By
Tom Odhiambo
Title: Imposing Standards: The North-South Dimension Global Tax Politics; Authors: Martin Hearson; Publisher: Cornell University Press; Year: 2021; Pages: 247.
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In today’s globalizing world, it is near impossible for any country not to have some kind of business with some other country. The countries of the Global South are more or less forced into relationships with countries of the Global North because of the flow of money for investment down south.
International foreign direct investments (FDI) are touted as one root out of the poverty trap that is strangulating the Global South.
Thus, government officials from poor African, Asian, and Latin American countries travel the world or hand out brochures at conferences, promising multinational corporations and individual investors of benefits should they set up shop in their countries.
Bilateral tax treaties, therefore, are written because the investing country desires to protect the economic rights or benefits of their citizens in the global south countries.
The states receiving the investments are, on the other hand, convinced that they are taking care of their benefits. They tend to believe that by signing these treaties, they are entering into a special and exclusive relationship with the other country.
As Martin Hearson shows in his book, Imposing Standards: The North-South Dimension to Global Tax Politics (Cornell University Press, 2021) thousands of such treaties have been signed. Some of these treaties are decades old but still determine how cross-border investments and taxation are treated between the signatory countries.
There is enough literature to show that in the cases of the signed treaties between countries from the Organization for Economic Cooperation and Development (OECD) and those from the global south, the latter hardly gain much.
The poorer countries of the global south may get some multinational to invest locally, but they have little leverage over the transfer of earnings back to the investor’s country of origin. The treaties are largely designed to avoid double taxation.
This means that there is a lot of concessions granted to the companies from the rich countries by the governments of the poor countries. Why?
Of course, government officials who negotiate these treaties are under pressure to attract investment. They know that they are competing with other countries for the same investment. They may even have an idea of what the other countries are offering the investor.
But they also know that the investors and those negotiating on their behalf are prepared to extract the most beneficial terms to them.
So, the government reps sit at the negotiating table probably knowing that the other side of the table is better prepared, and because it has the money that the government needs, it won’t accept unfavorable conditions.
Actually, Hearson shows in Imposing Standards that often the government negotiators are poorly skilled, unprepared or just don’t have the technical skills needed for high level negotiations. Why would this be so?
In some cases, this situation happened or happens because of the nature of government employment where patronage could have led to staffing of important offices with less skilled but connected individuals.
Also, bilateral trade agreements can involve lengthy discussions on several clauses of the treaty. Unless those representing a given government are experts in treaties, especially in relation to taxes and taxation, the government will likely end up being shortchanged.
But even more important is the fact that the negotiators from the OECD countries would most likely be highly qualified, better remunerated and some of them seasoned in the business. The terms of engagement between the two groups could also have been predetermined by history plus theory and practice from the Global North.
How does some poorly paid, inadequately trained, and unmotivated civil servant negotiate with such a team, under such conditions?
As Hearson shows in the case of Zambia, such circumstances once led to:
“… an almost reckless disregard for the treaties’ implications, making concessions that undermined policies it was simultaneously trying to implement to raise more revenue and keep capital in the country. Zambia also lacked a clear sense of the concessions that it might have been able to extract from treaty partners, as illustrated by the better results obtained by other African countries in negotiations with the same countries, and the better results Zambia itself obtained once it had the support of an external specialist adviser.”
In other words, without better qualified, knowledgeable, and motivated negotiators, African countries will continue to lose out when it comes to signing bilateral tax treaties.
Imposing Standards reminds everyone who is concerned about the nature and methodology of bilateral tax treaties that they are historically and innately skewed against poor countries of the Global South, especially African ones.
It is not just that Africa is undeveloped, has lesser qualified negotiators and is more subject to political changes that affect such treaties, it is also that in many cases, the investing companies pay expatriate workers better than the locals.
This arrangement means that they do transfer more resources back to their home countries more easily because of reduced tax rates. African countries have very little leeway to renegotiate or repudiate these treaties because, in the first place, they signed them voluntarily.
Recourse to a court of law in case of a dispute or to a private arbitration is often expensive and paints the poor country in bad light. Such a country would be seen as unreliable and a risk for investors.
Considering the power of the OECD countries, for instance, it is easy for an African nation, for instance, to become an investment pariah. No country wishes to be described as such.
There is no doubt that bilateral tax treaties will continue to disfavor countries of the Global South. The wealthier nations of the Global North will continue to naturally take care of their interests, and thus, ‘impose standards’ on others.
But the poor countries need to train their negotiators, pay them well, establish institutions that will train local manpower in tax law and negotiation skills.
Yet, probably the most important skills would be to imbue their citizens and officers with patriotism, so that they don’t just concede to unfavorable terms by investors because they don’t seem to care or have been promised some other benefits but refuse to accept standards designed elsewhere being imposed on their countries.
The writer teaches at the University of Nairobi. Tom.odhiambo@uonbi.ac.ke
