Mongolia and tax treaties: the mouse that roared

Recently we blogged a presentation and article by the hard-hitting Lee Sheppard of Tax Analysts, slamming the OECD for allowing and even encouraging a wide arrange of abusive tax practices. The blog is worth reading in its own right, especially given that the OECD will on Friday publish a long-awaited report (previewed here) on how it plans to help countries tackle multinational tax avoidance. We will publish a briefing on this later today.

For now, we will highlight a short part of her speech, delivered in her characteristically forthright style:

Don’t sign OECD model treaties, don’t sign U.N. model treaties
. . .
For multinationals, "there are countries for which there is extraction, and countries where there are customers, and these are all countries from which income has got to be stripped. And the rubric that allows this is the international consensus. It is the whole treaty network. The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals"
. . .
The international consensus is "basically a load of nonsense that protects multinationals." When you sign onto the international consensus, you sign on to a bunch of deleterious consequences.
. . .
"When you sign an OECD model treaty, you say there is no withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign that?"

Hard-hitting, important stuff. Our emphasis added. Now, a new special report from Reuters (hat tip: Katrin McGauran) is also well worth reading, in this context. Entitled In tax case, Mongolia is the mouse that roared, it shows one developing country kicking back against the tax abuses that are routinely run out of the Netherlands, just as Sheppard described it. The story begins:

"Turquoise Hill Netherlands is a little-known Amsterdam-based company with three employees, no office, and not even its own mailbox. To the government of Mongolia, though, the company represents billions in taxes that it will never see.
. . .
The Netherlands may help countries like Mongolia with aid, but it also undermines development in poor countries by making it easier for companies to cut taxes."

Turquoise Hill is a 51 percent owned subsidiary of Anglo-Australian mining giant Rio Tinto, which has been stripping income out of Mongolia via the use of its old tax treaty with the Netherlands. This relates to a copper mine that Rio Tinto believes could be the world's third biggest.

Although Mongolia cancelled this treaty in 2011, deeming it unfair (which it clearly was,) it is not clear that this will allow it to start taxing the company appropriately. As the story notes:

A Rio Tinto spokesman told Reuters in an email that the cancellation of the Dutch treaty will not affect [the] use of its Dutch holding company, because the firm has a separate investment agreement with Mongolia which "stabilizes" treaties that were in force in 2009. 

This is unfortunate, but it is heartening that other developing countries are starting to take a look at the unfairness of the international tax treaty system. Last year, Argentina terminated treaties with Switzerland, Spain and Chile. Zambia's new government is also reviewing bilateral treaties. (We looked at some of the issues at play in a blog entitled India: don't sign with Liechtenstein.)

Also take a look at our June Taxcast, looking at Mongolia and its rejection of tax treaties, and providing further details. The section starts about 12 minutes into the taxcast.



Perhaps more surprisingly, the Dutch government is now itself assessing the fairness of some of its treaties.

"Dutch State Secretary of Finance Frans Weekers said he was already reviewing tax treaties with five developing countries to determine if they may be unfair, and will re-negotiate if they are. So far he is not looking at the Mongolia case, but Finance Ministry spokesman Remco Dolstra said that Weekers plans to visit soon and will discuss the matter."

This is welcome, though it remains to be seen how far the Dutch government is prepared to go in confronted the entrenched vested interests at play here.

The report cites our friends at SOMO in the Netherlands, who have done some good work in this area, and cites a Dutch politician making a good point:

"We provide aid to developing countries, but at the same time we make it impossible for them to generate their own income," says Jesse Klaver, a member of parliament for the Green Left party. "It's harmful and unacceptable for us to help multinationals make profits at the expense of developing countries."

Quite so.

More generally, it is time to open up the entire OECD-led global treaty network to greater scrutiny and criticism, for it has enabled corporations around the world to take the benefits from societies in which they operate, without paying their fair contribution to the creation of those benefits.

Coming very soon: our report on the OECD and its "Base Erosion and Profit Shifting" report on tackling corporate tax avoidance.