Finally, there is specific evidence that tax treaties are sometimes pushed through by nonspecialists in spite of the reticence of tax treaty specialists themselves. A study of tax treaty negotiations in Colombia, for example, suggests that tax officials received a political instruction to negotiate treaties swiftly in pursuit of "investment at any price."154 One negotiator from a lower-income country interviewed for this book explained that his country had signed a treaty with Mauritius, a tax haven, on very disadvantageous terms because the negotiation had been initiated by the country's newly created investment promotion authority and conducted without any revenue authority involvement. The tax implications were not considered, and the country did not even formulate an opening position before beginning negotiations.155 There are numerous examples of heads of state signing agreements over the heads of their negotiating teams or instructing them to negotiate in a hurry.156

### Conclusion

This chapter focused on tax treaty specialists: those who formulate international models and national policies and negotiate treaties themselves, as well as the other actors within their community, such as from businesses and academia. This transnational policy community has a distinct conceptualization of the role of tax treaties grounded in a set of norms concerning the appropriate way to tax multinational firms. The community wields the threat of double taxation as a tool through which to strengthen its influence over tax policymaking. The effect is to depoliticize negotiations between states that have distributional consequences, with political involvement treated as an exogenous constraint rather than an endogenous part of the policymaking process. Much of this is achieved using increasingly obscure language and elaboration of ever more detailed terms, as well as by the community's claim to authority derived from professional expertise. The community is predominantly composed of professionals from OECD countries, and this is one reason why, despite being in the majority, lower-income countries are still "norm takers" in the international tax regime.

The ability of the international tax community to exercise power within national bureaucracies varies over time and between countries. In lower-income countries, the number and experience of international tax bureaucrats varies, which is one reason for the variation in approaches to international tax: as individuals become socialized into the international tax community, their attitude toward tax treaties may changes: as they first learn about their costs and benefits framed in terms of their preexisting ideas, which may create a skeptical outlook; if they internalize the community's ideas about the desirability of convergence around OECD standards using tax treaties, it may create an enthusiastic outlook.

The influence of specialist tax bureaucrats over treaty making in a country depends further on their autonomy within the government structure. The number and nature of veto players varies between countries, and veto points may cause treaties to fail because of differing preferences over treaty partners, treaty content, or the whole project of tax treaties itself. These differences do not necessarily emerge because different actors have different material incentives, but because they hold different ideas about what tax treaties are for and, indeed, about the function of international tax rules.

—Deputy chairman of the Board of Inland Revenue

The United Kingdom has the widest tax treaty network of any country in the world. It played a very involved role in the development of the League of Nations and OECD model conventions, and the UK-US treaty of 1945 is regarded as having set the precedent for modern tax treaties.1 This chapter focuses on the 1970s, a period when the tax treaty network expanded rapidly into recently independent lower-income countries that were certainly keen to attract inward investment. Britain entered into negotiations with about forty lower-income countries during the period 1970–79, successfully concluding agreements with just over half. Most of these agreements are still in force today.

A conventional tax competition logic would suggest that the UK concluded a large number of tax treaties with lower-income countries because they were competing for British investment. In keeping with the arguments of previous chapters, this chapter develops that tax competition logic in two directions. First, it demonstrates that the main driver of the UK's treaty negotiations with lowerincome countries was competition between the UK and other home countries of multinational investors for outward investment opportunities. Second, it shows that two different logics of competition existed: one within the tax expert community, and another among nonspecialist stakeholders. For the tax specialists, including treaty negotiators in the Board of Inland Revenue, the goal of tax treaties was to export "acceptable" OECD tax standards wherever British firms operated. Nonspecialist stakeholders were motivated by a combination of the tax treaty myth and the perceived effects of tax treaties on the short-term effective tax rate of UK multinationals. This led to clashes of preferences, which the Inland Revenue

#### 94 CHAPTER 5

generally dismissed as misunderstandings or parochialism. The role played by expert technical knowledge in shaping the preferences of tax specialists is illustrated by the private sector actors, who did not align with each other but with the two civil service camps, based on their level of expertise.

Evidence presented in this chapter is drawn from civil service documentation released under the United Kingdom's thirty-year rule. It covers the decade from 1970, the most recent full decade for which these records were available, and one in which many treaties still in force today were negotiated with lower-income countries in Africa and Asia. The documents reviewed include internal civil service correspondence, minutes of negotiation meetings, and correspondence between the UK and other countries' negotiating teams. The focus is therefore on the variables driving the UK's actions, rather than those internal to the lowerincome country. We cannot tell conclusively from this evidence what motivated the lower-income country, but by mapping the process of each negotiation, it is possible to determine the extent to which the lower-income country was driving forward negotiations, or acquiescing to the UK's enthusiasm. Where the latter is the case, this illustrates how competition among capital-exporting countries is responsible for the emergence of new tax treaties, rather than purely among capital-importing countries as much of the literature assumes.

The rest of the chapter proceeds as follows. The next section briefly discusses the archival documents used. The chapter then establishes some general findings about roles and attitudes of different stakeholder groups in the treaty-making process, drawing from some specific examples as well as overriding policy considerations. I then move on to consider three cases in particular: the UK's negotiations with Egypt, Nigeria, and Brazil. Egypt shows the conclusion of a new agreement, Nigeria the renegotiation of a colonial agreement, and Brazil an unsuccessful negotiation in spite of strong demand from British businesses. In each of these cases, we see evidence that lobbying by tax specialists from British firms was crucial to determining the UK's position, as well as evidence of conflicting preferences between treaty negotiators and nonspecialist stakeholders.

### Context

The evidence used in this chapter is from the UK National Archives, which releases civil service files thirty years after they have been closed (seventy years for files that include information on identified people's tax affairs). Each file is recorded in an online database that includes its name and a short description. To find the relevant files, I searched this database for the terms "double tax," "double taxation," and "tax treaty," which yielded 2,301 results when I first conducted the search in 2014. The majority of these were country-specific files originated from the Inland Revenue or the FCO and its predecessors. They include internal civil service correspondence, correspondence between countries, and minutes of negotiation meetings. This means that they include both the internal thinking of the UK and the positioning of the negotiating partner, supplemented on occasion by intelligence about its motivations from other British sources.

Most of the country files indicate that sporadic contact between the two sides was the norm before any serious negotiations were initiated. The UK may have made tentative inquiries, as in the case of Latin American countries, or an ambassador from a lower-income country may have expressed an interest that the UK judged not to reflect a serious intent on behalf of that country's tax treaty decision makers. The UK entered into serious discussions with around forty lower-income countries during the 1970s, shown in table 5.1. The median length of time from the UK's first successful contact with a country with a view to negotiating a tax treaty to signature was just over three years, but a significant number of negotiations took over six years. The median time from first contact to ratification by both parties was as much as five years.

Negotiations were undertaken by a small team of officials within the Board of Inland Revenue. Most of the information used in this chapter is drawn from that team's files, although most treaties also have a corresponding Foreign Office file, which may include communication between the embassy and the desk officer in London, but is often purely procedural. In general, for each treaty the file begins with correspondence with the report of a conversation with a lower-income country, or correspondence either between the Inland Revenue and its counterpart or between the Inland Revenue and the British embassy. Preliminary discussions then give way to a formal request to start negotiations, and the Inland Revenue circulates a written request for comment to the Treasury, FCO, and the Department (or Departments, depending on the date) of Trade and Industry (DTI).

A typical negotiation consisted of an exchange of drafts (or simply the UK sending its draft and the lower-income country responding with comments), then a first round of negotiations in person. Finding a mutually convenient time to meet was a lengthy process when correspondence was principally by air mail, and a year's delay at this point for purely practical reasons was not atypical. After the first round of negotiations, the file usually includes formal minutes and a more informal memo circulated to accompany them, giving the negotiators' impressions of their opposite numbers. Further correspondence on outstanding issues usually led to a second round of negotiations, at which the agreement was initialed, signaling acceptance at an official level. The treaty was then subject to final checks, including translation and finalizing the definition of countries with the FCO, before it was signed. Sometimes errors, legislative changes, or a change of heart by one side could lead to

#### TABLE 5.1. UK negotiations with lower-income countries, 1970–79

*Source*: National Archives, various files. Where no information was available in the archives, this is indicated by a dash. Blank spaces indicate that this stage of negotiation did not take place.

\*Kenya's, Tanzania's, and Uganda's negotiations with the UK began as part of a joint negotiation on behalf of the East African Community.

amendments being made at this stage, either to the text itself or via a protocol, signed at the same time. Ratification followed, which in the UK involved the minister of state presenting the agreement to a parliamentary committee: the file usually includes a copy of the briefing given to the minister, explaining any salient or unusual features of the treaty, and giving suggested answers to anticipated questions; while these briefings are usually formulaic, they sometimes include information explaining the UK's reasoning. It was not unusual for signature or ratification to be delayed in the lower-income country, and the files sometimes show the UK negotiators seeking to expedite ratification by the other side.

There are also some files relating to the UK's general negotiating position, such as correspondence within and between departments relating to a crossdepartmental review of DTTs. Another set of files records meetings and correspondence with business organizations, including quarterly "state of play" reports on all the UK's negotiations, which were compiled as briefing documents for civil servants attending these meetings. These are discussed in more detail in the sections that follow.

### The UK's Active Pursuit of Tax Treaties

Since the earliest files discussing potential treaties, correspondence inside the UK civil service indicates that the UK was not merely a passive respondent to requests from lower-income countries, "stand[ing] ready with model treaties in hand," but rather it was actively shaping its own treaty network.2 Already in 1957, discussion of a potential agreement with Colombia states, "For years we have been unsuccessfully trying to conclude an agreement with a South American country without any success. . . . This is, therefore, the only area of the world, apart from the countries behind the Iron Curtain in which we have made no progress."3

With Turkey, the UK proposed talks in 1978 and again in 1979, but a note in 1981 indicates that the Turks "have expressed no enthusiasm" for a treaty.4 Similarly, the UK sent a draft treaty to Czechoslovakia in 1975, but in 1976 a civil servant wrote that "despite reminders, the Czechs have not responded."5 In the latter case, negotiations did take place in 1977 and 1978 but ended in a stalemate because "the Czechs [were] refusing to reduce their tax on royalties."6 Iran's previous "apparent lack of response" to the UK gave way to a "willing[ness] to have talks" in 1974, but later the same year the civil service files record that "our embassy is pressing the Iranians as much as we can."7 Another example is Mexico, with which the UK requested negotiations in 1978 after an approach to the Inland Revenue from business groups.8 The next mention in the "state of play" reports is in 1981, which record that the UK had been "told they are not yet ready."9

While business lobbying often underpinned the decision to pursue a treaty with another country, the Inland Revenue frequently made a first approach once it saw that a country had begun to negotiate with competitor states. In 1961, for example, the UK sent a draft treaty to Thailand after the latter began to negotiate tax treaties with other countries, even though there was no interest from British businesses.10 In the early 1970s, it tried again, noting a handful of requests from businesses as well as that Thailand had by that point concluded tax treaties with many competitor countries. After a meeting in 1972 with "the only one who is able to talk about Double Taxation Agreements" in Thailand's revenue department, a British Foreign Office official concluded that, "in principle they would be interested but it was not likely that Thailand would take the initiative."11 A memo from October 1973 notes that "Thailand does not seem to be very interested in a DTA with the United Kingdom."12

Similarly, when the UK approached Bangladesh about a treaty in 1976, a background note in the file states that "there is not much pressure in the United Kingdom for a treaty with Bangladesh,"13 and that the UK's initiation of the treaty was "partly because other countries had opened negotiations with Bangladesh."14 Bangladesh's revenue officials were apparently not interested at first, and the UK "made the running," including by applying diplomatic pressure.15 By the second round of negotiations in Dhaka, the head of state, Ziaur Rahman, was being given daily updates on progress.16 Nonetheless, the reluctance of Bangladesh's negotiators to surrender their taxing rights is visible in the meeting minutes. A Bangladeshi negotiator argued that the UK should break precedent and allow Bangladesh to retain higher withholding tax rates because it was "practically the poorest of the world's underdeveloped countries," to which his UK counterpart responded that "the United Kingdom did not regard a double taxation convention as a vehicle for giving financial aid, no matter how deserving the partner country."17

If the UK was keen to sign treaties with all lower-income countries, but many of them rejected its overtures, this would be consistent with the view that it is policy in the lower-income country that is the primary determinant of the timing of treaty negotiations. The picture painted by the files, however, goes beyond that. The UK actively reached out to certain lower-income countries to urge them to open negotiations, exerting diplomatic pressure where necessary. For many, the decision to respond positively to British overtures was characterized more by acquiescence than by enthusiasm. Excluding renegotiations, three-quarters (seventeen of twenty-three) of the negotiations listed in table 5.1 for which information is available were initiated by the UK. Where lower-income countries made the first move, this was often because they wanted to renegotiate the terms of an existing agreement put in place when that country was a British colony.

