As tax treaties become more important in the international tax landscape, for both developed and developing countries, it is important to review practical guidance provided to tax administrations to enforce such treaties. This is a valuable primer for those involved in tax treaty interpretation and negotiation. The recently released Manual is provided as a reference link.
The present publication, entitled United Nations Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (the Manual), aims at strengthening the technical expertise of developing countries’ tax officials as regards the negotiation of tax treaties.
It provides practical guidance to treaty negotiators in developing countries, in particular those who use the United Nations Model Double Taxation Convention between Developed and Developing Countries (the UN Model).
This Manual constitutes an introductory guide to tax treaty negotiations and, as such, provides general explanations on the way treaty negotiations are conducted and on the issues that are typically addressed during these negotiations. While it seeks to identify important issues that treaty negotiators should be aware of, it does not attempt to provide an exhaustive analysis of these issues. When preparing for treaty negotiations, the user of this Manual will therefore often need to go beyond the explanations provided in these pages and to further research the issues that are identified therein. keeping in mind that the detailed Commentaries on the provisions of the United Nations Model Double Taxation Convention between Developed and Developing Countries and of the OECD Model Tax Convention on Income and on Capital constitute the most authoritative source of information on the interpretation of these provisions.
Monumental progress was recently made, in the form of 4 treaty protocols being approved; Luxembourg, Switzerland, Japan and Spain. This will hopefully start a natural progression towards prompt treaty approvals/ratifications.
Additional Section 965, transition tax, FAQ’s were issued. As you may recall, there was an infamous FAQ issued 13 April, 2018, whereby all overpayments from 2017 were deemed to be credited in their entirety to the 8 years, if elected, of transition tax liability. This important issue is still being contested, and am hopeful that HR 2985 calling for its proper reversal (i.e. IRS was wrong) will attract additional cosponsors and be an integral component of a tax technical corrections package that will be passed this year.
The 2019 United Nations (UN) tax treaty negotiation manual, attached for reference, was updated to reflect changes in the 2017 UN Model Treaty to include changes that resulted from the OECD’s base erosion and profit-shifting project.
Transfer pricing: IRS officials noted that completing the advance pricing and mutual agreement program’s (APMA’s) functional cost diagnostic model (FCDM) is a detailed process and taxpayers may want to submit the model form only in complex cases.
EY’s Global Tax Alert contains additional details, provided as reference.
As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis. The training should also be reviewed and updated annually for new developments.
Examples of topics for discussion:
Beneficial ownership & disclosures (coordinated with Treasury Know Your Customer perspective)
Permanent Establishment (PE)
General Anti-Avoidance rules (GAAR)
Transfer pricing methodologies, internal governance procedures
Transfer pricing documentation process
BEPS governance strategies
Financial statement tax reserve criteria and timing
Interrelationship of domestic law and double tax treaties
Elements of tax risk framework
Tax audit protocol
Tax audit methodologies
Customs / Transfer pricing coordination
BEPS Country-by-Country report, future trends
The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.
The African Tax Research Network (ATRN) requests research papers for its 1st Annual Congress entitled Contemporary Tax Challenges for African Countries. A link to the conference details is provided for reference;
The African Tax Research Network (ATRN) is a newly established platform for African inspired dialogue, research and collaboration mainly among researchers, policy makers and tax administrators. Its establishment results from the need to identify potential synergies and linkages, in areas of research, between academics, policymakers, researchers and tax officials from the African Tax Administration Forum’s (ATAF) member countries. Launched in 2009, the African Tax Administration Forum is a platform to promote efficient, effective and service-oriented tax administrations and currently consists of 38 African member states. The ATRN, which is housed in the ATAF Secretariat in South Africa, is pleased to announce its 1st Annual Congress from 02 – 04 September 2015 in Victoria Falls, Zimbabwe.
