Treasure Islands - Nicholas Shaxson [89]
This “no taxation without representation” formula is never perfect or even close to perfect, but historians recognize it as a cornerstone, over the very long term, of the development of democracy and representative government in the developed world. Until very recently, almost nobody spent time wondering whether this formula might work in developing countries too. The answer, instead, has been to send foreign aid.
Developing countries, by and large, have very low tax revenues, and the dynamics of tax and state-building have often been weak. Where tax revenues are high, it is often because the country is a mineral producer: These kinds of revenues make rulers accountable more to oil companies than to their citizens and fail to build accountability. Yet Africans today increasingly understand the importance of tax in their developing countries. “I have made revenue collection a frontline institution because it is the one which can emancipate us from begging,” said Yoweri Museveni, the president of Uganda, which collects taxes worth only about 11 percent of GDP. “If we can get about 22 percent of GDP we should not need to disturb anybody by asking for aid; instead of coming here to bother you, give me this, give me this, I shall come here to greet you, to trade with you.”35
Tax havens, of course, overturn the healthy dynamics by providing escape routes for their elites. It is worth briefly exploring some of the ways in which poor countries are drained of tax money through operations that, even when of questionable legality, are rarely challenged. This brings us back to the story about how countries allocate taxing rights between them.
Since the 1920s, when the League of Nations tried to get countries to agree how they would divide up the tax revenues on incomes from the various operations of multinationals, a big question has been at play. Do most of the taxing rights go to the “source” country that hosts inward investment from a multinational based in another country, which is the source of the income in question? Or do they go to the “residence” country—the multinational’s home country, where it is resident?
Capital-rich countries like Britain that hosted a lot of multinationals investing overseas wanted rules giving most taxing rights to “residence” countries, while the “source” countries receiving inward investment—often poorer countries—wanted to tax the investors’ income locally, at the source. The agreements were eventually laid out in bilateral tax treaties between countries, but these treaties were heavily influenced by the prevailing models. The rich countries, led by the OECD today, have pushed for a model skewed in favor of themselves, while the United Nations favors a model that shifts taxing rights toward “source” countries, typically poorer ones.
No prizes for guessing which model has come to dominate the field of international tax. When the United Nations produced a draft model tax treaty in 1980 that was supposed to shift the balance back in favor of “source” taxation and developing countries, the OECD intervened aggressively to stop this: not only by ensuring that its own model treaty benefiting rich countries remained the preferred standard, but also by interfering at the United Nations to weaken its model. John Christensen, a former economic adviser to the British Crown Dependency of Jersey, remembers a meeting of the United Nations Tax Committee in Geneva in 2008 when Britain’s representative suddenly stood up