### Actors and Actions in UK Treaty Making

In this section, I outline the roles of different groups of stakeholders in the decisionmaking processes surrounding the UK's tax treaties. Specifically, I examine the preferences of tax treaty specialists in the Inland Revenue, who led negotiations, and those of nonspecialists, in particular those in the rest of government. I also consider what happened when these different preferences created conflict between the two groups.

#### **Tax Experts: Dissemination of Technical Standards**

For specialists inside the Inland Revenue, the major causal effect of tax treaties was not, despite their formal title of "for the avoidance of double taxation and the prevention of fiscal evasion," the elimination of double taxation (fiscal evasion rarely seems to get a mention either). The reason for this was that the UK, like many other countries, had taken unilateral steps to prevent double taxation of its firms operating overseas by giving them a credit against their UK tax bill for any taxes paid overseas.

Recognition of this dates back to at least 1957, when an Inland Revenue civil servant wrote that, with regard to one treaty, "the United Kingdom taxpayer gets very little benefit out of it: he will get credit for the tax paid in Colombia against the tax due on the same income in this country whether we have an agreement or not."18 Two decades later, in 1976, a cross-department review of the UK's approach to international double taxation, led by the Inland Revenue, made the case even more boldly: "In the absence of an agreement there is no question of United Kingdom investors being doubly taxed."19

What, then, was the purpose of a tax treaty for the Inland Revenue? That same note from 1957 records that, for a board of directors in the UK, "the advantages of a double taxation [agreement] need no stressing."20 It goes on to argue that a tax treaty "at once assures the directors that they will be taxed according to internationally accepted rules and they will not be subject to discrimination."21 These are often referred to as "intangible benefits," and they are mentioned by government officials throughout the period under consideration. According to the 1976 review, "These include protection against fiscal discrimination, the establishment of a framework within which the two tax administrations can operate, and the expectation that an overseas authority which has negotiated a treaty will at least try to apply it reasonably." The deputy chairman of the Board of Inland Revenue in 1976 was Alan Lord, who twenty years earlier had represented the UK on the new OEEC committee that would eventually become the OECD's CFA. According to him: "Above all, treaties impose acceptable standards for allocating profits to branches and subsidiaries and for dealing with transfer pricing in countries (some of them within the EEC [European Economic Community]) where such standards would otherwise be absent."22

For the specialists, tax treaties were therefore tools through which the UK, which had always taken a prominent role in the development of the international tax system, ensured other countries' participation in it. This would be especially beneficial for British businesses in the case of lower-income countries, including those newly independent, where, as one official wrote, "protection against fiscal discrimination is generally worth more . . . because they are more likely to include deliberately discriminatory fiscal practices in their general law than are developed countries."23 A memo from as early as 1949 expresses the view that "the United Kingdom particularly has much to gain from the increasing adoption, particularly by under-developed countries, of sound principles of income taxation and from the conclusion on sound lines of conventions for the relief of double taxation."24 Treaties were largely understood as means to ensure that British firms could be competitive *when they decided to invest*, rather than to make investment in the treaty partner more attractive in the first place. Thus, treaties would increase investment from the UK to the treaty partner, but not by influencing business decisions; rather, they gave British investors a helping hand.

The effect of treaties on outward investment from the UK was not a trivial matter during the 1970s but an important policy question. Treasury policy was to limit the impact of outward FDI on the balance of payments by encouraging it to be done out of retained earnings, investment currency, or foreign currency borrowing. In 1973, at a meeting of the cross-Whitehall Tax Reform Committee handling changes to corporation tax, a Treasury official argued against measures that would prioritize overseas investment, because of the effect on the balance of payments. The concern was about foreign exchange reserves, which could be protected more through income from exports than from direct investment; furthermore, the likely shift in manufacturing abroad as a result of outward investment would increase imports.25 Discussing this point, the 1976 review concluded that the treaty network at that point "neither encourages nor discourages overseas investment in fiscal terms compared with domestic investment, except where matching credit [i.e., tax sparing clauses] is provided."26 Around this time, the Inland Revenue was arguing against conceding Brazil's demands for more comprehensive concessions in a tax treaty on the grounds that they "would mean that we were according outward investment a higher priority than hitherto with all that that implied for the balance of payments and the domestic economy."27

The community of tax specialists who shared this analysis and these objectives was not limited to the Revenue itself: it extended into the private sector. In December 1971, Alan Davies of Rio Tinto Zinc (RTZ), chair of the tax committee of the Confederation of British Industry (CBI), wrote to Alan Lord. The letter outlined the limitations of the Revenue's current approach to consultation, which was to solicit comments from industry by letter once negotiations were initiated. Davies cited "a peeved feeling on our side that some more confidence would be justified," and argued for more informal discussion about the progress of negotiations.28 The informal tone of Davies's letter perhaps reflects a personal familiarity with the Inland Revenue officials concerned. For example, he attended meetings of the United Nations Ad Hoc Group of Experts on Tax Treaties between Developed and Developing Countries, representing the ICC, as did Inland Revenue negotiators.29

The result was a system of regular quarterly meetings between tax specialists from industry groups (the CBI, British Insurance Association, and Chamber of British Shipping) at which detailed information on the "state of play" in negotiations was divulged, and comments sought on specific topics.30 The first such meeting took place in March 1972, and they continued for at least the next decade. At each meeting, the Inland Revenue participants were supplied with a status report on current and planned negotiations, which they shared verbally with the business representatives on the condition that the information was not shared outside of the small, expert group. When negotiations reached a difficult point, the matters of contention would often be discussed in this forum. The question of withholding tax clauses in the treaty with Kenya, discussed in the prologue to this book, came up at the very first meeting. The discussions are summarized in the minutes with a statement that "an agreement on some basis preferably with as low a rate as possible was preferable to no agreement at all."31

Before finalizing a treaty with Thailand, the Inland Revenue consulted with its tax contacts in the shipping industry, who were concerned about the precedent the agreement would set. A subsequent briefing note for the second round of negotiations stated that "the question is one of principle, and as the amount of money involved is small, we have decided, after consultation with the General Council of British Shipping, to have no Shipping Article in the Convention to avoid providing a precedent with other, and more important, countries."32

In contrast, a parallel negotiation with Tanzania broke down over the shipping question after discussions among the same group of experts.33 The context to this firm line was the creation of a precedent ahead of anticipated negotiations with India, where the sums at stake were much larger.

Thus, British negotiators saw tax treaties primarily as instruments that ensured British overseas investment would be taxed in a manner consistent with the standards set out in the OECD model convention, which they had helped draft. When negotiating with lower-income countries, they commonly encountered situations in which their opposite numbers wanted a greater share of the tax base

#### 102 CHAPTER 5

than the OECD model treaty permitted them, and where the successful conclusion of a tax treaty might depend on some deviation from the OECD approach. Decisions about how to respond to such dilemmas were made by Inland Revenue civil servants in consultation with their fellow tax experts from the business world.

#### **Other Actors: Competition for Outward Investment Opportunities**

Here I consider the preferences of nonspecialists, for whom tax treaties were also tools to increase the competitiveness of British firms abroad. A lack of detailed taxation knowledge, frequently lamented both by them and by the specialists, left them to rely on their own ideas, which were not necessarily grounded in facts. This would lead to conflicts, during which the Revenue would sometimes try to convince them that their faith in the effect of tax treaties was misplaced. "There can be little doubt that tax treaties are a means of stimulating trade and investment between the treaty partner countries," wrote the private secretary to the Treasury minister responsible for tax policy in 1976. "On the other hand their importance is sometimes exaggerated."34 The UK's lead negotiator noted in 1974, referring to Brazil, that "we should not over emphasise the importance of a DTA. It generally only affects income *flowing* from one country to another whereas in the short term a company will not remit much in the way of profits and will not be too bothered in the absence of an agreement."35

Most civil service nonspecialists who engaged with tax treaty matters during the 1970s wanted British firms that were eligible for investment-promoting tax relief in lower-income countries to receive a corresponding credit (often referred to as tax-sparing credit) against UK tax, to ensure that they could retain the benefit of the tax relief when they repatriated their profits. As the 1976 review notes, in outlining the priorities of different departments, "the main cash benefit for the investor [from a tax treaty] is matching credit for pioneer reliefs."36 The difficulty was that this was not the Inland Revenue's priority from tax treaties, and at times (as in the case of Brazil, below) the two priorities even came into conflict.

A good example can be seen in the negotiations with Zambia, one of the few cases in which negotiations were initiated by the lower-income country. When the Revenue consulted businesses ahead of these negotiations, tax-sparing provisions emerged as a priority for UK firms.37 British negotiators did not disclose this to Zambia, which had already indicated an interest in a tax-sparing clause when requesting negotiations.38 Instead, they tried to use Zambia's desire for a tax-sparing clause as a bargaining chip, offering it if Zambia would accept an agreement that prevented it from charging any withholding tax on royalty payments.39 Zambia chose instead to keep its 10 percent withholding tax and forgo the tax-sparing clause, and so the British negotiators had to write to their Zambian counterparts soon after the conclusion of negotiations to unilaterally offer the tax-sparing credit that they had previously withheld, claiming that they had subsequently been pushed by another country to offer similar terms.40

The Inland Revenue sought to keep input from other departments limited and compartmentalized, and did not welcome their attempts to influence its priorities. The Treasury, DTI, and Foreign Office would each be consulted on treaties once negotiations were opened, and on specific questions concerning their content, but the Revenue would often reject their requests to be able to influence its priorities.

During late 1972 and 1973, an extraordinary correspondence opened up between the FCO and Board of Trade, on the one hand, and the Inland Revenue, on the other. The former were frustrated by their inability to influence the latter's negotiating priorities. At a cross-Whitehall meeting in April 1972, the Revenue had merely invited them to submit "shopping lists" for treaties they would like it to negotiate.41 "We have already forfeited opportunities for investment in Brazil, notably to the Germans and Japan and, as a matter of commercial policy, it is important that we should not place our traders at a disadvantage when seeking out investment opportunities in the future," argued one official from the Board of Trade in February 1973. "As you know, we have been concerned that the corporation tax system should not so limit the scope for tax sparing as to damage the UK's ability to export to and invest in lower-income (and highly competitive) overseas markets. For this reason, we place great importance on the conclusion, as quickly as possible, of double tax agreements with our developing trading partners which allow for tax sparing."42

The Revenue rebuffed this pressure, even refusing to share a list of current negotiating priorities or negotiations that were under way, because "a high degree of confidentiality attaches to our negotiations with particular countries."43 The reference to confidentiality is ironic, because this correspondence took place at the same time as the Revenue had begun quarterly meetings with tax specialists from businesses, at which exactly this information was disclosed.

"I find the Inland Revenue's attitude and behaviour quite extraordinary," wrote an official in the FCO's financial relations department, as part of correspondence that passed between these other departments. "I cannot imagine that any other department in Whitehall would behave in this way. Nor would we have allowed any other Department to get away with behaviour like this for quite so long. I am quite clear we must call a halt now."44 Another lamented "a dispiriting and unfruitful confrontation with the Inland Revenue."45 The problem for the FCO, in particular, was that it lacked a coherent position within itself, and the technical expertise to develop one. "The subject is difficult and mastering it is undoubtedly time-consuming" mused one FCO official.46

It was not only officials from other departments who had trouble influencing Inland Revenue officials: their own ministers faced the same problem. In general, politicians had little involvement in tax treaties at all. At the start of the 1970s, negotiators worked within enabling powers set by Parliament and would seek ministerial guidance only when making a concession that had not previously been given in negotiations. There seems to have been no political involvement in the decision with whom to negotiate, and the minister in charge, the financial secretary to the Treasury, usually did not see a treaty until bringing it before Parliament for ratification.

