Double Tax Treaties

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Double Tax TreatiesJuly 2011
Tomas Balco KIMEP Kazakhstan
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Purpose and Objectives of the Tax Treaties
Tax Treaties?

• Total tax treaties in the world
• By end 2004
• 2,559 double tax treaties
• 1,718 bilateral investment treaties
• 215 preferential trade and investment agreements
• and since then?

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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Purpose and Objectives of the Tax Treaties
Purpose and Objectives

• Removal of tax barriers to cross-border trade and
  investment
• Elimination of double taxation
• Certainty of tax treatment
• Reduce tax rates
• Lower compliance costs
• Prevention of fiscal evasion
• Prevention of tax discrimination
• Resolution of tax disputes

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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Place of Treaties in the Legal System

• Treaty a formal agreement between two or more
  States
• Phases negotiation, signature, ratification,
  entry into force
• Place of treaties in the legal system depends on
  the countrys view on international law
• Most countries treaty prevails over domestic law
• Some countries (e.g. US) treaty equals domestic
  law
• Object of tax treaties limit exercise of
  national taxing powers on cross-border situations

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Place of Treaties in the Legal System
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Place of Treaties in the Legal System
OECD, UN, CASES, LITERATURE
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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Model Conventions

• Why do we need a Model Tax Convention?
• What is a Model Tax Convention?
• What is the legal value of a Model Convention?
• Model Conventions
• League of Nations Models 1928 1946
• OECD Model 1963, 1977, 1992 and beyond
• UN Model 1980 and 2001
• CIAT Model
• ASEAN Model
• National models (e.g. USA, Netherlands)

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Model Conventions
Model Conventions and Bilateral Treaties

• The OECD Model Tax Convention and its Commentary
• The OECD Model and bilateral treaties among OECD
  countries
• Provisions based on the Model
• Reservations
• Observations
• Provisions not based on the Model
• Bilateral treaties with non-OECD countries
• Bilateral treaties between non-OECD countries

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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Structure and effect of comprehensive income tax
treaties
Effect of Tax Treaties

• Elimination of Double Taxation
• Allocation of exclusive taxing rights
• Providing for methods of credit/exemption
• Mutual Agreement procedure
• Elimination of Tax Evasion
• Exchange of Information
• Cooperation between tax administrations

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Structure and effect of comprehensive income tax
treaties
Tax Treaty Structure

• Scope of the treaty (Articles 1, 2 and 29)
• Definitions (Articles 3 to 5)
• Distributive rules (Articles 6 to 22)
• Exclusive allocation of taxing rights
• Shared allocation of taxing rights
• Elimination of double taxation (Article 23)
• Exemption (Article 23A) Credit (Article 23B)
• Special provisions (Articles 24 to 28)
• Procedural rules (Articles 25, 26 and 27)
• Principles (Articles 24 and 28)
• Final provisions (Articles 30 and 31)

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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Tax treaties and domestic law
Principles

• In many countries constitution determines the
  position of international treaties in the legal
  system
• In addition, the Tax Codes contain information
  about the position of tax treaty in relation to
  the remaining provisions of tax code

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Tax treaties and domestic law

• Treaties often do not allow domestic law to
  interfere
• Tax treaties often rely on domestic law on the
  basis of Art. 3(2) OECD Model
• Domestic law must comply with tax treaties
• Special problems
• Later changes in domestic legislation may affect
  characterization for treaty purposes
• GAAR and other domestic anti-abuse clauses may
  affect the entitlement to treaty benefits also in
  the presence of treaty anti-abuse clauses

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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Allocation of the Taxing Rights
Allocating Taxing Rights under the Treaty

• Exclusive allocation
• Income..shall be taxable only
• State of residence
• (Arts. 7 8 12 13(3),(5) 15 18 21)
• State of source
• (Art. 19)
• Consequence No double taxation

Shared allocation Income..may be taxed (Arts. 6
7 10 11 13(1), (2), (4) 15 16 17 19) Both
States tax double taxation Primary allocation
State of source Secondary allocation State of
residence may tax and give relief
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Allocation of the Taxing Rights
Article 12 OECD

• Royalties arising in a Contracting State and
  beneficially owned by a resident of the other
  Contracting State shall be taxable only in that
  other State.

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Allocation of the Taxing Rights
Article 11 OECD

• Para. 1
• Interest arising in a Contracting State and paid
  to a resident of the other Contracting State may
  be taxed in that other State.
• Para. 2
• However, such interest may also be taxed in the
  Contracting State in which it arises but the
  tax so charged shall not exceed 10 per cent of
  the gross amount of the interest.

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Allocation of the Taxing Rights
Article 6(1) OECD

• Income derived by a resident of a Contracting
  State from immovable property situated in the
  other Contracting State may be taxed in that
  other State.

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Allocation of the Taxing Rights
Article 19(1) OECD

• Salaries paid by a Contracting State to an
  individual in respect of services rendered to
  that State shall be taxable only in that State.

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Allocation of the Taxing Rightsc
OECD Model
Residence State
Source State
Arts. 12, 18, 21
Arts. 10 or 11 and 23
Arts. 6, 7 or 15 and 23
Art. 19
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Content
Purpose and Objectives of Tax Treaties Place of
treaties in the legal system Model Conventions
and their history Structure and effect of
comprehensive income tax treaties Tax treaties
and domestic law Allocation of taxing
rights Scope and entitlement to treaty benefits
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Scope and entitlement to treaty benefits
Scope of DTAs

• We distinguish
• personal scope
• taxes covered
• territorial scope

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Scope and entitlement to treaty benefits
Personal Scope of Tax Treaties

• Art. 1 OECD Model entitlement to treaty
  benefits
• Person Art. 3(1) a) an individual, a company
  and any other body of persons
• Resident Art. 4 - liable to tax in a State by
  reason of domicile, residence place of management
  and similar criteria
• Contracting State State which is party to the
  treaty

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Scope and entitlement to treaty benefits
Personal Scope

• Persons who are resident (Art.1 OECD)
• Persons (Art. 3(1) a) OECD)
• individuals
• companies (Art. 3(1) b) OECD)
• other bodies of persons
• being liable to tax (Art. 4(1) OECD)

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Scope and entitlement to treaty benefits
Limited Entitlement to Treaty Benefits

• Domestic law
• GAAR and other anti-abuse clauses
• Partnerships that are not liable to tax are not
  persons
• Treaty
• Anti-abuse clauses (e.g. LOB clauses)
• Object and purpose
• Need to counter tax evasion and avoidance
• No double taxation

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Scope and entitlement to treaty benefits
Limitation of Benefits

• Objective - To deny treaty benefits to those who
• were not intended to be entitled to the
  provisions
• misuse treaties
• in substance are residents of third States
• See Commentary on Article 1 Improper use of the
  Convention (from paragraph 7)
• Various formulations used
• Wide/narrow scope (whole treaty/specific
  Articles)
• Varying certainty of application
  (objective/subjective criteria)

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Scope and entitlement to treaty benefits
Taxes Covered

• Art. 2(1) OECD taxes on income (and capital)
  
• irrespective of levying body
• central government
• state/province
• municipality
• exceptions/additions

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Scope and entitlement to treaty benefits
List of Taxes

• For example
• income tax
• corporation tax
• wages tax
• dividend tax
• specific oil/gas taxes

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Scope and entitlement to treaty benefits
Changes of Taxes in Time?

• Art. 2(4) OECD
• if replaced treaty remains applicable
• identical or similar taxes
• notification of changes

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Scope and entitlement to treaty benefits
Territorial Scope

• Land territory
• Territorial waters
• Continental shelf
• Economic zone