Queen Mary
University of London
International Tax Guest Lecture
Some Treaty Issues for Developing Countries
Heather Self, Pinsent Masons LLP
30 January 2014
Outline
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History of Double Tax Agreements
OECD and UN models
How Developing Countries attract FDI
How companies decide to invest
Other specific issues
Royal Commission on Taxation, 1920
Reasons to reject a principled approach to UK DTR:
• tax systems and principles differ between countries
• in relation to each country, winners would join but losers
would stand aloof
• practical difficulties would be enormous
• the cost would be too great
Evidence of Sir Josiah Stamp, as discussed by John F
Avery Jones CBE
Development of Treaties
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League of Nations Report 1923
UK/US Treaty 1945
First OECD model 1963
UN model (based on OECD model 1977)
Current OECD model 1992, regularly updated
BEPS process 2013
Source v Residence
If State A is the state of Residence and State B the state of
Source, then:
• business income derived by a resident of State A will be
taxed in State B if there is a PE there
• State B may levy withholding taxes on dividends, interest
and royalties paid to a resident of State A
• State B may retain taxing rights on capital gains from
land situated in State B
State A will give relief for tax paid in State B by credit
(global system) or exemption (territorial system)
Current UK approach
"We are taking action in three areas: first, to make the UK
tax system more competitive to ensure it supports
investment and growth; second, to clamp down on tax
avoidance and aggressive tax planning; and third, to drive
forward reform of the international tax framework.“
UK Government response to House of Lords Economic
Affairs Committee
Capital exporting countries v capital
importing countries
"It is useful to recall that in the digital tax debate, the EU is
generally rather a source than a residence country. One
therefore should realise that strengthening the taxing rights
of the EU in the digital economy, may imply or trigger
stronger taxing rights for source countries generally, with
potential adverse consequence for the EU's entitlement to
tax the revenues of the traditional economy.“
EU Commission Expert Group on Taxation of the Digital
Economy, December 2013
OECD v UN Model Treaty
The UN Model Treaty generally allocates greater taxing
rights to the source country:
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higher wht on dividends
lower threshold for a PE
sometimes wht on services
source country taxation of royalties
retain CGT taxing rights
Treaty patterns in Less Developed Countries
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often based on original colonial influences
unequal bargaining power
lack of strategic planning
OECD model often prevails
Treaty network in sub-Saharan Africa
Slide provided by Martin Hearson, LSE
Case study – building a power station in
Rwanda
EUPower's bid proposal
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why the project fits the group strategy
risks
benefits
summary financial model
recommendation
The financial model
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key assumptions
estimated profit and loss account for whole project
calculate NPV
stress testing
Where does tax fit in?
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part of the model but NOT a critical factor
prudent assumptions
debt:equity mix?
withholding taxes?
exit routes?
stability of tax system
Why is stability important?
BG Group warned future oil and gas exploration projects in the North
Sea would be put on hold following a controversial windfall tax on
offshore producers.
"Because the UK fiscal burden has increased, you wouldn't be
surprised to hear that (North Sea) projects have moved further down
our order of priorities. As far as the UK is concerned, this is the third
change to the fiscal regime in a relatively short period.
"Ours is an industry where very substantial investments are made in
order to produce returns over a long period. But we are concerned
about the volatility of the British fiscal environment."
The Guardian, Tuesday 10 May 2011
Tax and investment decisions
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Tax is part of the picture but does not drive the project
Stability is crucial: otherwise risk will be priced in
Capital may be a scarce resource
What other projects are available?
Rwandan Government's perspective
Key objective is to get a vital piece of infrastructure built at
lowest cost
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should tax incentives be offered?
will this investment be a catalyst for other FDI?
would a DTA signal stability?
how should risks and rewards be shared?
is Rwanda competing with neighbouring states?
The Prisoner's Dilemma
Positive or neutral aspects of a DTA
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a signal of stability
retain full taxing rights over local profits
some withholding tax income from passive sources
dispute resolution processes
NB local system needs to be robust, with clear antiavoidance rules
Key features for DTA strategic approach
• what best serves the local interest?
• should neighbouring countries co-operate?
• should OECD members accept higher source taxation?
Other specific issues
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the use of holding companies
capital gains (Vodafone India)
withholding taxes on services
cancellation of treaties
Why use an intermediate holding company?
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administrative convenience
robust local law
local Treaty network
how much substance?
commercial choice or Treaty-shopping?
Deloitte advised big business on how to avoid tax in some
of the poorest countries in Africa, ActionAid report reveals
03 November 2013
One of the world’s Big Four accountancy firms, Deloitte, offered
advice to large companies on how to avoid potentially hundreds
of millions of dollars of tax in some of the poorest countries in the
world, according to an ActionAid investigation released today.
ActionAid has uncovered a Deloitte document called ‘Investing in Africa
through Mauritius' which details how tax can be avoided in African
countries by structuring business through Mauritius.
The strategy, which is entirely legal, could potentially be used to
deprive African countries of vitally needed tax revenue.
Vodafone India dispute
H Gp
V Gp
Sale of shares
Cayman
India
VNL
Vodafone India dispute
• Indian law: nonresidents subject to wht on gains from
Indian capital assets
• Vodafone: gain on sale of a Cayman asset
• India: gain on indirect sale of Indian asset
Vodafone won in Supreme Court in 2012, but retrospective
law (back to 1962) then proposed by Indian Government.
Tullow Tanzania dispute – withholding tax on
services
• Tullow operated in Tanzania and paid tax on profits
• Seismic data analysis by Irish and South African
suppliers
• assessed to wht: did payments have a source in
Tanzania?
• assessment on Tullow: no discussion of PE issues for
supplier
"Tullow Tanzania BV was the provider of employment to the
professionals involved in the work for which payment was made and to
the extent that fee was generated by employment service in Tanzania it
was therefore subject to withholding tax."
Tax avoidance – Developing countries take
on multinationals
Zambia and Mongolia have told the BBC they want to stop mining
companies shifting profits out of their countries before they can be
taxed.
The speaker of the Mongolian Parliament, Mr Z. Enkhbold, told the
BBC that Mongolia is cancelling international tax treaties which
mining companies had intended to use to take profits from their
Mongolian operations tax free.
"Tax must be paid where the real business is located," Mr Enkhbold
told the BBC, "not in offshore countries".
BBC News, 24 May 2013
Conclusions
• Tax is part of investment decisions, but usually not the
key factor
• Stability is very important (and underestimated)
• LDCs should think strategically about their DTA priorities
• Co-operation with neighbouring states may be better
than competition
• Holding companies should be respected, within agreed
Treaty framework
• Could BEPS provide an opportunity to improve DTAs for
developing countries?
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