The technical complexity of tax treaties was inevitably a barrier to effective political scrutiny, but this must surely have been combined with the short tenure of financial secretaries: eleven people occupied the position during the 1960s and 1970s, with an average tenure of two years.47 As a civil service memo from 1975 notes: "It is however a long time since the agreements took their present form and the Treasury Ministers of today have had no experience in this field outside government."48

The longest-serving financial secretary, Robert Sheldon, in post from February 1975 to April 1979, was also the only one for whom the Treasury archives record any attempt to scrutinize the activities of his civil servants on their treatymaking activities. In December 1975, Sheldon was being briefed ahead of a parliamentary debate at which he was to propose the ratification of several tax treaties. He expressed concern that he was expected to propose an agreement in Parliament that he had not seen beforehand. He suggested that parliamentary approval be dropped and replaced with greater ministerial oversight.49 At a subsequent meeting in May 1976, Sheldon wanted "to reassure himself in the absence of quantifiable data that when he is asked to recommend a double taxation agreement to the House as a reasonably balanced deal he can happily do this."50

During the December 1975 debate, Sheldon undertook to look into the costs and benefits of tax treaties. This commitment provoked lengthy exchanges within the civil service, both to examine costing methodologies and to explain what officials saw as the problem with this approach. "What might be a reasonably balanced agreement as a whole," Sheldon's private secretary wrote to him, "might appear otherwise if the disadvantages were more easily quantifiable than the advantages." Furthermore, such costing information might undermine negotiations. Demonstrating that the UK had obtained a good deal might provoke the other country to seek to change it, while a bad deal would set a precedent.51

These notes indicate the difficulty faced by a minister trying to exert some influence over a policy area with which he was unfamiliar. During the mid-1970s, the UK had been seeking to amend the articles of its tax treaties covering the taxation of dividends, to reflect changes to its corporation tax system. The civil servant who first briefed Sheldon commented, "I got the impression that he does not realise—or did not until I pointed it out to him—that double taxation agreements also deal with other matters than dividends. . . . He seemed surprised when I told him we had sixty plus agreements in operation."52

This lack of understanding is also apparent in the minutes of the May 1976 meeting. Sheldon questioned "what the OECD Model was and what we would do if it turned out not to provide an advantageous pattern for the UK."53 This question illustrates a lack of basic familiarity with the area, and is all the more surprising because Sheldon's brief would also have included ministerial responsibility for the UK's input into the OECD model. To make matters worse, Sheldon cut the meeting short before officials could give a full explanation.

A third category of nonspecialist stakeholder was those within business, who were evidently very keen to influence UK policy. At the nonspecialist level, businesses were able to influence the positions of other parts of government, including the FCO and DTI, but this rarely translated into treaties. Geographic departments in the FCO, in particular, were often persuaded by businesses, which lobbied British embassies, to advocate new British tax treaties. For example, "UK finance houses and business interests are adamant that we are losing a significant amount of business in Spain because there is no double taxation agreement," wrote an official in the FCO's southern Europe department.54 These positions fed into the central FCO departments, in particular the economists' department and financial relations department, which as we have seen were furious that the Inland Revenue would not heed their concerns about the competitiveness of British businesses. Meanwhile, the Inland Revenue seemed content to divide and rule the geographical departments.

Business lobbying via these departments met with limited success, partly because those other parts of government had limited influence on the Revenue but also because one part of the private sector undermined the other, a fault line that sometimes ran within, rather than between, businesses. As the Brazil case study, below, will illustrate, private sector tax specialists sometimes directly contradicted their nonspecialist colleagues when in discussion with the Inland Revenue. While some of these specialists evidently felt it necessary to sacrifice the intellectual purity and consensus of the epistemic project for the sectional interests of their own firm, in many cases the business-Revenue consultations were more a strategic discussion of how to manage their respective nonspecialist constituencies.55

A memo from the CBI to the DTI, covering a wide range of policy and not written by tax specialists, states that tax treaty "negotiations should not be left exclusively to the Inland Revenue (whose main concern is naturally the minimisation of losses to the Exchequer)."56 A year later, an Inland Revenue official was "subjected to a two-hour intense grilling" by CBI representatives who were not tax specialists at a cross-Whitehall consultative meeting. They had apparently "suggested that future negotiations for double taxation agreements would better be dealt with by a department other than the Inland Revenue since the negotiations were currently carried out for the United Kingdom by narrow specialists who were so blinkered by the technicalities of taxation that they failed to see the full view of the picture."57 The CBI delegation also expressed the view that the Inland Revenue's consultation with tax experts from industry "was not really satisfactory since it was restricted to 'taxmen.'"58

The "taxmen" from industry felt obliged to apologize for their colleagues' actions in subsequent discussions with the Inland Revenue.59 Later that year, a covering note from the chair of the CBI's tax committee to the Inland Revenue accompanying a copy of the CBI's submission to the UK-Egypt joint economic commission made another apology for the author's nonspecialist colleagues. "We were intending to discuss this question with you before we let the Department of Trade have any comments," it said, but short notice had prevented it. "Our overseas Department receives such requests from the Department of Trade from time to time and we are now trying to ensure that any answer is given by the tax experts who attend the joint CBI/ICC Working Group meetings at Somerset House [the Inland Revenue office] rather than by those who are not too familiar with the technical implications. This should avoid any future complications over such representations."60

We can see, therefore, that nonspecialist actors had different priorities than those of the Inland Revenue and the tax committees from business with which the Revenue consulted. Civil servants outside the Inland Revenue, as well as the business lobbyists with whom they interacted, were frustrated by their inability to influence the Inland Revenue.

### Sample Negotiations

The previous section demonstrated two different motivations among different stakeholders for the UK pursuit of tax treaties. The tax treaty specialists sought to surround British businesses with the protective shield of OECD standards, while others focused on the specific tax advantages that British businesses would gain and the competitive edge this might give them. Tax competition driven by nonspecialists faced a potential "firewall" if it met opposition from specialists.61 In this section I extend the analysis with greater specificity, by focusing on individual treaty negotiations. Egypt is an example of a successful negotiation, Nigeria of a renegotiation, and Brazil of an unsuccessful stalemate. In all three cases, we see evidence that the preferences of British businesses were the primary motivating factor behind individual negotiations. We also see, however, that these priorities had to coincide with the range of options deemed acceptable by Inland Revenue negotiators. In both the Nigerian and Brazilian examples, the lower-income country sought to negotiate on its own terms, not those dictated by the OECD model. While British businesses were desperate, the Inland Revenue held firm to its view of the "acceptable standards" a treaty should contain, and the only difference in outcomes between the two cases was that Nigeria backed down while Brazil held firm.

### **Egypt**

The UK's 1976 treaty with Egypt is a typical example among those examined for this chapter. It resulted from pressure exerted on the UK government by British businesses operating in Egypt. Influential businesses sought a treaty either to limit Egypt's ability to tax their operations in accordance with rules set out in the OECD model or to pursue a tax-sparing clause. They explicitly pointed to the competitive disadvantage they faced in Egypt in the absence of a functioning treaty. Negotiations took some time to get off the ground, because Egyptian revenue officials were concerned about the revenue losses; yet when negotiations took place, Egypt did not have the technical capacity to defend its tax base. British officials, meanwhile, did not engage enthusiastically until the CBI informed them that British businesses were keen to see an agreement.

Egypt and the UK exchanged correspondence about tax treaties sporadically during the 1950s and 1960s, without ever concluding an agreement. Each side took the initiative at different times, while changes in civil service staff or government, reforms to tax policy, and at one point the Suez crisis caused changes in priorities.62 By the late 1960s a strong preference for a treaty had emerged from the two national airlines, both of which were state owned.63 In March 1969, the Egyptian embassy in London formally requested a limited DTA, which would exempt each country's national airlines from taxation in the other.64 But later that year, when an embassy official spoke with Egyptian tax authority officials, they denied all knowledge of or interest in this proposal, and talks never went ahead.65 The only party to seem aggrieved by this was the British Overseas Airways Company (BOAC), which declared itself "bitterly disappointed" that talks had failed, because Egyptian demands for taxation on it were "unreasonable" and "impossible."66

In February 1971, the UK formally requested negotiations on a comprehensive tax treaty, noting that "interest has been expressed by a number of British companies."67 This followed a letter from the British embassy stating, "I have twice heard suggestions that a general double taxation agreement would be both welcome and useful" because some UK firms had faced "harsh tax assessments."68 However, the request does not seem to have had the support of the Inland Revenue, whose officials observed in an internal memo: "The importance of a comprehensive agreement with Egypt is not clear. We have not called for representations [from industry] as such and neither have any requests been made to us from outside concerns apart from BOAC to take the initiative."69 The request appears to have met with a similar fate in Egypt. According to a report from the British embassy in Cairo, "A tax official, on discovering that such an agreement would benefit Britain rather than Egypt because EgyptAir succeeds in never declaring a profit in London for tax purposes, whereas BOAC usually faces a stiff tax bill in Cairo, had decided to sit on the notes and do nothing."70

The logjam was finally broken four years later, when a joint UK-Egypt economic commission was under way, managed by the Department of Trade, covering a variety of areas of economic cooperation. The CBI's position document on the economic commission recorded "a wide expression of interest in a double taxation treaty with Egypt and there would seem to be little doubt that if a satisfactory agreement can be reached there would be substantial interest among those members we have consulted, in investment in Egypt."71 The tax treaty was negotiated in one two-week meeting in May 1976. An Inland Revenue note indicates that the Egyptians "were willing to be led by us most of the time in the drafting" and "for the most part the Egyptians were content" with the British positions.72

Egypt's interest in the treaty, however, appears to have been quite weak. The ratification process in Egypt dragged on for years after 1976, during which time it became apparent that the treaty's real immediate impact was in increasing British firms' competitive position. A meeting with a construction firm in 1976 records its frustration that competitor firms from treaty countries benefited from tax-sparing provisions. "They were worried that the absence of a treaty would mean them losing an order and not getting a foothold in Egypt."73 A letter from BOAC, now British Airways (BA), in 1978 complains that "BA are now the only major airline in Cairo not exempted from Egyptian tax."74 In early 1979, an Inland Revenue document notes that, in the light of delays at the Egyptian end, "we are under some pressure from United Kingdom companies with interests in Egypt to push the convention through Parliament and into force as quickly as possible."75 The agreement was ratified by Egypt the same year, and by the UK in early 1980.

#### **Brazil**

The UK devoted far more time and effort to negotiations with Brazil during the 1970s than almost any other lower-income country. It is a negative outlier, an unusual case in which strong pressure from business lobby groups did not translate into an agreement, even though there was no organized opposition. When talks were suspended in 1976, the Inland Revenue acknowledged that "it is British investors who will be the sufferers."76 The transnational expertise perspective outlined in chapter 4 offers an explanation for this outcome. The British position was that it could only conclude an agreement with Brazil, "providing for significant amelioration of aspects of their tax code that run clearly counter to OECD principles; and if they are not interested, so be it."77 This nonetheless poses the question why nonexpert interest group pressure was ineffective in the UK, when several other OECD countries had accepted Brazil's non-OECD terms.

Tax treaties with Brazil were in strong demand. Foreign businesses wanted to be part of the country's "economic miracle," and this allowed Brazil to adopt a "take it or leave it" approach to certain unconventional demands. Talks between the UK and Brazil had failed in 1967 but were taken up again beginning in 1972. A particularly difficult issue for the UK was Brazil's insistence that the UK grant extensive tax-sparing concessions. In common with many UK treaties, this would mean crediting the value of a Brazilian tax exemption against the UK company's tax bill as if it had paid full Brazilian tax, but unusually it would also mean doing the same for the reductions in withholding taxes on cross-border payments that Brazil would be able to levy on British investors as a consequence of a treaty. In the reported words of a Brazilian negotiator, "Whilst Brazil does not want the United Kingdom to lose tax, she cannot allow the United Kingdom to collect more tax as a result of the convention."78 Such a concession required an amendment to section 497(3) of the Income and Corporate Taxes Act of 1970 in the UK, the provision that gave effect to tax treaties, and this was passed in 1976.

