International Taxation and Developing Countries

Peter Mullins
January 22, 2020

International tax issues are a concern for both developed and developing countries, with evidence of aggressive tax planning by multinational enterprises (MNEs). MNEs are able to exploit weaknesses in the design of the international tax framework to reduce their tax liabilities. The international tax system has been further complicated by the expansion of the digital economy. Concerns about the international tax system have led to major international tax initiatives, most notably the G20-OECD BEPS project, as well as to proposals for more radical reform of the international tax framework. The dilemma for developing countries is how to respond to these international tax challenges, including the range of international tax initiatives. Developing countries want MNE investment and the benefits they bring, while deriving tax revenues from MNE activities to meet their fiscal needs, including financing the Sustainable Development Goals. Many of the international tax reform initiatives are designed by, and for, developed economies, and so may be too complex and/or not practical in a developing country. This paper considers the problems with the international tax framework for developing countries, and reviews international tax initiatives and alternative taxing mechanisms. The paper then provides guidance on strategies that developing countries can adopt to address international tax challenges, particularly in four priority areas: developing simple and comprehensive international tax rules in domestic laws (including transfer pricing rules); limiting interest deductions; ensuring adequate withholding taxes; and being cautious of new double tax treaties.

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