This congress presents an opportunity for academics, researchers, tax administrators, students, tax practitioners, consultants and decision-makers on fiscal and tax policy to gather and discuss different aspects relating to national, regional and international tax matters.
The theme of the Annual Congress is “Contemporary Tax Challenges for African Countries”.
Prospective authors, both academics and practitioners, are invited to submit original and innovative papers on any topic related to this broad theme. Suggested topics of interest to be covered under the main theme include:
Natural resources taxation
Local taxation and fiscal decentralisation
Customs & domestic taxation
Taxation in the digital economy
Taxation in banking, telecommunication, insurance
Taxation and regional integration
Taxation & the distribution of income & wealth
Taxation and Human Rights (including taxation & gender)
This conference is an excellent opportunity for interested parties to submit their ideas and presentations to form a win-win opportunity for taxpayers and tax administrations. A collaborative relationship will enhance future efficiencies in this rapidly growing region.
The PwC News Alert, issued today, highlights statements of India’s High Court re: treaty override situations in a recent decision of Vodafone South Ltd. These statements are significant in determining whether retrospective amendments can override treaty benefits. The link to the Alert is attached for reference:
Important observations noted in the Alert:
Sovereign power extends to “breaking” a tax treaty.
Unilateral cancellation of a tax treaty through an amendment to domestic law, subsequent to conclusion of a tax treaty, is a recognized sovereign power.
If , after the tax treaty came into force, an Act of Parliament was passed which contained a provision contrary to the tax treaty, the scope and effect of the legislation could not be curtailed by the tax treaty.
India is not a signatory to the Vienna Convention on the Law of Treaties (Vienna Convention), although such principles have previously been relied on by several Indian courts as such concepts have been accepted as a source of international law.
The concept of treaty override is becoming a very significant issue, evidenced by various GAAR provisions that have been enacted in domestic law that override general tax treaty provisions. Additionally, recently released OECD draft on BEPS Action Plan 2 (22 March 2014 post) highlights the complex interplay of GAAR provisions with primary and linking mechanism proposals set forth to ensure consistency and uniformity.
In summary, the concepts of the Vienna Convention, combined with current events and complexities re: tax treaty override, merit special attention as tax audits become more complex leading to costly and lengthy appeals, while legislated issues become more subjective all leading to additional cases of double taxation and controversies based on uncertainties of international tax law.
The OECD invites public comments with respect to Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan.
A summary of the OECD press release, the OECD proposal and Best Practice comments are included herein for reference:
The Action Plan identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Action 6 (Prevent Treaty Abuse) reads as follows:
Prevent treaty abuse
Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.
The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.
As part of that consultation process, interested parties are invited to send comments on this discussion draft, which includes the preliminary results of the work carried out in the three different areas identified in Action 6:
A. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances.
B. Clarify that tax treaties are not intended to be used to generate double non-taxation.
C. Identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.
These comments should be sent on 9 April 2014 at the latest (no extension will be granted). The comments received by that date will be examined by the Focus Group at a meeting that will be held on the following week.
Persons and organisations who intend to send comments on this discussion draft are invited to indicate as soon as possible, and by 3 April at the latest, whether they wish to speak in support of their comments at a public consultation meeting on Action 6 (Prevent Treaty Abuse), which is scheduled to be held in Paris at the OECD Conference Centre on 14-15 April 2014. Persons selected as speakers will be informed by email by 4 April at the latest.
This meeting will also be broadcast live on the internet and can be accessed on line. No advance registration is required for this internet access.
General observations of proposal:
The OECD proposal provides a three-pronged approach:
Treaty statement re: anti-avoidance rule and treaty shopping opportunities
Specific anti-abuse rule based on Limitation of Benefit (LOB) provisions
General anti-abuse rule
Other OECD recommendations include comments re: Permanent Establishment (PE), tax policy, and broad General Anti-Avoidance Rule (GAAR) interpretation (including allowance of domestic GAAR provisions notwithstanding the relevant double tax treaty). The GAAR proposal provides that obtaining a treaty benefit was one of the main purposes of any arrangement or transaction that resulted directly or indirectly in that benefit. Note this GAAR proposal supplements the LOB provisions.