The second Brazilian demand was more difficult.79 Under Brazilian domestic law, firms had to pay a withholding tax on the gross value of any royalty paid to a foreign recipient. Unusually, however, they were not permitted to deduct the value of the royalty payments when calculating their net profits. They also paid tax on the payments through corporate income tax, leading to a high effective tax rate. While the UK's unilateral double tax relief system gave investors a credit for taxes paid abroad, the effective rate in Brazil exceeded this credit, and so the company bore the cost, reducing its competitiveness. Brazil insisted that any tax treaty leave this state of affairs intact, though it was in direct contravention of the OECD model's provisions. Several OECD countries had reached agreements with Brazil that permitted this practice to continue, because other concessions obtained in treaty negotiations, such as lower withholding tax rates, gave their firms a competitive advantage.80 This both increased the pressure on the Inland Revenue from British businesses and reduced its leverage in negotiations with Brazil. British companies "are undoubtedly at a competitive disadvantage as compared with companies from other countries," noted a background brief in August 1974.81

Businesses did not directly lobby the Inland Revenue; rather, they went via other ministries. "Pressure for an agreement with Brazil comes from the DTI, ODA, our Embassy in Brazil and, although perhaps to a lesser extent, from the CBI, in particular RTZ," wrote an Inland Revenue official in November 1973.82 In October 1974, a memo from the Department of Industry to the Inland Revenue pressed the case for a treaty, citing "specific evidence of orders being lost by British companies apparently because of their relatively lower post-tax returns forcing them to quote higher prices in compensation."83 With no movement by December, the Department of Trade weighed in, beginning a correspondence between its secretary of state, Peter Shore, and Chancellor of the Exchequer Denis Healey.84

As the pressure from business lobbyists on other government departments ratcheted up, tax specialists within British businesses reassured the Revenue that they were broadly in agreement with its view that the Brazilian terms were unacceptable.85 In 1974 the Inland Revenue called a special meeting with its regular interlocutors, tax specialists within British multinationals. The latter group agreed with the Revenue that Brazil's terms on royalties would be detrimental in the long term, in view of the precedent that would be set:

> The CBI Secretariat (but not the Overseas Tax Panel) are well aware of the powerful trade and political pressures in favour of having an agreement (apparently *any* agreement) with Brazil which he [Paul Moran of the CBI] thought could lead to an explosion in the autumn. His personal view was that the Revenue and Treasury Ministers could be under pressures from other Ministers which might lead to an agreement, in spite of the unsatisfactory features that had been discussed. Much of the pressure is based on ignorance of the effects of unilateral relief and of the likely terms of a treaty, and it appears that much of it is generated in Brazil and by companies whose only overseas operations are, or are likely to be, in Brazil and which operate on the basis of official handouts.86

Minutes of the meeting and a follow-up letter from the CBI record the industry tax experts' frustration at being unable to correct their colleagues' "ignorance" because of the confidential nature of their meetings with the Inland Revenue.87 Inland Revenue memos contrast the "non-fiscal voices" within the CBI with those of "the CBI's Tax Committee, as a Committee of tax experts" and observe that "the CBI will no doubt have to consider how to deal with the situation in which it is speaking with two voices."88

In 1976, British negotiators were able to travel to Brasilia with their new legislative mandate on tax sparing, but with instructions "to refrain from agreeing to the unacceptable features of Brazilian law which they wish to enshrine in the treaty, but to avoid a breakdown in the talks."89 While the negotiations did not create any further progress, the visit was illuminating for revenue officials. In negotiations, the head Brazilian negotiator (as reported by British negotiators) "frankly admitted that the treatment of royalties was unsound tax practice but made it clear his hands were tied," because of what the minutes describe as "a political decision."90

The Brazilian officials' frustration at political constraints preventing an agreement is revealed more sharply still by a note relating comments made by another negotiator: "Dornelles' No2 (Noqueira) at a dinner given for us last night by the Ministry of Finance told me that they are extremely anxious to get a treaty with the U.K. because their chances of getting one with the U.S.A, Switzerland or the Netherlands are ranked as nil. Switzerland is now second largest investor and will not even discuss a treaty on 'German package' lines. The U.S.A. have an annual meeting with the Brazilians for window dressing purposes only. The Netherlands merely write once a year to enquire whether there has been any change in Brazil's policy."91

After the negotiations, British officials held several meetings with business representatives in Rio de Janeiro. They reached the conclusion that, with one small exception that could probably be resolved unilaterally, there was no genuine problem with double taxation for most firms, despite the idiosyncrasies of the Brazilian tax system. "The impression all three of us got," wrote the chief negotiator, "was that the business community in Brazil were doing very well indeed and that a tax treaty would be a bonus rather than a matter of life or death to them. . . . They would not be at all impressed with [a treaty] which served only to confirm the undesirable features of Brazilian law."92 He concluded that the FCO's picture of British businesses' views may have been distorted by the Consul General in Rio de Janeiro, who had become "positively paranoiac about the whole question of a tax treaty with Brazil and has got past the stage, if he was ever there, of being able to consider objectively the arguments against accepting the Brazilians' terms."93

The Brazil files stop at the beginning of the 1980s, but the same debate continues. In 1992, in a separate file, an Inland Revenue official wrote that "Brazil continues to be the big prize: but it is not ripe for an immediate approach and what indications there are suggest that it will be a difficult nut to crack."94 The absence of a treaty with Brazil is still raised by British business lobby groups today, and was mentioned in Parliament in 2014, when the UK-Zambia treaty was ratified: according to the minister responsible, the UK and Brazil still cannot agree on terms.95 The Inland Revenue's position is, in effect, that the benefits of maintaining an influential OECD model outweigh the costs to particular UK firms operating in Brazil, and that those costs may in any event be exaggerated.

The debate over the UK-Brazil tax treaty illustrates that the preferences and instrumental power of corporate capital in the UK were not monolithic but varied depending on technical knowledge. Had the aim of the UK's tax treaty negotiations been simply to give British firms a competitive edge by lowering their effective tax rate in Brazil, as British firms in Brazil were lobbying for via the British embassy and the DTI, an agreement would have been possible. But it would have come at the cost of implicitly endorsing Brazil's approach to taxing royalty payments. This would have undermined the longer-term project of exporting norms embodied in the focal point of the OECD model, which motivated members of the international tax community both in the Inland Revenue and in businesses.

#### **Nigeria**

Unlike Egypt and Brazil, Nigeria already had a tax treaty with the UK when it first requested negotiations in 1963. This may explain why it took twenty-four years to conclude a new one. The existing treaty was a colonial-era agreement that was, naturally, strongly biased in favor of the (now former) colonial power. While Nigeria's request for a new agreement related primarily to its desire that inward investors from the UK be eligible for tax-sparing credits in the UK,96 the Inland Revenue had by 1969 decided not to push forward with renegotiations "since the UK would only stand to lose by a new agreement which was bound to be less favourable than the old."97 As in the case of Brazil, this cool attitude came against opposition from the High Commission and Foreign Office, which, like the Nigerians, favored a renegotiation to introduce tax-sparing credits.98

When negotiations began in earnest a decade later, it was because Nigeria had announced the abrogation of all its colonial-era tax treaties, and the concurrent imposition of new taxes on air and shipping companies.99 A telegram from the Inland Revenue to the British embassy in Lagos noted that the government "is very concerned at serious implications of termination of Double Taxation Agreement for British airline and shipping companies," and asked the embassy to request immediate renegotiations "in view of the strength of representation already being made here at senior official level and the probability of escalation to Ministerial level in the near future."100

The Nigerian government was willing to sign a new treaty, but according to an Inland Revenue official, its proposed draft "would require us to make concessions which are far in advance of the terms which other lower-income countries have accepted in treaties with us."101 Progress was made in the first round of talks, including an agreement limited to air and shipping that relieved some of the immediate pressure on negotiators, but at the second round soon after February 1979 it became apparent to British negotiators that "an agreement on the terms offered would have been unattractive in itself and would have served as an unfortunate precedent for future agreements."102

The main concern was the rate of tax that could be imposed on fees for technical consultancy and management services, on which Nigeria had declared what one negotiator explained was a "total war."103 The British economic arguments about the distortionary effect of taxes on management fees carried little weight because Nigeria's position was to use tax to discourage their payment at all. The Revenue discussed the situation in confidence with tax experts within the CBI, who "share our reluctance to reach an agreement until the Nigerians make concessions."104

The UK view did not change after 1980, but Nigeria moderated its position, and a new treaty was initialed in 1982. However, the treaty was not actually signed until 1987. The problem seems to have been with the Nigerian treaty approval process, which, unusually, required parliamentary ratification before signature. Although the negotiators on both sides were happy with the treaty, Nigerian officials in other ministries did not take any action to progress it, according to correspondence in the files.105 Thus, the signature and ratification were blocked by actors outside the specialist treaty negotiating community.

In both the Nigerian and Brazilian cases, the UK dug in its heels and refused to deviate from the position set out in the OECD model. Why did Nigeria capitulate, while Brazil continued to resist? Drawing conclusions about the negotiating partner's preferences from the UK files is difficult, but we can at least speculate. The Brazilian officials claimed they wanted to accept the UK's terms, and accepted the rationale behind the British position, but they were constrained by political factors preventing them from accommodating the UK. Nigeria's cancellation of a treaty and five-year delay between initialing and signature indicate that—like Egypt—it was more concerned with maximizing tax revenues than with any urgent need to sign a tax treaty. So why did it make the concessions? The files do not contain an answer, other than that the climbdown came after Nigeria had negotiated with a clutch of OECD countries, opening up the possibility that its negotiators had learned what higher-income countries considered "acceptable" tax practices during earlier negotiations. An internal British note describes the original draft proposed by Nigeria as "an opening bid from a country which has had little recent experience in negotiating double tax conventions."106

#### Conclusion

The UK in the 1970s was a quintessential example of a capital-exporting country negotiating a wide tax treaty network. This is usually assumed in policy discourse and in the academic literature to have been a result of competition among lowerincome countries to attract British investment. By examining civil service documents, I have demonstrated that this interpretation is incomplete. British firms were at a competitive advantage in any given host market with respect to firms from other countries if those other countries had a tax treaty with the host and the UK did not. As a result, it was usually the UK, not the lower-income country, that made the first move, and indeed the UK was frequently turned down by lower-income countries.

A further disaggregation into different stakeholders allows us to see the two potentially competing ways in which this competition effect worked. For the Inland Revenue negotiators and other tax specialists in the UK (and, the files suggest, their colleagues in other OECD countries), UK firms would benefit if the host country had to follow the "acceptable fiscal standards" set out in the OECD model. In contrast, pressure from businesses was often driven by the pursuit of short-term or parochial gains, especially tax-sparing clauses. Notably, since the UK began to exempt the foreign profits of British multinationals in the mid-2000s, the tax-sparing clauses that motivated both business lobbyists and lower-income countries are now largely redundant.

Importantly, the in-group for decision making within the UK was not defined by occupation but by specialism. Business lobbying was only effective insofar as the Revenue could be convinced that the terms of an agreement were consistent with its overall aim, because the UK treaty-making apparatus gave it a veto, and was further insulated by the technical obscurity of tax treaties that prevented other stakeholders from influencing its activities. Private sector officials who had a tax specialism were brought inside this tent, and their views were influential in decisions made by the Inland Revenue in the Brazil and Nigeria cases, as well as numerous others. Information readily supplied to the business tax experts was at the same time withheld from government officials from other departments on the grounds of confidentiality, and their views dismissed as "ignorant." Even the government ministers supervising tax officials were unable to exert influence because they lacked the technical understanding.

Having focused on the capital-exporting side of the negotiation, the book switches to a focus on capital importers in the next two chapters. These cases support the contention that tax competition is a strategic interaction between capital exporters and capital importers, but they also demonstrate how the latter operates. Just as in the UK, technical knowledge influences preferences concerning tax treaties. In the lower-income country case studies, we see how this can vary over time within the same country, as well as between different stakeholder groups at a given moment in time.

### ZAMBIA

They ask for an arm and a leg and you give them both legs.

