As the world is increasingly interconnected, international taxation – traditionally more of a niche issue for tax lawyers – is receiving more and more attention in wider discussions on economic development: Double tax treaties, or agreements that two countries sign with one another to prevent multinational corporations or individuals from being taxed twice, have become more common, with more than 3,000 in effect today. And while they may contribute to investment, some have also become an instrument for aggressive tax planning.
Economists tend to agree on the importance of competition for a sound market economy. So what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is that by competing with one another and eroding each other’s revenues, countries end up having to rely on other—typically more distortive—sources of financing or reduce much-needed public spending, or both.
All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome.
Photo credit: Dmitry Karyshev
Armenia was faced with a slowing economy, sinking remittances, and inefficient tax administration. At the same time, ordinary taxpayers had to navigate arduous processes when paying taxes. The Armenian government was eager to reform its tax administration. Below is a transcript of what we learned when we spoke to World Bank experts working with Armenian tax officials to make things better.
Julia: I’m Julia Oliver.
Maximilian: I’m Maximilian Mareis.
Julia: And we have been talking with tax experts around the World Bank to find out about what they do.
Maximilian: So, let’s start with this project in Armenia. Why did we get involved?
Julia: Well, the global financial crisis hit Armenia and its three million people pretty hard. In 2012, when the World Bank began working with policymakers to improve the country’s tax administration, the country faced a pretty bleak picture. Foreign remittances were low, and the domestic economy was slowing. In addition the country had high levels of informal employment.
Tax officials and experts grappled with the issue of tax treaties several weeks ago at the IMF-World Bank Annual Meetings. This arcane subject has now emerged as a new lightning rod in the debate on fairness in international taxation. As citizens demand that corporations pay their fair share of taxes and some governments struggle to raise enough revenues for basic services, tax treaties present difficult issues.
Photo: Daniel Kozak, World Bank
The first time I came to Bucharest in 2013 the Bank office offered to arrange a pick up from the airport. Being a seasoned traveler, I declined the offer. I reasoned that I had lived and worked in so many countries I could manage the transfer to the hotel without assistance. I was wrong.
I picked up my luggage to find a local cab outside the airport. A taxi driver offered me a ride. I didn’t negotiate the price upfront seeing that he had a meter in the car.
Twenty minutes later we reached the hotel. The meter read Lei 200 - at the that time about $60. That was over twice the going rate but there was little else I could do. I felt cheated as so many tourists do.
I learned from the experience, accepted offers of help from colleagues and paid more attention to rates going forward.
An electronic kiosk had been installed at the airport. Arriving visitors could now press a button to get an estimated wait time to hail a taxi. I took my ticket. It was a smooth ride.
What made the difference?
The new taxi ordering system is now available on mobile phones mirroring, in many ways, the service provided by Uber. Passengers can rate drivers and increase accountability.
Bucharest has gone from being a difficult place to find an honest cab driver to one of the most convenient.
The change has been driven by incentives and improved technology.