THE UNITED NATIONS MODEL
TREATY – SOME THOUGHTS
ROY ROHATGI
MUMBAI – JULY 6, 2012
MODEL TAX TREATIES – HISTORY
(1921-1954)
•
FIRST BILATERAL TAX TREATY: PRUSSIA – AUSTRIA HUNGARY 1899
•
DEVELOPMENT OF MODEL TAX TREATY FROM 1921
LEAGUE OF NATIONS TAKES INITIAITVE (1921-1946)
APPOINTS FOUR ECONOMISTS - THEIR 1923 REPORT: DOUBLE TAX A BARRIER TO FOREIGN
INVESTMENTS - HENCE NEED TO AVOID DOUBLE TAXATION
APPOINTS FINANCIAL COMMITTEE IN 1923 - FIRST DRAFT MODEL FOR AVOIDANCE OF
DOUBLE TAXATION IN 1927: MODEL (ISSUED 1928) FAVOURED RESIDENCE STATES
SETS UP PERMANENT FISCAL COIMMITTEE – 1933 DRAFT MODEL (ISSUED 1935) - DEALT WITH
ALLOCATION OF TAXING RIGHTS E.G. BUSINESS INCOME COMBINED 1928 & 1935 MODELS TO DRAFT 1943 MEXICO MODEL – 1946 LONDON MODEL
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- MEXICO MODEL FAVOURED SOURCE TAXATION – LARGELY DEVELOPING COUNTRIES
- LONDON MODEL FAVOURED RESIDENCE TAXATION – LARGELY DEVELOPED COUNTRIES
UNITED NATIONS
LEAGUE OF NATIONS REPLACED BY UNITED NATIONS - WORK TAKEN OVER BY FISCAL COMMISSION
SET UP BY ECONOMIC AND SOCIAL COUNCIL (ECOSOC) OF THE UNITED NATIONS IN 1946
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UNITED NATIONS VOTED IN FAVOUR OF MEXICO MODEL IN 1951 (NOT ACCEPTED BY
DEVELOPED CONTRIES)
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WORK OF FIISCAL COMMITTEE SUSPENDED IN 1954
OECD MODEL – HISTORY
- POST 1954
OEEC MODEL
- OEEC (RENAMED OECD) TOOK OVER THE WORK USING LONDON MODEL TO DRAFT A
MODEL FOR DEVELOPED COUNTRIES
BASED ON TWO KEY PRINCIPLES:
(I) RESIDENCE COUNTRY WILL RETAIN MOST TAXING RIGHTS AND GIVE CREDIT OR
EXEMPTION RELIEF FOR DOUBLE TAXATION
(II) SOURCE COUNTRY WOULD RESTRICT ITS TAXING SCOPE TO REDUCE SOURCE
TAXATION AND REDUCE TAX RATES WHERE TAXING RIGHTS RETAINED (TO ENSURE
DOMESTIC TAX SYSTEM RELATIVELY UNAFFECTED SOURCE TAXATION KEPT TO A
MINIMUM)
LED TO OECD 1963 MODEL (DRAFT) – OECD MODELS 1977(FINAL) – 1992 – 19941995- 1997 – 2000 – 2003 – 2005- 2008 – 2010 – 2012 ???
NOTE: OECD MODEL MEANT FOR USE BY ITS MEMBER STATES (MAINLY DEVELOPED
COUNTRIES WITH COMPARABLE TRADING PATTERNS) – TAX REVENUE LOSSES BY SOURCE
STATES WERE EFFECTIVELY OFFSET BY REVENUE GAINS IN RESIDENCE STATES – OECD
COMMITTEE ACCEPTED IN 1965 THAT IT WAS NOT APPROPRIATE FOR TREATIES WITH
DEVELOPING COUNTRIES
THIS APPROACH IS NOW QUESTIONED WITH INCREASING SOURCE TAXATION IN DEVELOPED
COUNTRIES AND RISE OF DEVELOPING COUNTRIES E.G. INDIA AND CHINA – IMPACT OF MNCs ?
INCREASING CONCERN OVER ISSUE OF BASE EROSION AND PROFIT SHIFTING
QUESTION: WHY TWO MODELS ?
WHY A UNITED NATIONS MODEL
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UNLIKE DEVELOPED COUNTRIES, THEIR TREATIES WITH DEVELOPING
COUNTRIES LARGELY HAD INCOME AND CAPITAL FLOWS (AND REVENUE
SACRIFICE) WHICH WERE ONE-SIDED - HENCE OECD MODEL NOT
SUITABLE IN SUCH CASES
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CONFIRMED BY OECD FISCAL COMMITTEE REPORT OF 1965 PARA. 164
ON FISCAL INCENTIVES FOR PRIVATE INVESTMENT IN DEVELOPING
COUNTRIES
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LED TO DEMAND FROM “ECOSOC” FOR A TREATY MODEL SUITABLE FOR
DEVELOPING COUNTRIES WITH DEVELOPED COUNTRIES
KEY ISSUE: ALLOCATION OF TAXING RIGHT -NOT AVOIDANCE OF DOUBLE TAXATION PER SE
1965 OECD REPORT
• “THE ESSENTIAL FACT REMAINS THAT THE TRADITIONAL TAX
CONVENTIONS HAVE NOT COMMENDED THEMSELVES TO
DEVELOPING COUNTRIES.