—Finance Ministry official, Zambia

This chapter complements the previous one by considering the other end of negotiations, in a lower-income country. One of the few negotiations between the UK and a lower-income country during the 1970s that was initiated by the lowerincome country itself was the 1972 treaty with Zambia. In comparison with other agreements signed by the UK at the time, this was an easy negotiation for the UK, in which Zambia did not gain an outcome that protected many of its source taxing rights. Zambia permits us a within-case comparison, by looking at two different time periods: the 1970s, when Zambia was an enthusiastic negotiator, and the 2000s and 2010s, when it was not.

This first UK agreement was part of a flurry of negotiations at the beginning of the 1970s, and during that decade Zambia signed ten tax treaties, with countries of Western Europe and Japan. No other sub-Saharan country signed as many: Kenya and Tanzania, the next closest by number of signatures, signed six each.1 Yet as figure 6.1 shows, on average, Zambia's early 1970's treaties imposed far greater restrictions on its source taxing rights than those signed by other African countries, and also Zambia's later treaties. In Zambia in the 1970s, a context where nobody in the bureaucracy had a detailed knowledge of international tax, the tax treaties myth took hold, but without the commensurate negotiating capability. The large tax revenue from Zambia's mining industry during the early 1970s meant that the tax costs of the treaties Zambia was negotiating were less important to those driving the negotiations.

In contrast, from democratization in 1991 until the Movement for Multi-party Democracy (MMD) finally lost power in 2011, a period when sub-Saharan

FIGURE 6.1. Negotiated content of tax treaties signed by sub-Saharan countries, 1970–85

*Source*: *Martin Hearson, "Tax Treaties Explorer," 2020, http://treaties.tax.*

countries signed 313 treaties among them, Zambia signed just three, with China, Mauritius, and the Seychelles. Ministers and senior officials, who were veto players in the ratification process, were concerned about the fiscal costs of tax treaties, because Zambia's tax-to-GDP ratio had declined since the 1970s and multinational corporate tax was becoming increasingly politicized. Tax treaty officials, exposed to external advice and socializing environments, formed an agenda for treaty negotiation and renegotiation. But they were blocked by nonspecialists, whose concern about protecting tax revenues made them skeptical. From 2011 onward, there was an alignment between technical officials and their leadership, resulting in a program of renegotiations and only three further treaties, all with African countries.

The discussion of the earlier time period primarily uses historical documentary sources. These include negotiation correspondence and meeting minutes from Zambia's negotiation with the UK, obtained from the British National Archives, and informal intelligence on Zambia's broader treaty negotiation program, from the same files and from US diplomatic cables.2 I also use written accounts from individuals involved in economic policymaking in Zambia at the time, and official documents published by the Zambian government—in particular, the annual reports of its commissioner of taxes, which include sections on tax treaty negotiations. I was also able to speak by telephone and email with two former advisers to the Zambian government during the 1970s who have published work about their experiences, Charles Irish and Andrew Sardanis.3

The data for the later time period are drawn from fifteen semi-structured interviews. Fieldwork in Lusaka followed a snowball sampling approach, beginning from contacts made through NGOs and at international meetings. Interviews were conducted with a total of three current and two former officials drawn from the finance ministry and tax authority, including those with responsibility for treaty negotiations in these two institutions during the later waves of negotiations. These were triangulated through interviews with three tax advisers in the private sector, two British officials familiar with the Zambia-UK renegotiation, two expatriate technical assistance providers, and several other stakeholders from NGOs and academia in Zambia. These interviews have all been anonymized, at the request of some government interviewees.

#### The Early Years: 1970–84

Zambia's first tax treaty after independence was with regional neighbors in the EAC, in 1968. After this, it sought to obtain new treaties with higher-income countries, focusing first on countries with which it had not inherited an agreement from colonial times. This first wave of negotiations included Japan, Ireland, Italy, Germany, Denmark, and (unsuccessfully) India and Pakistan (table 6.1). These negotiating priorities follow quite closely the pattern of Zambia's main sources of foreign investment at the time (table 6.2). While the signatures came in the early 1970s, many of the negotiations appear, technically, to have taken place before this date, as the detailed timeline of treaty negotiations in table 6.1 shows.

In his 1968 report, the commissioner of taxes announced a plan to review and renegotiate the country's colonial-era agreements.4 At independence in 1964, Zambia, like other former British colonies, had inherited a set of tax treaties signed on its behalf by Britain. There were six treaties with European countries, one with the United States, and a collective one with Kenya, Tanzania, and Uganda—the EAC countries. Colonial-era agreements between higher-income and lowerincome countries tended to restrict the latter's right to tax quite considerably, in a manner that was inconsistent with the newly founded countries' desire to finance themselves, a state of affairs that provoked many lower-income countries to cancel or renegotiate those treaties.5

#### TABLE 6.1. Zambian negotiations, 1970–81

*Source*: Reports of Zambia Commissioner of Taxes, 1967–74; IBFD, "IBFD Tax Research Platform," 2020, http://research.ibfd.org/.

\* = Treaty not concluded

? = Date not known

#### TABLE 6.2. Foreign investors in Zambia's state-owned enterprises, 1974

*Source*: Timothy M. Shaw, "The Foreign Policy System of Zambia," *African Studies Review* 19, no. 1 (1976): 44–46.

The Zambian review seems to have taken several years to get off the ground, and most of the renegotiations took place in around 1971–72.6 Not every one of Zambia's treaty partners agreed to reopen its existing treaty with Zambia: an attempt to renegotiate with France in particular was unsuccessful. Some recently independent countries, such as Kenya, Uganda, and later Nigeria, chose to abrogate their treaties in such circumstances, to force countries to the table and secure a better deal; others, such as Malawi, concluded that renegotiation was not a priority at all.7 Zambia, on the other hand, opted for a piecemeal approach, renegotiating individual treaties to replace old agreements where it could. As a result, its colonial-era agreements with France and Switzerland have remained in force.

#### **Competition for Inward Investment**

What were Zambian negotiators trying to achieve? It is clear that investment promotion was a priority. One of the first acts passed by the new government of Zambia was the 1965 Pioneer Industries (Relief from Income Tax) Act, which granted tax incentives to encourage investment in sectors outside the dominant mining sector, and in the nonmining areas of the country.8 Many foreign investors were unable to secure the full benefits of these tax incentives, however, because their lower tax bills in Zambia simply led to higher tax bills in their home countries.

Zambia thought that the inclusion of a tax-sparing provision in a tax treaty would resolve this issue, giving full effect to the incentives outlined in the 1965 Pioneer Industries Act. All eleven treaties concluded between Zambia and OECD member countries during the 1970s and 1980s either provided explicitly for taxsparing credits or contained provisions that had the same effect.9 The priority accorded to the tax-sparing clause is illustrated in the formal letter from Zambia to the UK requesting that negotiations be opened. "In recently negotiated Agreements, Zambia has followed substantially the O.E.C.D. Draft Convention and it is suggested that any new Agreement should substantially follow this Draft Convention. Zambia would, in particular, wish to discuss matters arising from the operation of the Zambian Pioneer Industries (Relief from Income Tax) Act."10

While the treaties may have improved the effectiveness of Zambia's investment promotion measures, by the time that they were concluded they also undermined some of its newer policies toward foreign investors. From 1968 onward, Zambia attempted to balance investment promotion with other concerns: preventing the repatriation of capital by investors, increasing the participation of Zambian entrepreneurs in the country's economic development, and rebalancing the government's tax base away from large but volatile mining revenues. The reform agenda began with President Kenneth Kaunda's 1968 "Mulungushi" and "'Matero" declarations, which announced the partial nationalization of the nonmining and mining industries, respectively.11

According to Andrew Sardanis, an expatriate civil servant who helped design them, the goal of the Mulungushi reforms was "to give space to African businessmen to develop away from competition from better financed and more experienced foreign-owned enterprises."12 A *Financial Times* journalist, Antony Martin, argued at the time that the reforms were inspired in part by "a growing awareness that it would be futile for Zambia to rely primarily on foreign investment for its development."13

As the price of copper began to fall in 1971–72, the government tightened exchange controls and imposed import licensing restrictions to tackle its declining balance-of-payments deficit.14 There was growing concern that, as Ann Seidman explained in 1974, "an increasing portion of the after-tax surpluses in the private sector was removed from the country—even after the economic reforms of 1968 and 1969—largely in the way of profits, interest, dividends, compensation for government acquisition of shares in industries, and salaries for expatriates. Together these totaled almost K200 million in 1971 . . . about a third of Zambia's investible surpluses."15

Kaunda delivered a speech in 1973 criticizing the mining companies, complaining among other things that "in the last three and a half years . . . they have taken out of Zambia every ngwee [penny] that was due to them."16 As well as dividend repatriation, Kaunda complained that agreements with the mining companies permitted them to "provide sales and marketing services for a large fee. Although most of this work is performed in Zambia the minority shareholders have entered into separate arrangements with non-resident companies for reasons best known to themselves."17

### **Fluctuating Importance of the Fiscal Cost**

At the beginning of the 1970s, Zambia's tax-to-GDP ratio was a phenomenal 34 percent.18 This is comparable with the rate in OECD countries today, and more than double the average for sub-Saharan countries.19 It is no surprise, therefore, that Zambia's treaty negotiations at the beginning of the 1970s were not driven by a technical analysis of the actual effects of these treaties' negotiated content, and that negotiators had made no attempt to cost them. The report of Zambia's inspector of taxes in 1972–73 quotes the cost of the reduced withholding tax rates in treaties in force at that time, expressed as refunds to taxpayers from the domestic law rate. "An increase in claims for refunds is expected," it notes, "but no estimate of the total refunds can be made."20

The withholding taxes on interest, royalty, technical fee, and dividend payments made to overseas recipients had been introduced in 1971 and 1972, after agreement was reached on the new tax treaties but before they were signed. The taxes were primarily imposed as part of efforts to limit the repatriation of capital, but the government also recognized that "only with a significant increase of the fiscal revenues from sources outside the mining sector will it be possible to maintain the share of fiscal revenue in the GDP at a level of about 34 percent."21

Despite difficulties in administrating them effectively, the new withholding taxes were also significant in revenue terms. By 1974, they were already raising 17 million kwacha, out of total government revenue of 628 million.22 They could have raised more, but the newly implemented agreements with Ireland, Japan, Norway, and the UK were already costing Zambia 10 percent of its potential revenue from the dividend withholding tax.23 All the treaties prevented Zambia from imposing withholding taxes on technical and management fees, and capped the taxes it could levy on the other types of payments. But the first two agreements to be reached, with Japan and Ireland, also ruled out any withholding taxes on dividends—and in Ireland's case, interest and royalties altogether. Because most of Zambia's foreign investment came from treaty partner countries, these agreements significantly blunted the effectiveness of withholding taxes, as both revenue-raising and exchange control policies. It appears that, with such a high tax-to-GDP ratio, nobody was looking closely at the impact of tax treaties, especially in the earliest negotiations.

### **Low Technical Knowledge among Negotiators**

In late 1972, Charles Irish, a three-years-qualified American lawyer, arrived as a lecturer at Zambia University and an adviser to Zambia's finance ministry. Irish was aghast at what he regarded as the unfair nature of the tax agreements signed by Zambia with higher-income countries (he referred to it as a "bias for residence" taxation). He described the agreement with Germany as "horribly inequitable," while negotiators from the United States "were putting forward a treaty that was so one-sided it should have made them blush."24

For example, both Zambia and Kenya signed treaties with the UK, but the terms of Zambia's treaty, signed in 1972, were much less favorable than those of Kenya's treaty, signed in 1973. British negotiating records make clear that Kenya was much more focused on renegotiating an agreement with a wider scope for it to impose withholding taxes than the colonial agreement it inherited. Negotiations broke down over this point, until Kenya canceled the colonial-era agreement; and even after the two sides had reached an agreement, Kenya sought and obtained further concessions from the UK before ratifying. Tellingly, Kenya's negotiating team included an expatriate civil servant from the UK as well as the Kenyan lead negotiator; Kenya also attended meetings of the United Nations ad hoc committee on tax treaties, and negotiators frequently bolstered their positions with reference to what they had learned in discussions there.

