# **I. INTRODUCTION**<sup>**1**</sup>

Over the past decade international taxation has become headline news. Leaked information on private wealth and corporate profits hidden in Switzerland, Luxembourg, Panama, and small island jurisdictions, caused public outcry. Anecdotes of aggressive tax evasion complement macro assessments of the “scourge of tax havens” (Zucman 2015), looking at offshore household wealth (Alstadsaeter and others, 2017) and corporate profit shifting. Yet, despite increasing attention, public scrutiny of policies enabling or facilitating an outsize role of investment hubs<sup>2</sup> in the global economy remains limited,<sup>3</sup> which is likely due to the opacity of the international tax architecture.

In this context, we investigate the role of tax treaties, an aspect of tax policy making that can contribute to the strength of the business model in ‘offshore jurisdictions’ or ‘investment hubs’. Double Tax Treaties (DTTs) are intended to facilitate cross-border trade and investment by demarcating taxing rights of countries. They affect returns to foreign investment by determining when a branch is liable for income tax, the treatment of capital gains, or by changing the taxation of dividend, interest and royalty flows from the country where the investment is made, to the country where it has been initiated. While DTTs serve more purposes and often also come with a range of complementary political objectives, the avoidance of double taxation is at their core. However, these bilaterally negotiated agreements can, by restricting taxing rights and through the abuse of treaty networks using shell companies, also contribute to the loss of a country’s tax base and facilitate tax avoidance.

Our paper is focused on tax treaty policy in Sub-Saharan Africa. Building on a panel data set of 41 African economies from 1985 to 2015, we examine the effects of concluding DTTs with investment hubs empirically. In Africa, Mauritius has positioned itself as a conduit country for investment into the continent. As part of its strategy, Mauritius taxes corporate income at 15 percent, which can be reduced to an effective rate of 3 percent,<sup>4</sup> and negotiated favorable tax treaties with many African economies. We take advantage of the fact that 11 1 The authors would like to thank Geerten Michielse for his guidance and contributions throughout the preparation of this draft. The authors would also like to thank Punam Chuhan-Pole, Matt Collin, Ruud De Mooij, Alexander Klemm, Jeffrey Owens, Victoria Perry, Alex Sienaert, Marijn Verhoeven, and participants of the Vienna University of Economics (WU) research seminar on the future of international taxation for providing helpful comments. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, the World Bank, their Executive Boards, or management.

2 Definitions of “investment hubs” or “tax havens” differ across institutions and over time and there is no single globally accepted definition. The OECD has developed a list of havens as part of its work on harmful tax practices in 1998 and has since revised the list and approaches to define havens. Other efforts at defining the concept have been made by researchers, legislators, CSOs and regional and international organizations. A close link also exists to the discussion and definition of offshore financial centers (OFC), providing financial services to non-residents.

3 Several CSOs, including the Tax Justice Network (2015), Oxfam, ActionAid (2016) are publishing lists of tax havens, tax treaty policy decisions and examples of cost. In the G20/OECD led Base Erosion and Profit Shifting (BEPS) process (2015) several measures that will help reduce the risks of tax treaty abuse have been agreed.

4 See section II. for details.