• EXISTING TREATIES BETWEEN INDUSTRIALISED COUNTRIES
SOMETIMES REQUIRE THE COUNTRY OF RESIDENCE TO GIVE UP
REVENUE.
• MORE OFTEN, HOWEVER, IT IS THE COUNTRY OF SOURCE WHICH
GIVE UP REVENUE.
• SUCH A PATTERN MAY NOT BE EQUALLY APPROPRIATE IN TREATIES
BETWEEN DEVELOPED AND INDUSTRIALISED COUNTRIES AND THE
REVENUE SACRIFICE WOULD BE ONE-SIDED”
Source: Report of OECD Fiscal Committee (1965) on Fiscal Incentives
for Private Investment in Developing Countries, para. 164
UNITED NATIONS MODEL
– ITS COMMITTEE
•
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IN 1968, ECOSOC SET UP A COMMITTEE OF AD HOC GROUP OF INDEPENDENT
EXPERTS (NOT COUNTRY REPRESENTATIVES) ON TAX TREATIES BETWEEN
DEVELOPED AND DEVELOPING COUNTRIES – THIS COMMITTEE DEVELOPED AND
LAUNCHED THE UN MODEL TREATY (WITH OWN COMMENTARIES) IN 1980
IN 1980, GROUP WAS RENAMED AS AD HOC GROUP OF EXPERTS ON
INTERNATIONAL COOPERATION IN TAX MATTERS WITH 25 MEMBERS (15 FROM
DEVELOPING AND 10 FROM DEVELOPED COUNTRIES)
•
AFTER THE MONTERRAY DECLARATION IN 2002, THE COMMITTEE NOW
COMPRISES OF MEMBERS NOMINATED BY GOVERNMENTS AND ACTING IN THEIR
PERSONAL CAPACITY. THEY ARE SELECTED TO REFLECT AN ADEQUATE EQUITABLE
GEOGRAPHICAL DISTRIBUTION, REPRESENTING DIFFERENT TAX SYSTEMS. THEY
ARE APPOINTED BY THE UN SECRETARY-GENERAL, AFTER NOTIFICATION TO THE
UN ECONOMIC AND SOCIAL COUNCIL (ECOSOC).
•
EACH COMMITTEE IS APPOINTED FOR FOUR YEARS. AS FROM 2005, ITS STATUS
IS NOW AS A FULL UN COMMITTEE OF EXPERTS ON INTERNATIONAL
COOPERATION ON TAX MATTERS MEETING ANNUALLY.
•
COMMITTEE WORKS UNDER THE ECOSOC COMMITTEE ON FINANCING FOR
DEVELOPMENT AT THE UNITED NATIONS
CURRENT MEMBERSHIP (2009-2013)
"D’ING" COUNTRY# EXPERTS (15)
"D’PED" COUNTRY# EXPERTS (10)
MOROCCO
EGYPT
SOUTH AFRICA
NIGERIA
GHANA
SENEGAL
BELGIUM*
ITALY*
SPAIN*
GERMANY*
CHINA
MALAYSIA
REPUBLIC OF KOREA*
INDIA
PAKISTAN
BARBADOS
CHILE*
MEXICO*
BRAZIL
NORWAY*
SWITZERLAND*
UNITED STATES*
NEW ZEALAND*
JAPAN*
BULGARIA
# THOUGH NOMINATED BY COUNTRIES,
MEMBERS SERVE IN THEIR OWN
CAPACITY
* DENOTES OECD MEMBER
MANDATE OF THE UN TAX COMMITTEE
•
REVIEW AND UPDATE AS NECESSARY THE UNITED NATIONS MODEL DOUBLE
TAXATION CONVENTION BETWEEN DEVELOPED AND DEVELOPING COUNTRIES
AND THE MANUAL FOR THE NEGOTIATION OF BILATERAL TAX TREATIES BETWEEN
DEVELOPED AND DEVELOPING COUNTRIES;
•
PROVIDE A FRAMEWORK FOR DIALOGUE WITH A VIEW TO ENHANCING AND
PROMOTING INTERNATIONAL TAX COOPERATION AMONG NATIONAL TAX
AUTHORITIES;
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CONSIDER HOW NEW AND EMERGING ISSUES COULD AFFECT INTERNATIONAL
COOPERATION IN TAX MATTERS AND DEVELOP ASSESSMENTS, COMMENTARIES
AND APPROPRIATE RECOMMENDATIONS.
