Double Tax Treaties

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					Double Tax Treaties
July 2011
Tomas Balco
KIMEP Kazakhstan




Principles of International Taxation
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?




Principles of International Taxation
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




Principles of International Taxation
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


Principles of International Taxation
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




Principles of International Taxation
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 country’s
  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



Principles of International Taxation
Place of Treaties in the Legal System




Principles of International Taxation
Place of Treaties in the Legal System


                      OECD, UN, CASES, LITERATURE




Principles of International Taxation
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




Principles of International Taxation
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)

Principles of International Taxation
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


Principles of International Taxation
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




Principles of International Taxation
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




Principles of International Taxation
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)
Principles of International Taxation
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




Principles of International Taxation
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




Principles of International Taxation
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

Principles of International Taxation
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




Principles of International Taxation
Allocation of the Taxing Rights

Allocating Taxing Rights under the Treaty


Exclusive allocation                           Shared allocation
• Income..shall be                     Income..may be taxed
  taxable only                         (Arts. 6; 7; 10; 11; 13(1), (2),
   – State of residence                   (4); 15; 16; 17; 19)
   (Arts. 7; 8; 12;                    Both States tax: double
                                          taxation
     13(3),(5); 15; 18; 21)
                                       Primary allocation: State of
   – State of source                      source
   (Art. 19)                           Secondary allocation: State of
• Consequence: No                         residence may tax and give
  double taxation                         relief


Principles of International Taxation
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.




Principles of International Taxation
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.


Principles of International Taxation
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.




Principles of International Taxation
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.




Principles of International Taxation
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

Principles of International Taxation
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




Principles of International Taxation
Scope and entitlement to treaty benefits

Scope of DTA’s


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




Principles of International Taxation
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




Principles of International Taxation
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)




Principles of International Taxation
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



Principles of International Taxation
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)


Principles of International Taxation
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




Principles of International Taxation
Scope and entitlement to treaty benefits

List of Taxes


 For example:


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




Principles of International Taxation
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




Principles of International Taxation
Scope and entitlement to treaty benefits

Territorial Scope


• Land territory

• Territorial waters

• Continental shelf

• Economic zone




Principles of International Taxation

				
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