Estimating the revenue costs of tax treaties in developing countries

Abstract

Tax treaties between countries influence how much tax revenues governments receive from multinational enterprises. These treaties often reduce the withholding tax rates on outgoing dividend and interest payments. We provide illustrative estimates of costs for these two taxes for 14 developing countries in sub-Saharan Africa and Asia in a first multi-country comparison of this kind. These might be overestimates because we assume that foreign direct investments are not influenced by the tax treaties. We estimate that the highest potential tax revenue losses are within hundreds of millions USD and around 0.1% of GDP, with Philippines incurring the highest losses both in USD and relative to GDP. We also find that around 95% of the losses is due to dividends and that only four investor countries-Japan, Netherlands, Switzerland, and Singapore-are together responsible for more than half of the losses. We discuss the limitations of these estimates and how future research could improve their quality as well as coverage.

Tax treaties worldwide: Estimating elasticities and revenue foregone

“…As expected, the static estimates imply substantially higher tax revenue foregone than our elastic estimates. A case in point is Bangladesh, for which our static revenue foregone estimate related to dividends is 79 million USD (equivalent static estimates by ActionAid (2016) and Janský and Šedivý (2019), respectively, were 75 million USD and 85 million USD), whereas our elastic estimate puts the potential revenue foregone at only 42-49 million USD. We find comparable differences for the majority of countries and confirm the notion that static estimates tend to overestimate potential tax revenue foregone: when the behavioural reaction is reflected through the inclusion of elasticities, the estimates of potential revenue foregone are approximately halved.…”

“…From the opposite point of view, we find that as a recipient country, the Netherlands is responsible for the largest share of potential revenue foregone worldwide, 2.2-2.5 billion USD for dividends and 0.4-1.3 billion USD for interest, with a large share of both related to the EU directives. The Netherlands is also perceived as important in similar analyses by Fernandez et al (2013), Weyzig (2012), Garcia-Bernardo et al (2017) and Janský and Šedivý (2019). The results shown in Tables 5-8 only include country-level sums for country-pair-level estimates of potential revenue foregone due to space constraints; our results are presented in full at the country-pair level in the online appendix.…”

Base Erosion and Profit Shifting (Beps) in Low-Income Nations by the Multinationals: A Critical Review of Literature

“…This figure may increase to US$172 billion if not check (Adeleke, 2019). In India alone, the estimated losses could have been as high as 5% of GDP, while Nigeria has a low tax to GDP ratio of 6% (Cobham, & Janský, 2018;Janský, & Šedivý, 2019). Supporting study also attempted to demonstrate the tax revenue loss as a share of GDP depicted in Figure 4.…”

Power and sovereignty

“…However, this is only the case for the group of middle-and not low-income developing countries (Neumayer 2007(Neumayer , 1501Barthel et al 2010, 366-377). Additionally, it's not certain that increased FDI compensates for the losses in tax revenue, which can be quite substantial for developing countries (Jansky 2018).…”