The London School of Economics and Political Science Bargaining away the tax base: The North-South politics of tax treaty diffusion Martin Hearson A thesis submitted to the Department of International Relations of the London School of Economics and Political Science for the degree of Doctor of Philosophy, London, August 2016 1 Declaration I certify that the thesis I have presented for examination for the PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 92 508 words. 2 Abstract Developing countries have signed over a thousand tax treaties, at a cost of millions of pounds a year, based on a myth. The predominant legal rationale for so-called ‘double taxation’ treaties is outdated, while the evidence that they attract investment into developing countries is inconclusive. Although the financial gains from tax treaties are split between the treasuries of capital exporting countries and their multinational companies, most of the costs are incurred by the fiscs of capital importing countries. Rational actor models alone cannot explain the diffusion of tax treaties to the global South. The missing piece of the picture is ideas. As developing countries have formed their identities as fiscal states, a century-old narrative describing the deleterious effects of double taxation resulting from international fiscal anarchy has shaped different actors’ preferences. From the perspective of those focused on investment promotion, tax treaties are part of what a state does when it wants to compete for investment, regardless of the evidence about their actual effects. Meanwhile, officials developing the tax system have looked to the OECD as the source of sophisticated technical knowledge, and learned to regard tax treaties as the way to ensure ‘acceptable standards’ for taxing multinational companies. This thesis uses interviews with treaty negotiators, observations of international meetings, and archival research, including case studies from the UK, Zambia, Vietnam and Cambodia selected through a mixed methods strategy. It identifies three diffusion mechanisms: competition by developed countries for outward investment opportunities, ‘boundedly rational’ competition by developing countries for inward investment, and efforts by tax specialists to disseminate fiscal standards. It also highlights two scope conditions. First, competition for inward investment can be blocked if political actors are concerned about raising corporate tax revenue. Second, where the preferences of specialists and non- specialists in a country do not align, control over veto points is a prerequisite to diffusion. 3 Acknowledgements This project really began while I worked at ActionAid, and has continued as a collaboration with its various offices and partners around the world. Over the past four years I have been especially grateful for the ideas and contacts of: Nadia Harrison and Lovisa Moller in London; Anders Larsen, Nelly Busingye and Jalia Kangave in Kampala; Kryticous Patrick Nshindano and Pamela Chisanga in Lusaka; Savior Mwambwa and all at Tax Justice Network Africa in Nairobi; Nora Honkaniemi in both Nairobi and Hanoi. The others within civil society who helped to shape my thinking are too numerous to mention, aside of course from the founders of Tax Justice Network, especially John Christensen, without whom few of us would ever have thought to look into the obscure world of international taxation. I have enjoyed many rich and challenging discussions with members of the international tax community, as well as plundering their contact books. In particular, thanks go to Michael Lennard of the UN tax committee secretariat, Lee Corrick and Diego Gonzalez-Bendiksen at the OECD, Roberto Schatan at the IMF, Heather Self, Michael Durst, Jeremy Cape, David Spencer, as well as my friends in the tax Twittersphere. My supervisor Jeff Chwieroth’s comments shaped and focused the project throughout, making it immeasurably better. I am also grateful (in hindsight!) for critical feedback early on from LSE’s Leonardo Baccini and Steve Woolcock, and later from James Morrison. A special thanks is due to a number of academics who have reached out to me with useful comments but also comradeship in the lonely world of the tax IPE scholar, notably Len Seabrooke, Duncan Wigan, André Broome, Lauge Poulsen, Jason Sharman, Ronen Palan and Lucy Barnes on the international relations side, and Alison Christians, Eduardo Baistrocchi, Hugh Ault, Judith Freedman and the International Centre for Tax and Development team on the tax side. The companionship of fellow PhD students was of course invaluable, including: at LSE Joanne Yao, Lukas Linsi, Marian Feist, Andrew Delatolla, Daniel Schade and Heidi Wang-Kaeding; further afield Todd Tucker, May Hen, Daisy Ogembo and Deeksha Sharma. My wife, Rachel, has helped me keep this work in perspective. She put up with all the traveling without much complaint, but then she didn’t have to wait for a telegram to find out when I would be home. I acknowledge ESRC funding, without which I couldn’t have undertaken this project. The ESRC is state-funded, and so, ultimately, it was tax that paid for my PhD. 4 Contents Abstract .................................................................................................................................... 3 Acknowledgements .................................................................................................................. 4 List of tables ............................................................................................................................. 6 List of figures ........................................................................................................................... 7 Acronyms ................................................................................................................................. 8 Preface ..................................................................................................................................... 9 1 Introduction .................................................................................................................... 11 2 International fiscal relations ........................................................................................... 22 3 The tax treaties conundrum ............................................................................................ 56 4 Turning the tables: competition for inward and outward investment............................. 78 5 Expert authority in the diffusion of tax treaties ............................................................ 104 6 Case selection and methodology .................................................................................. 136 7 The United Kingdom .................................................................................................... 150 8 Zambia.......................................................................................................................... 179 9 Vietnam and Cambodia ................................................................................................ 197 10 Conclusion.................................................................................................................... 217 Annex 1: list of interviews ................................................................................................... 227 Annex 2: Descriptive statistics for quantitative analysis ..................................................... 230 Bibliography ........................................................................................................................ 231 5 List of tables Table 1.1: Outline of the mechanisms, conditions and cases ................................................. 19 Table 3.1: Selected provisions of tax treaties and their effects .............................................. 63 Table 4.1: Breakdown of interviews ...................................................................................... 80 Table 4.2: Examples of spatial lag variables in a diffusion study .......................................... 83 Table 4.3: Quotes from developing country negotiators ........................................................ 92 Table 4.4: Quotes from developed country negotiators ......................................................... 99 Table 5.1: Overlap in membership between UN and OECD tax committees ...................... 128 Table 6.1: Original and re-estimated coefficients for the Cox proportional hazard model.. 142 Table 6.2: Model fit for case study countries ....................................................................... 147 Table 6.3: Summary of case studies ..................................................................................... 148 Table 7.1: UK negotiations with developing countries during 1970-1979 .......................... 154 Table 7.2: Predicted survival for within-UK case comparison ............................................ 164 Table 8.1: Phases of