In 1974, Irish published a paper castigating the system, singling out the withholding tax revenue lost by Zambia through its treaties with the UK, United States, Germany, and Japan. He wrote: "The practical effect of the present network of double taxation agreements between higher-income and lower-income countries is to shift substantial amounts of income tax revenues to which lowerincome countries have a strong legitimate and equitable claim from their treasuries to those of higher-income countries. Concomitantly, these double taxation agreements result in a very considerable and unnecessary loss of badly needed foreign exchange reserves for lower-income countries. In other words, the present system of tax agreements creates the anomaly of aid in reverse—from poor to rich countries."25

According to Irish, negotiations at this time were pushed by a finance minister and his permanent secretary seeking to send a signal to investors, with little regard to the content. Interviewed in 2014, Irish stated that Zambia's negotiating strategy was not based on an analysis of the technical detail of treaties. "My impression of that time was that the revenue concerns were of less importance than the prestige concerns, and if you were able to conclude a tax treaty with the UK or the US then that was seen at the time in the minds of policymakers as opening the door to the possibility of foreign investment from those countries. There wasn't a very good awareness of the revenue consequences of the treaties, not very much at all."26 In his paper, he concluded that lower-income countries "feel compelled to accept any double taxation agreement in order to remove impediments to foreign investment contained in the internal tax systems of developed countries and to provide assurances of stability to foreign investors" and displayed "unawareness of the adverse nature of tax agreements with a bias for residence."27

Andrew Sardanis, an expatriate who was permanent secretary to the finance ministry in 1970–71, concurs. Zambia's treaty with Ireland remains a standout example of a one-sided treaty, leaving Zambia with very few taxing rights at all. According to Sardanis, "The fact is that most of the times, we let the other side write the agreements. . . . We were all very raw in those days and we also had our likes and dislikes. We liked Ireland because of its history of conflict with the UK and because many Irish in Northern Rhodesia were sympathetic to us during the period of apartheid.28

Three organizational factors are likely to have exacerbated the failure to fully appreciate the consequences of treaty negotiations. First, in Irish's words the civil service was "dominated by people who didn't have very much formal education," lacking experienced bureaucrats who might have scrutinized the content of treaties.29 This difficulty is corroborated by annual tax commissioners' reports, which outline the department's ongoing struggle to recruit, train, and maintain skilled staff. Successive commissioners complained of poor facilities, the lack of a sufficient budget, and the failure to fill more senior posts with competent staff.30 Little wonder that, in Charles Irish's words, "the income tax departments of lowerincome countries are woefully undertrained and understaffed and are barely able to cope with the administration of domestic tax laws, much less give serious consideration to complex international tax matters."31 For the Ministry of Finance it was the same, according to a study of mineral taxation reforms, which notes that "Zambia did not have the needed cadre of technically-trained public officials and professional economists to contest the companies' claims."32

This was compounded by a second factor: President Kaunda's predilection for moving ministers and senior officials between posts on an almost annual basis. Dennis Dresang and Ralph Young describe a "merry-go-round" in ministerial posts, the product of political and later economic instability within the government.33 From 1965 to 1975, ministerial reshuffles or organizational changes that shifted ministerial responsibilities took place every ten months,34 while the average period of a permanent secretary in post was eighteen to twenty-four months.35 The post of tax commissioner, with responsibility for tax treaty negotiation, was occupied by a different person each year from 1970 to 1974. The Ministry of Finance changed permanent secretaries at least four times in six years between 1967 and 1974.36

The minutes and correspondence from Zambia's negotiations with the UK bear out Irish's assertion that this state of affairs led to tax treaties that were "too often the product of unquestioned acceptance of the developed country's position after little or no substantive negotiation."37 Zambia's negotiations with the UK in 1971 were carried out personally by the newly appointed E. C. Chibwe, on a whistlestop tour of European capitals, flanked by two officials from other departments who did not appear to speak in the negotiations.38 The Zambia-UK treaty was initialed in less than four days, an unusually easy negotiation. Having emphasized the tax-sparing clause in their letter requesting an agreement (written under a previous tax commissioner), Zambia's negotiators dropped this demand when forced to choose between it and retaining the right to levy a 10 percent withholding tax on royalty fees.39 Zambian officials made clear that the royalty rate was of crucial importance, despite the fact that royalty flows were, according to British data, "negligible."40 That Zambia caved in when faced with this ultimatum, rather than holding on for British concessions in a second round of talks, may be indicative of pressure on negotiators to reach agreement quickly, but it is inconsistent with the motivation behind the original request for negotiations. Furthermore, British investors did not consider the treaty to be valuable. It seems hard to sustain the view that Zambian negotiators had a clear consensus as to why they wanted a treaty with the UK, what they needed to concede to get one, or that they understood the aspects of the treaty most likely to bring the most costs or benefits.

A third factor was the role that appointments to senior positions played in political patronage, especially during the period when treaty negotiations were under way. Until the institution of the one-party state in 1972, senior posts in the Zambian government were used to balance the representation of different factions in the ruling coalition.41 The finance brief came with substantial prestige and was allocated accordingly: it changed hands in 1967 as part of the balancing act, then twice in 1969, when it was first added to the portfolio of Vice President Emmanuel Kapepwe, and then moved to a new post of minister of development and finance.42 Zambia's lead tax treaty negotiators, its tax commissioners, were thus operating without any specialist technical support below them, and without any focused scrutiny above them.

During the late 1970s and 1980s, Zambia's position toward inward investors became, if anything, more favorable, with a relaxation of exchange controls in 1976 and a new package of tax incentives in 1977.43 Yet Zambia became a more cautious, better tax treaty negotiator. The agreements signed between 1978 and 1985, with Finland, India, and Canada were reached at a much slower pace, and figure 6.1 shows much improved negotiating outcomes.

By his own account, the presence of an expatriate international tax specialist— Charles Irish—had made a difference.44 This is corroborated in US diplomatic cables that record Zambia's negotiations with the United States. In October 1973, the US embassy in Lusaka informed the US Treasury that Zambia's Ministry of Finance "had decided [to] seek [an] agreement more favorable to GRZ [Government of Zambia] in revenue terms than past agreements."45 Instead of just one round of negotiations, the cables indicate that at least three rounds took place. Zambia's delegation was led by a less senior official, its deputy commissioner of tax, and also included Irish.46 The agreement was never signed.

In summary, the late 1960s and early 1970s saw Zambia rush into negotiating a number of tax treaties with the aim of attracting inward investment through "prestige" and tax-sparing clauses. The decision to negotiate, with whom and on what basis, was made in the first half of the 1970s without any detailed knowledge of the specifics of tax treaty content, with a focus that oscillated between taxsparing clauses and defending withholding tax rates. As a result, Zambia displayed 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.

### The Skeptical Years: 1991–2011

The reintroduction of multiparty democracy in 1991 saw the election of only Zambia's second government since independence. From 1997 onward, Zambian bureaucrats began participating extensively in international training and conferences on tax treaties. In the early 2000s, Zambia was even among twenty-five countries represented on the UN Committee of Experts dealing with tax treaties. Interview evidence indicates that a number of negotiations and renegotiations took place during this time. Despite all this activity, no treaties came to signature until 2010, when agreements with China, Mauritius, and the Seychelles were signed. This period in which few treaties were signed stands in contrast to both the 1970s and the position from 2011 onward, when a Patriotic Front (PF) government replaced the MMD (table 6.3). Mauritius and the Seychelles, of course, are tax havens, and these treaties open Zambia up to the risk of tax avoidance; the agreement with China is also quite one-sided, which provoked the United Kingdom to ask for a renegotiation to match its terms. This section discusses the reasons for the lack of new treaties, as well as these three rather surprising signatures.

TABLE 6.3. Zambia's negotiations since 2010

\*Renegotiation

#### **Growth of a Cohort of Technical Experts**

As part of a classic structural adjustment program, the new MMD government immediately began to implement an aggressive suite of Washington Consensus policies, eliminating tariffs and exchange rate controls, privatizing much of the state-owned industry, and introducing a VAT.47 Within two years, it had passed an act creating a new semiautonomous Zambia Revenue Authority (ZRA), a reform that swept through Anglophone Africa during the 1990s as a means of increasing the efficacy of revenue collection.48 Semiautonomous revenue authorities are governed at arm's length from the government; they are free to set their own employment practices to reduce the extent of patronage in their staffing and to improve staff retention.49

The creation of a specialist organization dealing with tax administration, combined with an influx of technical assistance on tax issues from donors such as the UK, Germany, and Japan, quickly brought senior Zambian officials into contact with an international network of tax treaty negotiators. A review document prepared by the OECD secretariat and the government of Zambia in 2011 describes the extent of this interaction:

> Officials from the Ministry of Finance and National Planning together with the ZRA are working closely with their counterparts in other jurisdictions through double taxation agreements and organisations such as: the African Union; OECD; African Tax Forum; World Customs Organisation; SADC; COMESA Technical Committees on Customs; etc. Zambian Officials are often invited to attend discussions on issues pertaining to tax administration and customs border control organised by international organisations. An example of the outcomes of networking on tax treaties are the double taxation agreements that Zambia has signed with a number of countries.50

As one negotiator, who was senior within the ZRA at this time, explained, "From about 1997, the ZRA having been formed in 1994, there was a lot of interest from the OECD to get non-OECD countries to appreciate the issue of [tax treaties]."51 Zambia went "religiously" to OECD tax treaty meetings in Paris and participated in numerous OECD trainings.52 Throughout the 2000s, it was represented almost every year at either the OECD's Global Forum on Tax Treaties in Paris or the annual session of the United Nations Committee of Experts on International Cooperation in Tax Matters in Geneva. Its representatives were generally top-ranking officials from within the revenue authority.53 At these meetings, according to an analysis of OECD documents by Lynne Latulippe, "the OECD's activities created and maintained non-members' perception that tax treaties were necessary to attract FDI, although it did not produce any direct evidence of the consequences or the influence of tax treaties."54

Several examples illustrate the prevailing direction of discussions in these forums. In 2002, members of the SADC signed a memorandum on tax cooperation that committed them to "strive to ensure the speedy negotiation, conclusion, ratification and effective implementation of tax treaties" and "establish amongst themselves a comprehensive treaty network."55 COMESA entered into a similar project in 2009.56 Zambia's decision to accede to requests from Mauritius and the Seychelles for tax treaties, despite the risks originating from their positions as tax havens, was linked by many interviewees to the SADC protocol. As one government interviewee explained, "First of all there's the issue of expanding the network. Being part of SADC, SADC protocol says you're going to have treaties with each other. There's this thing that says you're in this together. If you just look at tax on its own you're never going to sign any treaties."57

In 2006, UNCTAD, in a project funded by the Japan Bank of International Cooperation, produced the *Blue Book* for Zambia, which included the following among its ten recommendations for capacity-building assistance: "Carry out a [tax treaty] negotiation round with China, the Republic of Korea and three other South-East Asian countries with strong investment interests in Zambia. This can be facilitated by UNCTAD. The participants will consist of teams of DTT negotiators mandated by their country to negotiate and conclude such agreements. The round will last five days. UNCTAD's secretariat will provide assistance for the facilitation and the organization of the round (preparatory work, invitations, exchange of drafts and comments, preparation of the negotiating matrix, secretarial backstopping during the round)."58

Zambia's specialist international tax officials at the time saw tax treaties as intimately linked with investment, but not as drivers of new inward investment. As they saw it, investors from countries without tax treaties might face double taxation, and this was a problem that should be resolved. According to a senior ZRA official at the time, "We wanted to expand the network. It was about the time we had opened up, and there was a lot of interest in terms of FDI coming into the country. It was about the time investors were coming in, and we wanted to have treaties there to avoid double taxation."59

His counterpart from the Ministry of Finance also explained that treaties "come from the [existing] investors' influence. It's when they need to repatriate income."60 One of the former negotiators even expressed a quite cynical view about the political reality of his position. "I know there's empirical evidence that it has no effect on investment, but the reality country-to-country is that there's a bluff goes on, and countries don't want to take the risk of losing big investments. . . .  They come and say, 'for us to further this investment, we need a treaty.' That's what it's about: bluffing."61