MAKE RECOMMENDATIONS ON CAPACITY-BUILDING AND THE PROVISION OF
TECHNICAL ASSISTANCE TO DEVELOPING COUNTRIES AND COUNTRIES WITH
ECONOMIES IN TRANSITION; AND
GIVE SPECIAL ATTENTION TO DEVELOPING COUNTRIES AND COUNTRIES WITH
ECONOMIES IN TRANSITION IN DEALING WITH ALL THE ABOVE ISSUES.
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HOW DOES THE COMMITTEE OPERATE ?
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MOST DETAILED DISCUSSIONS ON SELECTED ISSUES ARE DONE IN SUBCOMMITTEES OF SELECTED
MEMBERS AND OUTSIDE EXPERTS THROUGHOUT THE YEAR – THEIR CONCLUSIONS ARE THEN
DISCUSSED AND FINALISED BY THE ENTIRE COMMITTEE AT THE ANNUAL MEETING IN GENEVA EVERY
OCTOBER. (ONE WEEK).
ANNUAL MEETING IS ATTENDED BY THE FULL COMMITTEE PLUS OBSERVERS FROM NON-MEMBER
COUNTRIES, INTERNATIONAL ORGANISATIONS (IMF, WB, ADB, OECD, ETC.) AND INTERNATIONAL TAX
EXPERTS FROM CIVIL SOCIETY. ALL ARE GIVEN TIME TO PRESENT THEIR VIEWS AND TO ACTIVELY
PARTICIPATE IN THE DISCUSSIONS
EFFORT IS MADE FOR ALL DECISIONS TO BE BASED ON CONSENSUS WITH FULL REPORTING OF
DIFFERENT VIEWPOINTS. SINCE IT IS DIFFICULT TO FIND A SINGLE SOLUTION IN ALL CASES, LIMITED
CHOICES OR ALTERNATIVE TREATMENT ARE PERMITTED. WHEN UNABLE TO AGREE, MATTER IS LEFT TO
BILATERAL NEGOTIATIONS (NOTE: ITS RECOMMENDATIONS ARE NOT BINDING)
THERE IS CONSIDERABLE LOBBYING BY OECD MEMBERS TO ADHERE TO THEIR MODEL AND EXTENSIVE
USE OF OECD TEXT AND COMMENTARIESIS IMADE WHERE NOT CONTROVERSIAL HOWEVER, IT IS
UNDERSTANDABLE THAT WHAT SUITS 34 LARGELY DEVELOPED OECD MEMBER STATES MAY NOT MEET
THE NEEDS OF REMAINING 159 NON MEMEBR STATES WITH DIFFERING NATIONAL TAX AND TREATY
POLICIES UNDERLYING THEIR ECONOMIC, SOCIAL AND POLITICAL NEEDS.
I BELIEVE THE MODEL SHOULD PROVIDE FOR MULTIPLE CHOICES (WITHIN REASON) TO MEET THE NEEDS
OF NATIONAL TAX AND TREATY POLICIES AS WELL AS ASPIRATIONS OF VARIOUS COUNTRIES - ONE SIZE
CANNOT FIT ALL.-- IT SHOULD PROVIDE MORE FLEXIBILITY TO PRESERVE THEIR SOVEREIGN TAXING
RIGHTS AND IMPROVE TREATY COMPLIANCE
UN COMMITTEE OBJECTIVES
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EACH MEMBER STATE HAS SOVEREIGNTY OVER ITS TAXING RIGHTS AND IS FREE TO
FOLLOW ITS OWN NATIONAL TAX AND TREATY POLICY. UN MODEL TREATY DOES NOT SET
OUT TO PROVIDE A SINGLE UNIVERSAL APPROACH BUT PROVIDE WORKABLE SOLUTION
FOR TREATY ISSUES
UNLIKE OECD MODEL THE UN MODEL AND ITS COMMENTARIES ARE NOT BINDING BUT
PERSUASIVE –THEY ARE MEANT TO BE A GUIDE TO ENSURE INTERNATIONAL CONSISTENCY
IN DRAFTING AND NEGOTIATING TAX TREATIES AND THEIR APPLICATION
UN MODEL IS MEANT TO PROVIDES GUIDANCE PARTICULARLY TO DEVELOPING COUNTRIES
ON DRAFTING, NEGOTIATING AND IMPLEMENTING. – HENCE EFFORTS MADE TO PROVIDE
SIMPLER SOLUTIONS TO ISSUES AS WELL AS CAPACITY BUILDING THROUGH TRAINING, ETC.