Proposals are also introduced to address tax avoidance risks via changes to domestic laws. Such risks include thin capitalization, dual residence, arbitrage transactions (including timing differences), and transfer mispricing. Intentions of the UN Model Convention are also introduced for analogous interpretation.
The proposal notes that treaties should not prevent application of domestic law provisions that would prevent transactions re: CFC rules and thin capitalization.
Finally, the OECD proposal indicates that the treaty should clearly state that prevention of tax evasion and tax avoidance is a purpose of the tax treaties.
The proposal, in alignment with the overall OECD BEPS proposals, is targeted at avoidance of double non-taxation, without a balanced commentary and measures addressing the risk of double taxation. Additionally, the terms “tax evasion” and “tax avoidance” are used in tandem within the proposal, although such terms are literally construed as having significantly two separate meanings and relative intent. Finally, the allowance of domestic GAAR provisions in addition to, or in lieu of, treaty provisions and EU Parent-Subsidiary guidelines will promote additional uncertainty re: subjective interpretations of broad proposals that will ultimately lead to increased tax disputes, double taxation and the loss of multilateral symmetry.
This proposal has tremendous significance in the transfer pricing arena that must be seriously considered and reviewed in its entirety, including the possibility for early comment to ensure OECD consideration.
The U.N. Committee of Experts on International Cooperation in Tax Matters (U.N. Committee ) is responsible for drafting the U.N. model tax treaty and the Practical Manual on Transfer Pricing for Developing Countries. The U.N. Committee’s work on international tax and transfer pricing developments should be watched closely by the international tax community. Additionally, developments on important topics should be compared with that of the OECD, including its Revised Draft on Transfer Pricing Aspects of Intangibles (03 August post), White Paper on Transfer Pricing Documentation (31 July post) and the Base Erosion and Profit Shifting Action Plan (19 July post).
The attached link provides reference to its provisional agenda for the 21-25 October 2013 session, the appointment of 25 members to the U.N. Committee for a 4-year term expiring on 30 June 3017 and the U.N. Model Double Taxation Convention.
The 9th session of the U.N. Committee will address U.N. Model Tax Convention issues, including the following:
Article 4 (Resident): Application of treaty rules to hybrid entities
Article 5 (PE), including international VAT cases
Article 7 (Business Profits): Force of attraction principles
Other topics, including provision on taxation of fees for technical services, issues for the next update of The Practical Transfer Pricing Manual for Developing Countries, and The Manual for Negotiation of Bilateral Tax Treaties between Developed and Developing Countries.
The 25 members were appointed by U.N. Secretary-General Ban Ki-moon and will act in their personal capacity. A detailed biography of each member is included in the press release; a listing of their name and current position is provided herein for quick reference.