#### **Conflict within Government**

Despite devoting so much energy to tax treaty negotiations throughout the 1990s and 2000s, Zambia had concluded only three tax treaties by 2011, with China (as recommended in the *Blue Book*) and the Seychelles and Mauritius (SADC members). Negotiators at the time indicated that many renegotiations, including with South Africa, Tanzania, and the UK, were stalled once officials had reached agreement, while others failed to get off the ground because of slow ministerial approval.62 No treaties were actually signed until 2010, and it is common knowledge among negotiators and advisers in the private sector that these—as well as several that have not been signed—had been negotiated some years before.63

Treaty negotiators and private sector tax advisers all explained in interviews how officials were unable to secure ministerial approval for signature and ratification. "Government was not sure what were the benefits," said one former negotiator. "Some people had read that DTAs give away revenue. Somehow it never got past cabinet. The revenue authority was finding it a bit frustrating."64 Another concurred: "You send it to the minister for permission, and it just sits there."65 One factor appears to have been changes in government, with new presidents coming into office in 2002 and 2008. "When you have a change in government, you have to go back to the drawing board," explained a negotiator.66

The growing concern about Zambia's tax performance, and especially about taxes paid by mining multinationals, clearly set the tone. Zambia's tax-to-GDP ratio had declined by more than half since the early 1970s, to just 16 percent of GDP in 2003.67 As copper prices rose during the 2000s but tax revenues did not follow suit, the subject became politicized. In early 2008, the government attempted (ultimately unsuccessfully) to introduce a windfall tax of up to 75 percent on mining companies, which required canceling agreements reached with mining companies at privatization.68 Corporate taxation, particularly of the mines, was a key topic during a presidential election later that year, won by former vice president Rupiah Banda after the death of incumbent Levy Mwanawasa.69 The Banda administration prioritized strengthening Zambia's tax system and turned up the heat in the run-up to the 2011 election, during which opposition leader Michael Sata stood on an explicit platform of tackling tax avoidance by multinational mining firms.70 According to one official, "The whole tax regime had an injection in 2010, because we were trying to get rid of [tax] incentives, and we started to [re]negotiate."71 Another seemed to agree. "There was no specific policy change, it was simply that the minister and cabinet decided to handle this issue. Okay, I suppose you can call that a change in policy."72

The specialists' efforts to negotiate and renegotiate tax treaties were obstructed in this context because political decision makers, who were concerned to be seen to increase tax revenues, did not support the tax treaty project. Only when treaties aligned with their political priorities were negotiators able to secure signature and ratification of agreements. This explains why agreements were only signed with strategically important China and with SADC neighbors. Negotiators' longstanding ambitions for new and renegotiated older treaties never saw the light of day, despite completion of negotiations. Even the official version of the 2002 SADC protocol on tax treaties does not have a Zambian ministerial signature.73 As one official lamented, "If it is new and they are saying 'go for it' it is ratified. If it is old, nobody is interested."74 According to a prominent tax adviser in a professional services firm, "The treaty with South Africa is very old, it can't be implemented in places. It's 15 years since they renegotiated that treaty. . . . We think cabinet has been lazy, they have not given it a lot of thought."75 An expatriate technical adviser to the Ministry of Finance stated that "ministers of finance have been reasonably competent, but somewhere in the political system it all disappears."76

### 2011 Onward: A New Attitude toward International Tax?

After the 2011 election, with the change of party administration a new cohort of senior civil servants began their posts at the Treasury, and those who took over the remit for tax treaties did not have the same history of participation in international tax organizations. According to those officials themselves, this fresh perspective and new political impetus, combined with civil society campaigns that drew specific attention to tax treaties, have led to a new approach. Renegotiations were undertaken with the UK, India, Norway, South Africa, Ireland, and the Netherlands (the latter three treaties regarded as substantially problematic). Even the colonial-era treaty with Switzerland, slated for termination in 2014, has since been renegotiated.77

"In 2012, with the change of government, this government came in with a different view, they were ready to terminate treaties," said a junior official with experience in both administrations. "We are close to happy [with the renegotiations]. The first thing we did was to repair the damage."78 The finance ministry official responsible for tax treaties in 2014 appeared skeptical, stating that "there is currently no evidence to show that tax treaties have helped to attract investment into Zambia. . . . So the important advice to third world countries like Zambia will be to demonstrate really how double taxation avoidance can be achieved without signing tax treaties."79

The process of renegotiation undertaken by Zambia is intended to stem some of the losses due to abuse of existing tax treaties and to maximize the administrative benefits that Zambia can obtain from the information exchange and mutual assistance provisions of tax treaties.80 But there is evidence here of a degree of path dependency, as figure 6.2 shows. Despite the clearly skeptical attitude from inside the finance ministry, it is much harder for Zambia to renegotiate or cancel an existing treaty than it is to secure a new one. For example, a tentative attempt by the ZRA to disregard the colonial-era agreement with France failed after the threat of a legal challenge from French businesses in Zambia and from the French government.81 The newly renegotiated treaty with the UK is a more useful tool for the ZRA's enforcement work, and it includes a broader definition of PE; but in return, Zambia was forced to accept a substantially reduced maximum withholding tax rate on British firms in order to bring the treaty in line with concessions it had offered to China in the 2010 agreement. "It's hard enough competing with Chinese businesses in Africa as it is," a British diplomat explained.82

There is a sense from government officials that if the present administration in Zambia were building its treaty network from scratch, it would not conclude

FIGURE 6.2. Zambia's renegotiations

*Source*: *Hearson, "Tax Treaties Explorer."*

many treaties at all. Its only fresh agreements it signed between 2012 and 2020 are with other African countries. The agreements with the Seychelles and Mauritius, which had been negotiated and signed under the previous government, are not seen as good deals for Zambia. "The process of approval took too long such that by the time [these] agreements were signed, the agreements were 'out of tune' and therefore lacked the standards we now insist upon," said a senior finance ministry official. "I am not sure if Zambia would remain in good standing with the international community if it decided to annul the treaties (unilaterally or not) with either the UK, Germany, Japan or Canada, for instance. Perhaps we have sold our soul for [having] been aid recipients from countries such as the ones stated above."83 In 2020, however, Zambia did terminate its treaty with Mauritius.

### Conclusion

This chapter looked at a lower-income country that has historically been something of an outlier, with a fluctuating attitude toward tax treaty negotiations. During the 1970s it was a positive outlier, signing more treaties than most of its neighbors, and on worse terms. At this time it did not have specialist bureaucrats to drive the process, and so the decision to negotiate was based on the idea held by political actors that treaties would attract investment, without any clear analysis of the costs and benefits. The process was led by politically appointed nonspecialists, with little technical support or experience, in a context of a high tax-to-GDP ratio that may have reduced the salience of the treaty's costs in the initial period. This meant that negotiation, signature, and ratification were quick, but the quality of negotiation was poor, until an expatriate specialist arrived and caused Zambia to question its approach.

In the late 1990s and 2000s, Zambia had a specialist bureaucracy, which engaged frequently with the international tax community. These officials saw treaties as an important part of the enabling framework for inward investment—not as instruments that would directly attract investment but as tools to ensure foreign investors were taxed according to international rules, and also to increase Zambia's capacity to enforce its tax laws. It was important that older treaties be brought in line with modern standards in order to achieve this. But these objectives were not shared by cabinet ministers, in a context where tough tax politics toward mining companies was of paramount importance. As a consequence, most were not signed or ratified, with the exception of treaties with SADC countries and with China, where specific political pressures existed. It was from 2011 onward that the preferences of bureaucrats and politicians aligned, leading to a rapid wave of negotiations that improved many older treaties but did not undo all of the earlier damage.

### VIETNAM AND CAMBODIA

We didn't even know who the Seychelles were. I had to Google it.

—Treaty negotiators, Cambodia

This chapter considers two Southeast Asian countries, Vietnam and Cambodia. In comparison with Zambia, both were late adopters of tax treaties: neither had a single bilateral tax treaty when they began to open up to FDI in the early 1990s. At that time, their attitudes toward investment promotion were not radically different, as illustrated by the tax incentives that both offered to foreign investors and their active BIT negotiation programs. Yet, while Vietnam has signed more tax treaties than almost any other lower-income country, Cambodia has taken a cautious approach, only beginning to sign treaties in 2016. In contrast to conventional explanations of the origins of tax treaties, which view the capital importer as the active pursuer of tax treaties, Cambodia declined requests for tax treaty negotiations from capital-exporting countries and tax havens for many years. Both countries received approaches from numerous capital-exporting countries seeking to enhance opportunities for their multinational investors, and felt competitive pressure to sign tax treaties in order to attract inward investment. Yet for a long time, only Vietnam acquiesced.

What explains this divergence? One difference between the two countries was timing. Vietnam urgently needed to replace its economic dependence on the Soviet Union after the end of the Cold War, and began to negotiate tax treaties in the early 1990s before it had a corporate tax system in place, seeing them as a shortcut to creating a tax regime for foreign investors. This urgency precluded a detailed consideration of a negotiating position, meaning that Vietnam allowed others to determine the content of its treaties. Cambodia, meanwhile, did not face such time pressure, imposing a much lower tax burden on foreign investors to begin with, and depending very little on tax revenue from businesses. By the time Cambodia faced real pressure to negotiate tax treaties, it desperately needed more tax revenue, creating a strong reluctance to sign away taxing rights. In contrast, Vietnam—like 1970's Zambia—had a large reservoir of state income that was unaffected by treaties, in this case from state-owned enterprises.

The consequences of these early choices are visible in the way in which these countries engage with international norms. Vietnamese officials have, since the late 1990s, engaged mostly with the OECD, rather than the UN. While they have become more strategic in their negotiating stance, they are motivated by the idea that all investment, no matter how small, and regardless of the costs or the level of competitive pressure, should be covered by a tax treaty. Vietnam has also used its domestic tax system to take unilateral steps that negate the main supposed investment-promoting benefits of tax treaties. Cambodia, meanwhile, selectively imported technical knowledge from abroad as it prepared to negotiate, strengthening its negotiating position while holding on to some unconventional ideas.

This chapter begins with a comparison of Vietnam's and Cambodia's approaches to international economic cooperation, including tax treaties. It then briefly demonstrates that both countries came under pressure from capital exporters to sign tax treaties. After this, the mechanisms within Vietnam and Cambodia are considered separately.

### Comparative Context

Vietnam and Cambodia are neighboring countries in Southeast Asia. Both had somewhat closed economies until the beginning of the 1990s, when they began to open up to FDI. As figure 7.1 shows, FDI flows into Vietnam and Cambodia have been similar on a per capita basis since the early 1990s. One major difference between the two is the large role of state-owned enterprises and state investment in Vietnam's economy, in comparison with Cambodia, which has a much smaller state sector and relies much more on foreign enterprises for its economic growth. As a result, total investment per capita measured by gross fixed capital formation in Vietnam has been double that in Cambodia.

Tax treaties are a general exception to the pattern of participation in international agreements that we can observe for the two countries. Cambodia has usually followed closely behind Vietnam, participating in other forms of agreement within a few years (table 7.1). In contrast, the gap for tax treaties is a quarter of a century. While it is true that Cambodia has concluded fewer BITs than Vietnam, it had nonetheless signed twenty-six by 2017.1 Yet Vietnam and Cambodia are

FIGURE 7.1. Investment statistics per capita, Vietnam and Cambodia

*Source*: *World Bank, "World Development Indicators," World Bank Open Data, 2020, http://data.worldbank.org.*

TABLE 7.1. Timing of some key milestones in economic integration

*Source*: IBFD, "IBFD Tax Research Platform," 2020, http://research.ibfd.org/; Margaret Slocomb, *An Economic History of Cambodia in the Twentieth Century* (Singapore: NUS Press, 2010), 273–75; Pamela Sodhy, "Modernization and Cambodia," *Journal of Third World Studies* 21, no. 1 (2004): 153; UNCTAD, "International Investment Agreements Navigator," accessed August 10, 2015, http://investmentpolicyhub.unctad.org/IIA.

TABLE 7.2. Treaty-making activity: Cumulative treaties signed

*Source*: UNCTAD, "International Investment Agreements Navigator"; IBFD, "IBFD Tax Research Platform."

polar opposites when it comes to their attitudes toward tax treaties. By 2017, Vietnam had signed seventy-seven tax treaties, while Cambodia did not sign any until 2016. Table 7.2 compares the cumulative number of tax treaties that both countries have signed since 1990 with the number of BITs.

