UK tops global table of damaging tax deals with developing countries

Treaties limit the tax poorer nations can place on British companies doing business within their borders, says ActionAid.
The UK has signed a high number of tax deals with some of the world’s poorest countries, potentially depriving those states of millions in tax revenues every year, according to an analysis by ActionAid.

Tax treaties are legal agreements between two countries on how each can tax capital flowing from one jurisdiction to another. In theory they are established to prevent double taxation – where income is taxed in two jurisdictions – but in practice many agreements limit the tax poorer nations can place on companies doing business within their borders.

Since 1970 the UK has signed a number of treaties with developing African and Asian countries, 13 of which severely restrict their ability to tax foreign companies operating in their country through corporation tax, withholding tax on dividends and capital gains tax. This is among the highest number of harmful treaties signed by any country since 1970 according to ActionAid’s research.

“The global web of tax treaties is tying the hands of governments and severely limiting the ability of poor countries to tax global companies. It’s deeply concerning that the UK his one of the countries with the largest number of harmful tax treaties which make it possible for multinational companies to slash their tax bills in poor countries,” Savior Mwambwa, ActionAid tax campaign manager said.

Based on ActionAid’s data the Guardian has found 21 treaties between developed and developing countries that limit the maximum withholding tax rate on dividends at 0% and a further 114 treaties that limit the maximum withholding tax rate on dividends leaving a developing country to 5%.

According to business databases, the Guardian has identified at least 1,500 companies based in developing countries that have a US or Europe-based parent that are able limit their tax rate on dividends to 5%.

The structures, which are completely legal under the treaties, allow companies to avoid taxes on dividends earned from activity in a developing country. That income is then routed back to parent companies in developed nations, where tax rates are often much higher.

In some cases the treaties can lead to double non-taxation, where profits are untaxed in either country. In the case of a 0% tax rate, companies can send profits derived from their businesses in a developing country to a parent company in an OECD or G20 nation, paying no tax as it leaves the country. It is then up to the parent country to tax the income. The current UK treaty with Gambia has a 0% withholding tax rate on dividends paid to a UK company.

There are also a number of colonial era tax treaties between the UK and its former colonies still in operation. An agreement between Malawi and the UK signed in 1955 while the African nation was under colonial rule is still in operation today. The treaty states that companies operating in Malawi, which are owned by a UK parent, can send dividends back to their home country untaxed.