BRICs and Double Taxation
Conventions
Douglas Rankin
Andrew Dawson
What should DTCs do?
• Mitigate double taxation
• Mitigate fiscal evasion
• Remove/reduce barriers to trade and investment
• Provide certainty of tax treatment
Mitigating Double Taxation
• DTCs share out taxing rights
• States concede taxing rights given by domestic
law
• Source state / residence state taxation
What do UK DTC users want?
• Low/zero w/t on passive income
• Limited source state taxation of business profits
in line with OECD standard
• Ditto services income, capital gains, leasing,
other income
• Arm’s length standard for transfer pricing
Brazil’s treaty policy
Dividends
• No w/t concession in a DTC
• Rates above OECD norm
• Branch profits tax
• No zero rate for pension funds, direct investors
Brazil’s treaty policy
Interest
• 15% rate ( OECD 10%, UK pref 0%)
• No relief where interest paid to a pe in third state
• Definition catches non-interest income
Brazil’s treaty policy
Royalties
• w/t rates of 10,15% (OECD, UK 0%)
• wide definition to include leasing and technical
fees…see Protocols to DTCs
Brazil’s treaty policy
Capital Gains
• Extensive source state taxation
• Share sales are caught
Brazil’s treaty policy
Services
OECD non-members position on article 5
• “Brazil does not agree with the interpretation
provided for in paragraphs 42.11 to 42.48 of the
Commentary on the taxation of services,
especially in view of the principle of taxation at
the source of payments in its legislation” ..July
2008
Brazil’s treaty policy
Services
• Full taxation if payment is made from Brazil
• Pe requirement displaced
• Immaterial where work is carried out
• Similar position on electronic commerce
Brazil’s treaty policy
• No article 9(2)
• Source state taxation of other income
• Tax sparing
• ……..more…
UK experience
• Talks in late nineties
• Air and Shipping Agreement
• 2007 informal discussions
• Precedents
Experience of others
•
“We have reviewed several of the tax treaties recently ratified
between Brazil and other countries. Many of the provisions included
in those treaties would NOT be helpful to US companies if they were
included in a US/Brazil treaty”
•
“A treaty without reasonable accommodations similar to recent US
tax treaty practice …could be a step backwards”
NFTC to US treasury, July 2008
Brazil taxation policies: prospects for change
• Treaty policy linked to general taxation policy
• External pressure
• Internal pressure
• Expectations
CHINA
• DIVIDENDS
• 10% RATE
• No zeros
• Direct investors
• INTEREST
• 10% RATE
• Limited zeros
CHINA
• ROYALTIES
• Broad definition
• No zeros
• Mitigation for leasing
• Attachment to technical fees
CHINA
• Capital Gains
• Gains on share sales
• Substantial participation
• Property companies
• Other Income
• Source state taxation
CHINA
• SERVICES
• Source state taxer
• Days of presence
• UN Model
• IPS
• Old article 7
CHINA
• Transfer pricing
• ALP ….. Article 9(2)
• APA program
• MAP …Arbitration
• OECD work/ SAT bulletins
Russia
• Existing UK-Russia DTA 1994
• Close to OECD
– Dividends 10%
– Interest: residence state only
– Royalties: residence state only
– No day counting services PE
– Corresponding adjustment in Article 9
Russia (cont)
• But
– Subject to tax test in dividends article
– Some Russian DTAs have lower rates
• Russian model
– Higher withholding rates
– Article 9(2)? Arbitration?
– Day counting services provision?
– No recent DTAs with comparable countries
India
• UK-India DTA 1993, replaced 1981 DTA
– A lot of source state taxation
– 90 day services PE; stock of goods
– Service PE if in connection with oil etc
– Domestic law restrictions on PE expenses
– Wide royalty and technical fees provisions
– Withholding on passive income of 15%
– Capital gains taxed with no restrictions
Indian DTA interpretations
• Non-recognition of partnerships
• Relegation of POEM
• Aggregation of separate projects to form PE
• Article 5(2) examples are a priori PEs, etc
• Narrowing of scope of prep & aux in Article 5(4)
• Representative office concludes contracts
• Easy to conclude contract & be a dep. Agent
• Indian affiliated service company often a PE
Indian DTA interpretations (cont.)
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Service PE even if services performed outside India
Satellite’s footprint can be a PE
Mobile phone roaming agreement creates a PE
A cable or pipeline can be someone else’s PE
Commentary’s circumscription of royalties are all wrong
“Process” in Article 12 is a wide concept
Equipment leasing includes services
India – prospects for change?
• Present position suits a large capital importer
• Difficult not to be in India, but…?
• Growth, development, capital exporting?
• Courts a restraint on extreme interpretations
BRICs and the OECD
• Russia, India and China all observers to OECD
• Observers not required to agree OECD principles
• Brazil has shown limited interest in OECD
• OECD looking for enhanced engagement
• Implications for OECD product and influence