UN MODEL OBJECTIVE IS AVOIDANCE OF DOUBLE TAXATION (NOT DOUBLE NON TAXATION)
AND PREVENTION OF TAX EVASION (NOT TAX AVOIDANCE) – HOWEVER INCREASING
FOCUS IS NOW GIVEN TO TAX AVOIDANCE AS IN OECD MODEL (BOTH GENERAL AND
SPECIFIC)
QUESTION: WILL THERE GENERALLY BE GREATER CONVERGENCE OR DIVERGENCE BETWEEN THE
UN AND OECD MODELS IN FUTURE? IF YES, IS IT DESIRABLE OR AVOIDABLE?
OECD – UN MODEL
KEY DIFFERENCE – TAX TREATY
AS AN INSTRUMENT OF ECONOMIC POLICY
OECD MODEL : PRIMARILY AVOIDANCE OF DOUBLE TAXATION AND DOUBLE NON-TAXATION
THROUGH ALLOCATION OF TAXING RIGHTS (RESTRICTED TO FISCAL CONSIDERATIONS ONLY)
UN MODEL:
• CONSIDERS NON-FISCAL NATIONAL INTERESTS WITH EMPHASIS ON PROMOTION OF
ECONOMIC, SOCIAL, AND POLITICAL DEVELOPMENT THROUGH INCREASED CROSS BORDER
INVESTMENT AND TRADE FLOWS (MAY PERMIT DOUBLE NONTAXATION)
• FAIRER ALLOCATION OF TAXING RIGHTS WITH EMPHASIS ON SOURCE STATE RIGHTS TO
GENERATE FINANCING FOR DEVELOPMENT THROUGH WIDENING DOMESTIC SOURCE STATE
TAXING RIGHTS
• DOES NOT DICTATE TREATY TEXT OR THE COMMENTARIES E.G. PERSUASIVE ONLY AND
ALLOWS EACH STATE TO APPLY ITS OWN TAX AND TREATY POLICY AND TAX SOVEREIGNTY
• MEET THE EXPECTATIONS OF 193 COUNTRIES WITH SOVEREIGN TAX AND TREATY RIGHTS
AND MINIMISE TREATY DISPUTES UNDER DIFFERING TAX SYSTEMS
• UN MODEL IS A MODIFIED OECD MODEL IN STRUCTURE BUT DOES NOT PRESUME EITHER
THE CORRECTNESS OF THE OECD POLICY POSITIONS OR ITS LANGUAGE OR COMMENTARIES
DOMESTIC ANTI-AVOIDANCE RULES
UN MODEL: IMPROPER USE OF TAX TREATIES (JUNE 2009):
• MODELLED ON OECD COMMENTARY WITH SOME
DIFFERENCES
• EASIER TO FOLLOW THAN OECD COMMENTARY
• CLARIFICATION OF COMMENTARY E.G. REFERENCETO
DOMESTIC LAW DEFINITIONS WITH RESPECT TO SAARS (E.G.
ART. 3(2) AND 10(3))
• RECOGNISES LEGAL CERTAINTY AND TAXPAYERS’ RIGHTS
• DETAILED EXAMPLES OF IMPROPER USE (PARAS. 42 – 103)
• BALANCE TAX REVENUE, LEGAL CERTAINTY AND TAXPAYERS’
EXPECTATION (PARA. 9)
2011 UN MODEL UPDATE
SOME KEY CHANGES
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•
•
•
•
•
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ARTICLE 5 -- PERMANENT ESTABLISHMENT
ARTICLE 7 -- PE PROFIT ATTRIBUTION (UNCHANGED)
ARTICLE 11 – ISLAMIC BANKING
ARTICLE 13 – CAPITAL GAINS
ARTICLE 14 - INDEPENDENT PERSONAL SERVICES
ARTICLE 25 - MUTUAL AGREEMENT PROCEDURE
ARTICLE 26 – EXCHANGE OF INFORMATION
ARTICLE 27 - COLLECTION OF TAX DEBT (NEW – COPIED OECD)
SOME KEY ISSUES FOR FUTURE UPDATE
• TAXATION OF INCOME FROM SERVICES
• REVIEW OF TRANSFER PRICING GUIDELINES (Article 9)
ARTICLE 5
(PERMANENT ESTABLISHMENT/ "PE")
- THRESHOLD FOR SOURCE COUNTRY
TAXATION OF BUSINESS PROFITS UPDATED
AND CLARIFIED.
- A KEY CONCEPT – THE LEVEL OF ECONOMIC
ENGAGEMENT/ FOOTPRINT REQUIRED TO
JUSTIFY SOURCE COUNTRY TAXATION OF
BUSINESS PROFITS UNDER TREATIES.