Mr. Khalid Abdulrahman Almuftah, Deputy Director, Revenues and Tax Dept., Ministry of Economy and Finance, Qatar
Mr. Mohammed Amine Baina, Chief, Division for International Cooperation, Dept. of Taxation, Ministry of Economy and Finance, Morocco
Ms. Bernadette May Evelyn Butler, Legal Adviser, Ministry of Finance, Bahamas
Mr. Andrew Dawson, Head, Tax Treaty Team, HMRC, UK
Mr. El Hadj Ibrahima Diop, Director of Legislation and Litigation Studies, Ministry of Economy and Finance, Senegal
Mr. Johan Cornelius de la Rey, Legal Officer, Legal and Policy Division, South African Revenue Service (SARS)
Ms. Noor Azian Abdul Hamid, Director, Multinational Tax Dept., Inland Revenue Board (IRBM), Malaysia
Ms. Liselott Kana, Head, Dept. of International Taxation, Internal Revenue Service, Chile
Mr. Toshiyuki Kemmochi, Director, Mutual Agreement Procedures, National Tax Agency, Japan
Mr. Cezary Krysiak, Director, Tax Policy Dept., Ministry of Finance, Poland
Mr. Armando Lara Yaffar, Director General, Int’l Affairs, Dept. of Revenue, Ministry of Finance and Public Credit, Mexico
Mr. Wolfgang Karl Albert Lasars, Director, International Tax Section, Federal Ministry of Finance, Germany
Mr. Tizhong Liao, Deputy Director General of Tax Treaty, Dept. of International Taxation, State Administration of Taxation, China
Mr. Henry John Louie, Deputy to the Int’l Tax Counsel (Treaty Affairs), U.S. Dept. of the Treasury
Mr. Enrico Martino, Head, International Relations, Dept. of Finance, Ministry of the Economy and Finance, Italy
Mr. Eric Nii Yarboi Mensah, Chief Tax Treaty Negotiator, Ghana Double Tax Treaty Convention Team
Mr. Ignatius Kawaza Mvula, Assistant Director, Zambia Revenue Authority
Ms. Carmel Peters, Policy Manager, Inland Revenue, New Zealand
Mr. Jorge Antonio Deher Rachid, Tax and Customs, Embassy of Brazil, Washington, D.C.
Mr. Satit Rungkasiri, Director General, Revenue Dept., Ministry of Finance, Thailand
Ms. Pragya S. Saksena, Joint Secretary, Tax Policy and Legislation, Central Board of Direct Taxes (CBDT), Dept. of Revenue, Ministry of Finance, India
Mr. Christoph Schelling, Head, Division for International Tax Affairs, State Secretariat for Int’l Financial Matters, Swiss Federal Dept. of Finance
Mr. Stig B. Sollund, Director General and Head of Tax Law Dept., Ministry of Finance, Norway
Ms. Ingela Willfors, Director, Int’l Tax Dept., Ministry of Finance, Sweden
Mr. Ulvi Yusifov, Head, Int’l Treaties Division, Int’l Relations Dept., Ministry of Taxes, Azerbaijan
It will be interesting to observe the interaction of new U.N. Committee members, and most importantly the initiatives addressed against the backdrop of the OECD’s recent developments.
Permanent Establishment (PE) risk is receiving increased visibility around the world, in established countries and emerging markets. Therefore, have you increased your focus to strategize Best Practices to minimize this risk? The following ideas are presented for consideration:
Coordination of employee transfers/assignments to understand new roles and responsibilities, legal entities, etc.
PE global training to increase awareness, collaborating with the Human Resource function.
Review tax treaties for all business changes to understand PE triggers and exceptions.
Utilizing special purpose entities to centralize, or isolate, potential risks.
Developing a Do’s and Don’ts list to discuss with the business; attach to Job Descriptions, as applicable.
Formal PE technical training, at least annually, for all employees having international tax responsibilities.
If consideration of PE risk is coordinated by external advisors, develop a collaboration plan to review regularly.
“Presence” test PE safe harbor, dependent on treaty: Who is counting the days and coordinating related steps of a project?
“Preparatory & Auxiliary” PE treaty exception: review Form vs. Substance on a recurring basis.
Develop PE expertise and clarify roles of internal staff and external advisors.
Proactive vs. reactive PE determinations, understand when a proactive PE determination may be beneficial.
Follow PE trends of aggressive jurisdictions with scenario planning.
Collaborate with the business to understand upcoming strategies that may introduce new PE risks.
Review “Branch” activities annually to determine if they exceed allowable actions in the respective countries.
Establish a collaborative process for entry into new countries to ensure tax coordination and risk identification.
Ensure a communication protocol is established for response to PE allegations that are made public.
Following current events for OECD and UN model conventions, as well as related commentaries
Identification, with mitigating controls, in tax risk and ERM framework