e., developing countries. There are a few instances where the developing countries have relied on the UN Model. In a scenario of no progress from model reforms of OECD or UN for that matter, the countries are themselves trying to re-negotiate their treaties; sometimes unilaterally. For instance, India has last year only re-negotiated its treaty with Mauritius which earlier exempted capital gains tax for companies based out of the latter. Official data states that in the last decade the highest foriegn investment to India has come from Mauritius. In 2019, India has also ratified OECD’s the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) to ensure on checking tax evasion. Similarly, the government of Senegal canceled its tax treaty with Mauritius in 2020 claiming the treaty was causing them a loss of USD 257 million over 17 years. In 2015, both South Africa and Rwanda began talks to renegotiate their tax treaties with Mauritius.

Lawyer| Consulting Editor @ ijlpp.com|