- GENERALLY IT IS LOWER AND MORE READILY
MET UNDER THE UN MODEL
ARTICLE 7: ATTRIBUTION OF PROFIT
• ONCE YOU HAVE A PERMANENT ESTABLISHMENT, YOU
HAVE TO ATTRIBUTE PROFIT TO IT, TO DETERMINE THE
AMOUNT OF PROFIT THAT THE SOURCE COUNTRY CAN TAX
(ARTICLE 7: BUSINESS PROFITS).
• OECD APPROACH – HYPOTHESISING OF THE PE AS IF IT
WAS A SEPARATE LEGAL ENTITY FROM THE REST OF THE
"ENTERPRISE", THOUGH ACTUALLY IT CLEARLY IS NOT. IN
EFFECT IT MEANS YOU ARE TREATED AS THOUGH YOU CAN
LEND TO YOURSELF OR PAYING ROYALTIES TO YOURSELF.
• UN MODEL DIFFERS – DOES NOT HYPOTHETICALLY TREAT A
PE AS A SEPARATE ENTITY – GENERALLY CANNOT LEND TO
YOURSELF, ETC.
ARTICLE 7 - ATTRIBUTION OF PROFIT
• UNLIKE OECD MC, THE UN MODEL HAS RETAINED THE
OLD ATTRIBUTION RULES (E.G. UNCHANGED)
• AVOIDS THE DIFFICULTY OF ASSUMING HYPOTHETICAL
FLOWS WITHIN A SINGLE LEGAL BODY AND HAVING TO
GIVE DEDUCTIONS FOR NOTIONAL FLOWS, WITHOUT
HAVING THE RIGHT TO TAX THOSE FLOWS.
• AVOIDS THE COMPLEXITY OF THE OECD ARTICLE – THIS IS
A BROADER CONCERN THAT DEVELOPING COUNTRIES
TEND TO DISPROPORTIONATELY SUFFER FROM COMPLEX
"SOLUTIONS" TO PERCEIVED PROBLEMS. WHO SHOULD
BEAR THE COST OF COMPLEXITY?
ARTICLE 11 : ISLAMIC BANKING
ARTICLE 11 (INTEREST)
– CERTAIN ISLAMIC FINANCING ISSUES ARE
ADDRESSED.
Q. HOW CAN AN INTEREST ARTICLE APPLY WHEN THERE IS
NO INTEREST?
A. ALTHOUGH IT IS NOT INTEREST, IT SHOULD BE TREATED IN
THE SAME WAY FOR THE PURPOSES OF AVOIDING DOUBLE
TAXATION UNDER THE TREATY.
ARTICLE 13 - CAPITAL GAINS
PARAGRAPH 5 OF ARTICLE 13 WILL BE AMENDED AS FOLLOWS:
– "GAINS, OTHER THAN THOSE TO WHICH PARAGRAPH 4 APPLIES,
DERIVED BY A RESIDENT OF A CONTRACTING STATE FROM THE
ALIENATION OF SHARES OF A COMPANY WHICH IS A RESIDENT OF
THE OTHER CONTRACTING STATE, MAY BE TAXED IN THAT OTHER
STATE IF THE ALIENATOR, AT ANY TIME DURING THE 12 MONTH
PERIOD PRECEDING SUCH ALIENATION, HELD DIRECTLY OR
INDIRECTLY AT LEAST __ PER CENT (THE PERCENTAGE IS TO BE
ESTABLISHED THROUGH BILATERAL NEGOTIATIONS) OF THE
CAPITAL OF THAT COMPANY."
ARTICLE 14 - INDEPENDENT
PERSONAL SERVICES
– HAS BEEN DELETED FROM OECD MODEL EARLIER
– UN TAX COMMITTEE DISCUSSED POSSIBLE DELETION, WHILE
SEEKING TO PRESERVE THE SOURCE STATE TAXING RIGHTS
THROUGH ARTICLES 5 AND 7.
– BUT THERE WAS A LOT OF SUPPORT FOR ARTICLE 14 AS
DIFFERENTIATED FROM ART. 5 (E.G. FIXED BASE VS. PE,
ARTICLE 24 NON DISCRIMINATION CONSEQUENCES?)
– IT WILL STAY, BUT WILL BE EXAMINED FOR POSSIBLE
IMPROVEMENTS, AND DELETION WILL ONLY BE AN OPTION
ADDRESSED IN THE COMMENTARY.
ARTICLE 25 – THE MUTUAL AGREEMENT
PROCEDURE
DIFFERENCES CAN EXIST BETWEEN COUNTRIES, SUCH AS INTERPRETATION ON
HOW THE DOUBLE TAX TREATY OPERATES. THIS CAN RESULT IN DOUBLE
TAXATION RESULTS.
THE MUTUAL AGREEMENT PROCEDURE ARTICLE IN TAX TREATIES PROVIDES
COMPETENT AUTHORITIES") FROM THE TWO COUNTRIES TO TRY TO RESOLVE
THE DIFFERENCES AND AVOID DOUBLE TAXATION.
