THE BLOG
10/01/2018 11:44 GMT | Updated 10/01/2018 14:07 GMT

Four Questions MPs Must Ask In Parliament Today About The UK-Lesotho Tax Treaty

Our MPs have the opportunity to advocate for fairer tax practices with poorer countries – and we hope they do

Victoria Jones - PA Images via Getty Images

Today, Parliament decides whether to ratify a new tax treaty between the UK and Lesotho, a nation of just two million people, landlocked by South Africa on all sides.

Tax treaties are agreements between two countries setting out how money flowing between the countries can be taxed. They matter for developing countries like Lesotho because they limit or disallow certain kinds of taxes from being imposed, taking taxing rights away from countries and limiting the ability of governments to make policy changes later. The result is that the amount of tax owed by multinational companies is reduced – but this money is badly needed by poorer countries, such as Lesotho, to fund public services.

Two years ago, the then-financial secretary to the Treasury Jane Ellison stated in Parliament that the government’s intent was to “align our tax treaties with our wider development policies”. As a charity focused on the rights of women and girls in the poorest parts of the world, ActionAid knows from experience that it is the poorest women and girls who suffer most when taxes aren’t paid, or when tax flows are reduced by deals like this. When schools charge fees because they aren’t properly funded, it is girls who tend to be the first to drop out. When hospitals don’t have the resources they need, it is women and girls who are most likely to be left caring for the sick.

This treaty is reflective of the balance of power between the UK and countries it signs treaties with. Scrutinising it properly will make clear how it affects Lesotho’s ability to raise taxes. As MPs prepare to debate the treaty in Delegated Legislation Committee - the Commons committee appointed to consider the treaty on behalf of the House - there are four questions they should ask Treasury Minister Mel Stride MP, who is representing the government.

How will this tax treaty support Lesotho’s development?

A country might sign a tax treaty to provide confidence to foreign businesses that might operate there, and to promote investment - but the World Bank says the evidence that tax treaties actually deliver this is weak. In its analysis, Lesotho’s gross national income per capita - its entire annual income as a country, divided by the number of people living there – is just US$1,270, compared to US$42,330 in the UK, making the average person in Lesotho more than 33 times poorer than the average Briton. The UK is Lesotho’s largest single source of foreign direct investment (FDI), investing US$17 million in the country in 2010, one-third of its US$51 million FDI income. That means this tax treaty matters far more for Lesotho’s economic development than that of the UK.

Signing tax treaties can be costly for a country. The UK’s aid watchdog, the Independent Commission for Aid Impact, has raised concerns that the UK’s network of tax treaties could be depriving developing countries of vital revenues. ActionAid’s research estimates that, in 2013 alone, for example, Bangladesh lost US$14.5 million in tax revenue because of a single clause in its tax treaty with the UK.

ActionAid would like to see the government publish its assessment of the impact this treaty could have on investment levels and tax revenue in both the UK and Lesotho, to demonstrate if and how the treaty will benefit the UK and Lesotho.

Why isn’t the negotiation process more transparent?

The government has published the text of the UK-Lesotho tax treaty for which it seeks approval, but has published little or no information to supplement this - for example, the reason for negotiating the new treaty, or its objectives. There is no opportunity for MPs or other stakeholders to comment on draft versions of the text. ActionAid would like to see a more open, transparent process, so that MPs, businesses and civil society can scrutinise and suggest improvements to tax treaties.

Why are UK businesses getting such a big tax break?

If there was no tax treaty in place, the government of Lesotho would charge non-residents a 25 percent ‘withholding tax’ on dividends, interest, royalties, technical fees and management fees leaving Lesotho for a foreign country. However, the proposed tax treaty between the UK and Lesotho would cap these charges at 5 percent on dividends, 10 percent on interest payments, and 7.5 percent on royalties being sent to the UK, providing a tax break to UK businesses operating in Lesotho and reducing the amount of revenue the Lesotho government can collect from them.

We think MPs should ask the government whether it is Lesotho’s preference to set withholding taxes this low; and if not, they should ask why the government negotiated them down, and whether these low tax rates are in Lesotho’s interest.

Why is the UK government able to challenge the decisions of the Lesotho government in secret international courts?

The new Lesotho tax treaty contains clauses that allow for ‘mandatory binding arbitration’. This means that if the UK government disagrees with a ruling made by the Lesotho Revenue Authority, it can challenge their decision in a form of secret international court which operates outside of Lesotho’s regular legal system. ActionAid has concerns about this because it can be extremely costly for developing countries such as Lesotho to become involved in these processes, so this could result in tax avoidance not being challenged by Lesotho.

One of the keys to ending gender inequality is to provide more and better quality public services. Our MPs have the opportunity to advocate for fairer tax practices with poorer countries – and we hope they do.

Jon Date is senior advocacy manager at ActionAid UK