Make Tax Fair

The UK's tax treaty with Malawi is outdated and unfair. It's time for Malawi to get a better deal. The SMP have worked with ActionAid to call for this colonial-era treaty to be completely renegotiated, to be made fairer for Malawi and fit for the 21st century.

The UK’s treaty with Malawi, which sets out how money moving between our countries is taxed, dates from 1955 while Malawi (then Nyasaland) was under UK colonial rule. It was signed by the UK Government and the UK Government’s appointed Governor of Nyasaland, Sir Geoffrey Francis Taylor Colby. It is one of the UK’s oldest and least fair tax treaties with any country in the world.

If we are serious about decolonizing, surely we must replace or update this unjust and damaging colonial-era treaty.

We call on the UK Government to urgently update this outdated and unfair treaty.

20+ years of promises

The current UK Government bears no responsibility for the colonial-era treaty being signed but has the opportunity to put this unjust historical legacy right. We understand earlier attempts at re-negotiating the treaty have stalled and are keen to raise public interest in this issue, aiming to secure a strong commitment from both governments for a new treaty to be signed.

The UK Government has been saying for more than 20 years that it will update this treaty but this still hasn’t happened, despite so much talk of ‘Global Britain’.

In the 2015-17 Parliament, as a result of our work, every Scottish MP was supportive of efforts to update this treaty. Scottish MPs from various different parties have used a Westminster Hall debates to push the UK Government to update the Treaty, as called for by the SMP.

In response, UK Government Ministers repeatedly stated that the new treaty would imminently be signed.

Yet it still hasn’t happened…

Why tax matters

Developing countries typically receive US$130+ billion in aid from wealthy nations a year, but research from the IMF estimates that they lose US$200 billion a year from tax avoidance. Malawi and other developing countries must be able to raise more revenue to fund their development and corporation tax is of particular importance in developing countries.

The way the UK-Malawi tax treaty allocates taxing rights unfairly favours the UK and limits the ability of the Government of Malawi to tax UK firms operating there.

Some of the changes needed will require updating the global tax rules which allow companies to get away with paying little or no tax – including measures to address tax avoidance and limit harmful tax competition. However, the negotiation of a new tax treaty between the UK and Malawi is a matter solely for those two countries, and one they can take action on now. A fairer and more just treaty would help bring in tax revenue that Malawi desperately needs for hospitals, schools and more.

What are tax treaties?

Tax treaties regulate when a country can, and can’t, tax foreign-owned companies operating within their jurisdiction and the money these companies send out of the country. They are negotiated in order to avoid an individual or company being taxed twice on the same income by both countries, and set out whether it is the residence country (where a multinational company is based) or the source country (where the economic activity happens, e.g. where a factory, mine or office is based) that has the right to tax. In its tax relationships with richer countries, Malawi (and other developing countries) is more frequently a source country – as there is a higher value of money being invested from developed countries into Malawi, than from Malawi to developed countries. However, research shows that the global network of tax treaties is unfairly stacked in favour of richer residence countries.

In addition to deciding who gets to tax which income streams, tax treaties often also set the maximum level at which they can be taxed, or even disallow certain types of taxation altogether – taking taxing rights away from countries and limiting the ability of democratic governments to enact policy changes. Global companies are using these treaties to limit their tax contributions in the developing countries where they generate their profits.

Most current tax treaties are simply not fit for the 21st century. They are helping money to flow untaxed from developing to rich countries, making the world more unequal and exacerbating poverty. Tax treaties are voluntary – neither the UK nor Malawi needs to sign a bad tax deal, and both Governments have the ability to renegotiate or cancel the treaty at any time.

The UK-Malawi Tax Treaty

The UK-Malawi treaty limits the ability of the Government of Malawi to tax UK companies operating in Malawi. The Scotland Malawi Partnership believes that the way it divides these taxing rights is unfair, depriving Malawi of the ability to raise sufficient tax revenues.

Total trade in goods and services (exports plus imports) between the UK and Malawi was £85 million in the four quarters to the end of Q1 2021. This is tiny for the UK (Malawi is the UK’s 146th largest trading partner, accounting for less than 0.1% of total UK trade – Source: UK Gov) and hence there is almost no attention paid in Whitehall to the trading terms with Malawi. However, Malawi’s economy is so small that UK trade equates to 13.7% of all foreign investment, making the UK the third largest investor in the country (after Switzerland and South Africa). This means renegotiating this treaty could potentially have a significant effect on Malawi’s tax revenues, at little relative cost to the UK.

We understand that the two governments had previously started a re-negotiation process but that this has stalled. We therefore hope, by raising public and political awareness, to encourage both governments to re-start this important process.

We recognise that there is an understandable lack of technical capacity within the Government of Malawi: unsurprising given the total government budget is less than that of the Borough of Hackney’s and the government’s health budget, through a pandemic, is just c£5 per person. We therefore call on the UK Government to take a pro-active and supportive approach, assisting the Malawi Government respectfully through the process.

Why it needs updating

A fairer treaty would help raise Government revenues in Malawi. There is a strong case for action on several counts:

  • Malawi’s treaty with the UK dates back to 1955: nine years before Malawi gained independence and has only been minimally revised since.
  • It is so out of date that not only does it not deal with the taxing of digital goods and services; it does not cover the taxing of TV-related goods.
  • Malawi’s treaty with the UK affords no rights to charge withholding taxes (taxes on money leaving a country) to Malawi whatsoever. British multinationals can therefore move money out of Malawi via interest or management fee payments, dividends or royalties freely without making any tax contributions there. If there were no tax treaty in place, UK companies would be subject to Malawi’s standard 15% withholding tax rate on dividends, interest and royalty payments.
  • The lack of withholding taxes in the treaty could also incentivise companies from countries other than the UK or Malawi to use the UK-Malawi treaty to avoid tax. The Netherlands-Malawi treaty also prevented Malawi from charging withholding taxes, this allowed the Australian mining company Paladin to lower its tax bill in Malawi through the use of a subsidiary in the Netherlands with no employees.
  • While the treaty contains some provisions to prevent it being used artificially for aggressive tax avoidance, its anti-abuse measures are severely outdated and not in line with the latest internationally agreed recommendations.