THEY GENERALLY DO NOT COMPEL COMPETENT AUTHORITIES ACTUALLY TO
REACH AN AGREEMENT AND RESOLVE THEIR TAX DISPUTES. THEY ARE
OBLIGED ONLY TO USE THEIR "BEST ENDEAVOURS" TO REACH AN AGREEMENT
AND THAT MAY NOT SOLVE THE ISSUE IF THERE ARE DIFFERENT
INTERPRETATIONS OR DIFFERENT CALCULATIONS.
ARTICLE 25 – THE MUTUAL AGREEMENT PROCEDURE
CHOICES WHERE THERE IS NO RESOLUTION:
CH CASES: NEW ARBITRATION PROCEDURES
UN MODEL UPDATE 2011 PROVIDES FOR OPTIONAL ABITRATION
(A) LEAVE UNRESOLVED UNDER TREATY (E.G. LEAVE TO DOMESTIC LAW)
(B) OR FORCE A DECISION
MUTUAL AGREEMENT PROCEDURE ARBITRATION – NEW ALTERNATIVE ART
25 B WILL INCLUDE A MANDATORY ARBITRATION OPTION WHERE PUT IN A
BILATERAL TREATY – STILL WITHIN COMPETENT AUTHORITY (CA) PROCESS.
PROS AND CONS OF MANDATORY ARBITRATION FOR COUNTRIES – REQUIRES
CLOSE CONSIDERATION IN THE LIGHT OF YOUR OWN CIRCUMSTANCES.
ARTICLE 25 -- ARBITRATION
DIFFERENCES FROM OECD MODEL
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WHILE THE OECD MODEL CONVENTION PROVIDES THAT ARBITRATION MUST
BE REQUESTED BY THE PERSON WHO INITIATED THE CASE, UN ART. 25B
PROVIDES THAT ARBITRATION MUST BE REQUESTED BY THE COMPETENT
AUTHORITY OF ONE OF THE CONTRACTING STATES.
UN ART. 25B, UNLIKE THE OECD MODEL CONVENTION PROVISION, ALLOWS
THE COMPETENT AUTHORITIES TO DEPART FROM THE ARBITRATION
DECISION IF THEY AGREE TO DO SO WITHIN SIX MONTHS AFTER THE
DECISION HAS BEEN COMMUNICATED TO THEM. BUT BOTH WOULD NEED
TO AGREE.
WHY YOU MIGHT PREFER NO ARBITRATION CLAUSE
– SATISFIED WITH THE COMBINATION OF MAP AND DOMESTIC LAW;
– FEEL LACK OF EXPERIENCE IN MAP MAY MAKE IT HARDER TO SUCCEED IN
ARBITRATION;
– CONSIDER IT HARD TO FIND ARBITRATORS WHO FULLY UNDERSTAND
DEVELOPING COUNTRY ISSUES;
ARTICLE 26 -- EXCHANGE OF
INFORMATION (EOI)
• EXPANDED ARTICLE 26.
• BASICALLY THE SAME AS THE OECD MODEL NOW, BECAUSE A
STRONG EOI PROVISION WAS SEEN AS PARTICULARLY IMPORTANT
FOR DEVELOPING COUNTRIES IN COMBATING TAX AVOIDANCE
AND EVASION.
• MAIN DIFFERENCE MAKES CLEAR A PURPOSE OF EXCHANGING
INFORMATION TO ASSIST IN COMBATING BOTH "TAX AVOIDANCE"
AND "TAX EVASION" - USEFUL AS THERE DOES NOT SEEM TO BE A
CONSISTENT USE OF THESE TERMS
• PART OF A PACKAGE OF CHANGES TO COMBAT ABUSES (ARTICLE 1
COMMENTARY – IMPROPER USE OF TREATIES - AND IN ARTICLE
13(5)).
ARTICLE 27 : MUTUAL ASSISTANCE IN
ENFORCING TAX DEBTS (NEW)
•
TRADITIONAL "REVENUE RULE" - ONE COUNTRY DOES NOT ENFORCE A REVENUE
JUDGMENT OF ANOTHER NATION. SOMETIMES SEEN AS AN EXERCISE OF THAT
COUNTRY’S SOVEREIGN POWER. WIDELY RECOGNISED THAT THIS IS TAKEN
ADVANTAGE OF TO AVOID TAX OBLIGATIONS.
NEW OPTIONAL ARTICLE ALLOWS ENFORCEMENT AS IF IT WAS THE
COUNTRY’S OWN DEBT. THERE ARE PROTECTIONS AGAINST ABUSE
•
COPIES PROVISION FROM OECD MODEL BECAUSE IT IS SEEN AS POTENTIALLY USEFUL
FOR DEVELOPING COUNTRIES IN COMBATING AVOIDANCE AND EVASION, BUT WITH
GREATER RECOGNITION OF THE BURDEN THIS CAN PLACE ON SMALLER DEVELOPING
COUNTRIES - CONTRIBUTION TO COST OBLIGATIONS PERHAPS CLEARER UNDER THE
UN MODEL.