To explain why the numbers of tax treaties signed by these two countries vary so much, this chapter uses secondary literature and field visits to Vietnam and Cambodia. Eleven semi-structured interviews were conducted in Vietnam (in total, four government officials, nine private sector stakeholders, and two others took part in interviews), and five in Cambodia (with two government officials and three private sector stakeholders). In both countries, the government officials responsible for tax treaty policy and negotiations were included in the sample. Sampling was largely purposive, with interviews arranged in advance through email. Government contacts were obtained through an OECD technical adviser who had been active in both countries, private sector contacts through the websites of private sector advisory firms, and other contacts through local NGOs. A small number of additional snowball-sampled interviews were arranged during field visits. In Vietnam, a government-industry consultation meeting on tax treaty interpretation was also observed. In Cambodia, both the lack of any tax treaties at the time of fieldwork and the embryonic state of the country's tax advisory sector reduced the number of potential interviewees available.

### Competition for Outward Investment Opportunities in Cambodia and Vietnam

The competitive pressure on Vietnam and Cambodia is reflected in the growing number of treaties signed by countries within the ASEAN region, with which Cambodia and Vietnam compete for foreign investment and trade. Vietnam and the Philippines have used tax incentives to compete for high-tech manufacturers, for example, while Cambodia, Laos, and Myanmar compete in lower-technology sectors.2 In both of the case study countries, there was evidence of what appears to be a strategic interaction between lower-income countries, whereby one ASEAN country's signature of tax treaties creates pressure on another.

This is not, however, the only form of strategic interaction driving treaty diffusion. Since opening up, Cambodia has received multiple requests for tax treaties from both Asian and European countries (about ten, according to one government source). Among the countries that, as one official said, "have been writing many times in the past" are Malaysia, Thailand, Korea, China, and Japan.3 At least two of these countries have made formal requests in person via their ambassadors.4 Requests have also been received from European countries and more than once from the Seychelles. "We don't even know who they are," said one official, referring to the latter. "I had to Google it," said another.5

Vietnam has already signed a treaty with the Seychelles, despite no investment flowing between the two, according to its own statistics. Its large network of treaties signals to other countries that they will receive a positive response if they request negotiations, and many treaties have been initiated from the other country. "Normally when we negotiate with other countries, they decide when we negotiate," confirmed Nguyen Duc Thinh, the head of the International Taxation Department of the General Department of Taxation (GDT), interviewed in 2015.6 While this confirms that the phenomenon of competition for outward investment described in chapter 3 is still relevant to the present day, the rest of this chapter focuses on decisions made in the lower-income countries.

### Vietnam

Following the *doi moi* reforms of 1986, Vietnam's government began to open the country to FDI, passing a liberal investment law that was unusual in that it protected investors from subsequent changes in laws, as well as from expropriation.7 Furthermore, the new investment regime offered inward investors a tax holiday of up to eight years and a reduced tax rate thereafter.8 Progress in expanding political and economic relations with the rest of the world was initially slow after 1987, but came to be felt more urgently within the Vietnamese Communist Party when the fall of the Soviet Union left it marginalized.9 This is thought to have been one of the drivers of Vietnam's willingness to relinquish its military involvement in Cambodia through the Paris peace accords signed in 1991, which in turn led to some thawing of relations with members of ASEAN, although it would take some time to establish trust.10

Vietnam threw itself into economic integration even before its domestic legal framework—including its tax laws—had caught up. From 1990 onward it signed BITs at a ferocious pace of around six per year, with European and Southeast Asian countries as partners in roughly equal numbers. A surge in FDI in Vietnam in 1996 followed the lifting of the US trade embargo in 1994, which paved the way for Vietnam to finally join the ASEAN community in 1995, and eventually the WTO in 2007.11 The ASEAN and WTO logos still light up the main road from Hanoi's Nội Bài International Airport to the city center today.

Vietnam was no slouch when it came to tax treaties, either. It signed its first treaty in 1992, picking up the same, faster pace as for BITs soon afterward (table 7.2). The nineteen tax treaties signed by Vietnam between 1992 and 1995 already covered half of its inward investment, and by 1997 it had concluded a total of thirty-two treaties, now covering two-thirds of all its inward investment.12 In 1997, Vietnam formally expressed positions on the provisions of the OECD model tax treaty for the first time, reserving the right to include numerous beneficial clauses in its own treaties that are excluded from the OECD model.13 Figure 7.2 shows how the content of Vietnam's tax treaties changed over time, by comparing them with this declared negotiating position. There appear to be two distinct periods of negotiation: treaties signed between 1992 and 1998 were much more heterogeneous in their content and generally less reflective of Vietnam's own preferences. From 2000 onward, most treaties included 60–90 percent of the clauses that Vietnam had indicated in its negotiating position. While treaties with OECD member countries since 2000 have not tended to be as reflective of Vietnam's negotiating position as others, the same structural break can be seen from 2000 onward, suggesting stronger negotiating by Vietnam. Two specific examples of this structural break are as follows:

*Source*: *Martin Hearson, "Tax Treaties Explorer," 2020, http://treaties.tax.*

#### **A Treaty Network Driven by Competition for Inward Investment**

Interviews with current and former Vietnamese officials indicate that an intense desire to attract inward investment explains many of these early decisions. According to Thinh, three factors drove Vietnam's prolific negotiation of tax treaties and its willingness to make big concessions in the 1990s.14 First, tax treaties and other economic agreements were ways of establishing political and economic relationships with other countries at a time when an economic embargo on Vietnam was still in place in the United States. This weakened Vietnam's negotiating strength. Second, by ensuring that all foreign investment was covered by tax treaties, Vietnam aimed to shortcut the development of domestic corporate tax laws, which would take considerable time at a point when there was a pressing need for inward investment. A third factor driving Vietnam's enthusiasm for tax treaties was a desire to have tax-sparing agreements with capital-exporting countries. Like Zambia in the 1970s, Vietnam in the 1990s was using generous tax incentives to try to attract inward investment; tax-sparing provisions in tax treaties ensured that foreign investors could benefit from the incentives in full. "This was our most vital condition for negotiating a DTA at this time. . . . We had to step back [from other negotiating preferences] a lot because the tax sparing was so vital," said Thinh.15

Vietnam's weak position, combined with its lack of experience negotiating, meant that it made concessions that it would not now make. An official who had been involved in these early negotiations explained that Vietnam began its negotiations using the OECD model because it had not heard of the UN model.16 Thinh concurred: "During that time our negotiating partners were from the OECD and it was urgent to open our door and so we had to accept [OECD model treaty provisions]. . . . When we were beginning to negotiate DTAs, we didn't have so much experience. When the countries came to negotiate with us they forced us to use the OECD model."17

As figure 7.2 indicates, however, it was not only with OECD members that Vietnam gave away large amounts of taxing rights. Among the pre-2000 treaties, aside from those with OECD countries, two are considerably less good deals than average for Vietnam. These are with Taiwan and Singapore, by far its two biggest sources of investment outside the OECD.

#### **The Low Importance of Fiscal Cost**

Vietnamese officials paid little attention to the costs of treaties they negotiated at this time because raising corporate tax from foreign investors was not a priority. "In Vietnam they don't care much about corporate income tax, it's VAT," one former civil servant explained to me.18 The country's tax system in the early years of its economic liberalization was complicated and discriminatory, incorporating taxes on turnover, profits, and profit disbursements. It was also administered inefficiently and somewhat arbitrarily by inexperienced and corrupt tax administrators.19 While this frustrated foreign-owned companies, they benefited greatly because they were exempted from turnover tax and taxed on their profits at a lower headline rate than domestic firms (25 percent compared with a maximum of 45 percent for domestic firms); furthermore, generous tax incentives in the Investment Law meant that most would not become liable for this tax for some time, if at all.20

As a result of this tax system, tax revenue from FDI was relatively small, as low as 0.02 percent of GDP in 1991, rising with the stock of FDI to 1.2 percent in 1997.21 But while tax revenue from foreign companies may have been low, Vietnam raised considerable revenue elsewhere.22 A paper coauthored by the head of tax policy in the Ministry of Finance notes that, despite difficulties in the administration of the tax system, Vietnam's tax-to-GDP ratio in the 1990s was much higher than other ASEAN countries that would have been expected to have greater "taxability" because of higher per-capita income and a greater industrial share in the economy.23

In part, this was because effective tax rates on domestic-owned firms in Vietnam were much higher than the rates in these other countries, exceeding 60 percent once turnover and profit taxes were taken into account.24 In addition, structural economic differences provided more tax revenue—in particular, the large share of state-owned enterprises in the economy, and the presence of the high-tax oil and gas sector (although revenue from the latter amounted to only around 2 to 3 percent of GDP).25 In 2000, tax revenue from foreign-owned firms still made up only 5 percent of total corporate income tax revenue, while more than four times as much came from state-owned enterprises.26 A new tax system promulgated in 1999 simplified the country's tax structure and made it less discriminatory. Foreign-owned firms now paid 33 percent tax on their profits, the same as domestic firms, but they still benefited from generous reductions lasting as long as ten years.27

#### **Treaty Negotiators: Limited Capacity but High Autonomy**

When Vietnam began to negotiate tax treaties, its negotiators had little prior exposure to the international tax community.28 Absent technical knowledge and negotiating experience, their approach to concluding tax treaties was incoherent. In the late 1990s, however, "some OECD experts came to Vietnam to talk about the DTAs," according to Thinh.29 Vietnamese officials became a regular fixture at the OECD's annual Global Forum on Tax Treaties during the 2000s, sending a delegation of two to four persons each time.30 In contrast, Vietnam did not attend annual meetings of the UN Tax Committee until 2017.31

While government officials outside the GDT still reproduce the tax treaties myth,32 this is not the only logic at work within the GDT itself. Rather, Vietnam has adopted the policy that all investors, no matter how small, should be covered by a tax treaty. "Even if it is a small amount of investment it is still worth it," according to Thinh. This contributes to one business representative's view that "Vietnam's negotiations have been on a 20-year roll."33 While Thinh and his colleagues want all investors to be covered by a treaty, it is very clear, from interviews and from their approach to applying tax treaties, that this is because they want to apply an international standard to all existing inward investors, not merely to encourage new inward investment.

Among private sector tax practitioners with experience dealing with the GDT, Thinh was described as the driving force behind decisions related to tax treaties.34 He also suffered from a lack of experienced support: according to a former employee within the International Tax Department, in 2015 Thinh was the only member who had been in his post for more than five years, out of a staff of twelve.35 According to one European tax lawyer who has worked in the region for over a decade, "It's all about people. If Vietnam didn't have Mr Thinh they wouldn't have any tax treaties."36 A former official from the Department of Trade stated, "The legacy of signing agreements all the time is set in momentum, and it keeps on going. . . . Sometimes it just happens because someone gets in the routine."37

It is notable, however, that the GDT's authority does not extend to being able to implement its desire to renegotiate treaties. The country has accepted an offer from the Netherlands to renegotiate in order to add an anti-abuse clause to that treaty, but while some lower-income countries have faced difficulties persuading higher-income countries to renegotiate treaties that are a good deal for the latter, Vietnam does not appear to have tried. As in Zambia, the main reason relates to internal bureaucratic politics. According to Thinh: "Nowadays . . . we would like to renegotiate. From our side, it's not easy because there would be questions from the other ministries and agencies. They would ask why we should want to. For example, we really want to renegotiate with France, because we don't have an interest article, but the other ministries would say 'everything is fine, why do you want to do this?'"

#### **The Legacy of Past Negotiations**

Today, it is much less clear what Vietnam stands to gain from its tax treaty negotiations. In 2005, it decided to abolish withholding tax on profits remitted by foreign investors as dividends, and reduce withholding taxes on interest, royalties, and service fees to very low rates.38 This dramatic move made its tax system much more attractive but also undercut the main supposed investment-promotion tool of its tax treaties. As Vietnam also no longer prioritizes tax-sparing clauses within its treaties,39 the tax treaty provisions that might be expected to have the biggest investment-promoting effect are no longer of relevance to investors in Vietnam.