COMPARISON WITH OECD MODEL
COMMENTARIES
• UN MODEL 2011 MADE SEVERAL CHANGES TO INCLUDE OECD
MODEL CHANGES SINCE 1997 WHEN HELPFUL FOR DEVELOPING
COUNTRIES, PARTICULARLY EFFECTIVE SOURCE-BASED TAXATION.
• OTHER PARTS HAVE NOT YET BEEN FULLY CONSIDERED (E.G. OECD
PARTNERSHIPS REPORT ISSUES)
• WILL THERE GENERALLY BE GREATER CONVERGENCE OR
DIVERGENCE BETWEEN THE UN AND OECD MODELS?
• ILLUMINATING RECENT DEBATE ON THE ARTICLE 9 COMMENTARY
OF THE UN MODEL.
UN MODEL – ARTICLE 9 :
COMMENTARY PARA. 3
(2001 UPDATE)
• USED TO SAY:
– "3. WITH REGARD TO TRANSFER PRICING OF GOODS,
TECHNOLOGY, TRADEMARKS AND SERVICES BETWEEN
ASSOCIATED ENTERPRISES AND THE METHODOLOGIES WHICH
MAY BE APPLIED FOR DETERMINING CORRECT PRICES WHERE
TRANSFERS HAVE BEEN MADE ON OTHER THAN ARM'S LENGTH
TERMS, THE CONTRACTING STATES WILL FOLLOW THE OECD
PRINCIPLES WHICH ARE SET OUT IN THE OECD TRANSFER PRICING
GUIDELINES. THESE CONCLUSIONS REPRESENT INTERNATIONALLY
AGREED PRINCIPLES AND THE GROUP OF EXPERTS RECOMMEND
THAT THE GUIDELINES SHOULD BE FOLLOWED FOR THE
APPLICATION OF THE ARM'S LENGTH PRINCIPLE WHICH
UNDERLIES THE ARTICLE."
UN MODEL ARTICLE 9 : PARAGRAPH 3
(AS MODIFIED)
• NOW IT WILL:
– PUT THAT STATEMENT IN CONTEXT AS ONE MADE BY THE FORMER UN
GROUP OF EXPERTS;
– NOTE THE ISSUE HAS NOT BEEN FULLY CONSIDERED BY THE CURRENT
COMMITTEE;
– REFER TO THE PUBLIC RECORDS OF COMMITTEE'S ANNUAL SESSIONS FOR
THE DEBATE SO FAR; AND
– THE RECORDS OF THE 2011 ANNUAL SESSION OF THE COMMITTEE WILL
NOTE THAT THE RECOMMENDATION MAY NEED TO NOTE THAT THE
GUIDELINES ARE FOR GUIDANCE ONLY AND THAT SOME MEMBERS HAVE
EXPRESSED RESERVATIONS.
– ACKNOWLEDGE AGREEMENT ON ARM'S LENGTH AND …
– MAKE CLEAR NO CHANGE TO DIRECTION OF PRACTICAL UN TRANSFER
PRICING MANUAL
SUBCOMMITTEE ON TRANSFER
PRICING – PRACTICAL ISSUES
• MANDATE:
– DEVELOP A PRACTICAL MANUAL ON TRANSFER PRICING, BASED ON
THE FOLLOWING PRINCIPLES:
a)
b)
c)
d)
THAT IT REFLECTS THE OPERATION OF ARTICLE 9 OF THE UNITED
NATIONS MODEL TAX CONVENTION, AND THE ARM'S LENGTH
PRINCIPLE EMBODIED IN IT, AND IS CONSISTENT WITH RELEVANT
COMMENTARIES OF THE UN MODEL [I.E. "RECOMMENDATION" OF
FOLLOWING THE OECD GUIDELINES].
THAT IT REFLECTS THE REALITIES FOR DEVELOPING COUNTRIES, AT
THEIR RELEVANT STAGES OF CAPACITY DEVELOPMENT.
THAT SPECIAL ATTENTION SHOULD BE PAID TO THE EXPERIENCE OF
OTHER DEVELOPING COUNTRIES [I.E. SOUTH-SOUTH SHARING OF
EXPERIENCES]; AND
THAT IT DRAWS UPON THE WORK BEING DONE IN OTHER FORA.
TRANSFER PRICING MANUAL
(to be released in October 2012)
• AREAS OF FOCUS:
– WHAT SORT OF APPROACH MIGHT BE APPROPRIATE FOR A DEVELOPING
COUNTRY AT ITS PARTICULAR STAGE OF DEVELOPMENT, IN LINE WITH ITS
OWN SOVEREIGN PRIORITIES?
– TP SHOULD BE UNDERSTOOD AS A JOURNEY – HOW SHOULD IT BE
PLANNED – A STAGED APPROACH? INITIAL FOCUS AREAS?
– INTEGRATION WITH OTHER ASPECTS, E.G. GENERAL INVESTMENT
PROMOTION POLICY.
– CAN ARM'S LENGTH PRICING (ALP) APPROACH BE ADDRESSED IN A WAY
THAT BETTER WORKS FOR DEVELOPING COUNTRIES (ESPECIALLY BY
ALLOWING FOCUS OF LIMITED RESOURCES ON AREAS OF GREATEST
CONCERN AT A POINT IN TIME, AND BY REDUCING LEVELS OF DATA
SEEKING AND CRUNCHING REQUIRED FOR EACH INDIVIDUAL CASE) AND
STILL BE ALP?
– HOW DO WE MOST FAIRLY DEAL WITH THE IMPRECISION AND
COMPLEXITY OF ALP AND DISTRIBUTE ITS BURDENS?
SOME KEY FUTURE ISSUES
FOR NEXT UPDATE
• TRANSFER PRICING
• TAXATION OF SERVICES
TAXATION OF SERVICES
•
TAX TREATMENT OF SERVICES IS A MAIN DISTINGUISHING CHARACTERISTIC BETWEEN
THE TWO MODELS, PARTICULARLY AFFECTING ALLOCATION OF TAXING RIGHTS. IN FACT,
THE UN MODEL HAS PROBABLY INFLUENCED THE OECD MODEL TO AT LEAST INCLUDE
EXPRESSION OF A MINORITY VIEW WHICH REFLECTS THE SAME SORT OF APPROACH AS
IN THE UN MODEL.
• A MAJOR PROJECT OF EXAMINING SERVICES TAXATION IN A THOROUGHGOING WAY IS
UNDERWAY NOW IN THE UN TAX COMMITTEE
• SOME KEY ISSUES :
- WHAT SHOULD BE THE SCOPE OF TAXATION OF SERVICES BY SOURCE STATE UNDER THE UN
MODEL?
- WHAT SHOULD BE THE THRESHHOLD FOR ALLOWING SOURCE COUNTRY TAXATION OF
SERVICES ?
-HOW SHOULD THE PROFIT BE ATTRIBUTED TO SERVICES PERFORMED IN SOURCE STATE?
RESIDENCE STATE? ELSEWHERE?
SHOULD THERE BE SPECIAL RULES FOR TAXING ELECTRONIC COMMERCE OR IT ENABLED
SERVICES ?
- WHAT GUIDANCE SHOULD IT PROVIDE SOURCE STATES WHICH CURRENTLY TAX SERVICES
UNDER THEIR DOMESTIC TAX LAWS AND TREATIES?
WHAT PROVISIONS ARE NEEDED FOR BASE EROSION AND PROFIT SHIFTING IN CASE OF
SERVICES PROVIDED BY RELATED PARTIES? - HOW EFFECTIVELY CAN TRANSFER PRICING
THRESHOLD FOR ALLOWING SOURCE
COUNTRY TAXATION
• OECD MODEL – MAJORITY VIEW SAYS SAME RULES FOR
WHETHER THE LEVEL OF ECONOMIC ENGAGEMENT
JUSTIFIES MORE SOURCE COUNTRY TAXATION IN CASES OF
SERVICES AS IN PROVISION OF GOODS.
• UN MODEL SAYS THE CONCEPT OF WHAT IS SUFFICIENT
ECONOMIC ENGAGEMENT DIFFERS BETWEEN GOODS AND
SERVICES.
– SHOULD NOT BE OBSESSED IN LOOKING FOR OFFICES, "BRICKS
AND MORTAR" ETC IN PARTICULAR GEOGRAPHICAL PARTS OF
YOUR COUNTRY AND EXAMINING THE CONNECTIONS BETWEEN
THOSE OFFICES.
– IF SERVICES ARE BEING PROVIDED OVER A REASONABLE PERIOD
OF TIME IN YOUR COUNTRY – THAT SHOULD BE ENOUGH.
ABOUT INTERNATIONAL TAX RULES
• Everyone wants a single path.
• We just want different single paths because we have different
situations and aspirations.
….. but we do need to think about ways of minimising problems
when the paths crunch up against each other…
Michael Lennard
Chief – International Tax Cooperation
Financing for Development
United Nations
THE UNITED NATIONS MODEL TREATY
THANK YOU
Acknowledgement:
I wish to thank Michael Lennard for permission to use
many of his slides from his IFA Mauritius presentation
in May 2012.