This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. Find out more here.  
 
TreatyPro.com | The Evolving State of the OECD Model Tax Convention

The Evolving State of the OECD Model Tax Convention

By TreatyPro Editorial
November 5, 2012

In this article, we take a look at the Organisation for Economic Cooperation and Development’s (OECD) ongoing efforts to reform certain aspects of the Model Tax Convention, particularly with respect to recent proposals on changes to the ‘beneficial ownership’ and ‘permanent establishment’ articles, and tax treaty treatment of emissions permits.

Background

With the Model Tax Convention on Income and Capital, the OECD aims to develop a standard set of guidelines to inform the negotiation process when two countries attempt to reach a double taxation avoidance agreement. Its origins date back to 1956, when the then Fiscal Committee of the OECD started work that would establish a draft convention to resolve double taxation problems between existing member states. The Committee’s final report, entitled Draft Double Taxation Convention on Income and Capital, was adopted by the Council of the OECD in July 1963 and member countries were urged to conform to the Draft Convention when entering into new, or revising existing, tax treaties.

The economic landscape has, however, changed vastly since the earliest Convention was first adopted. Business practices have becoming increasingly sophisticated, and with the rapid growth in cross-border trade in goods and services over the last three decades, the double taxation of business income has become a major issue. As the OECD states: “International juridical double taxation –generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods – has harmful effects on the international exchange of goods and services and cross-border movements of capital, technology and persons. In recognition of the need to remove this obstacle to the development of economic relations between countries, as well as of the importance of clarifying and standardising the fiscal situation of taxpayers who are engaged in activities in other countries, the OECD Model Convention on Income and on Capital provides a means to settle on a uniform basis the most common problems that arise in the field of international juridical double taxation.”

However, frequent changes in tax laws and practices in individual countries also mean that the Convention must be updated on a regular basis, and as a consequence it is a constantly evolving animal. Since 1992, the Model has been published in a loose-leaf format to allow the incorporation of these changes, and updates were published in 1994, 1995, 1997, 2000, 2003, 2005, 2008 and 2010. Beginning with the 1997 update, the Model was presented in two volumes. Volume I includes the Introduction and the text of the Articles of the Model and their Commentaries. Volume II includes a section on the positions of non-member countries, reprints of previous reports dealing with tax conventions that the Committee on Fiscal Affairs has adopted since 1977, the list of tax conventions concluded between member countries and the text of the Council Recommendation on the Model Tax Convention. 

The 2010 update includes changes that were previously released for comment in the following discussion drafts: the granting of treaty benefits with respect to the income of collective investment vehicles; revised discussion draft of a new Article 7 (business profits) of the OECD Model Tax Convention; application of tax treaties to state-owned entities, including sovereign wealth funds; tax treaty issues related to common telecommunication transactions; and revised changes to the commentary on paragraph 2 of Article 15 (income from employment).

The Model Convention, as it read on July 22, 2010, contains 31 Articles, covering issues from residence, to income from immovable property, dividends, interest, royalties, capital gains and directors’ fees, among others. The most recent proposed updates involve clarifications to Article 5 (Permanent Establishment) and revised meanings of ‘Beneficial Owner’ in Articles 10, 11 and 12. Other changes in the pipeline include clarification of the treatment of emissions credits in double tax treaties.

Consultation on Permanent Establishment

On October 19, 2012, the OECD Committee on Fiscal Affairs requested public comment on revised proposals concerning the interpretation and application of Article 5 (permanent establishment) in the Model Tax Convention, which is primarily used for the purpose of the allocation of taxing rights when an enterprise of one State derives business profits from another State. However, according to the OECD, despite the long history of the concept of permanent establishment, its practical application raises a number of issues, mainly as a result of ever-evolving business models. The Committee on Fiscal Affairs, through a subgroup of its Working Party 1 on Tax Conventions and Related Questions, has therefore examined various questions related to the interpretation and application of the definition of permanent establishment.  This public discussion draft included proposals for additions and changes to the Commentary on the OECD Model Tax Convention resulting from the work of that subgroup that have recently been presented to the Working Party for discussion. However, given the practical importance of these proposals, the Committee has decided to invite public comments on the proposed changes to the Commentary before they are thoroughly discussed by the Working Party.

The consultation covers 25 areas and includes issues such as: whether a farm can be a permanent establishment; home offices as permanent establishments; the presence of a foreign enterprise’s personnel in the host country; the meaning of “place of management”; whether “goods or merchandise” covers digital products or data; and the activities of fund managers and insurance agents.

It is proposed that a number of amendments to Article 5 be included in the next revision of the OECD Model Tax Convention due to be released in 2014, with comment welcomed until January 31, 2013. Given the wide scope of the consultation, any changes brought about by it are expected to have a significant impact on the future taxation of cross-border business.

Consultation on Beneficial Ownership

Also on October 19, 2012, the Committee on Fiscal Affairs released for public comment proposals in the area of beneficial ownership as it relates to certain articles of the Model Convention. These proposals are also derived from responses to an earlier discussion draft, which in this case was released in April 2011.

The consultation seeks to clarify when an entity should be deemed to be the beneficial owner of a dividend, royalty or interest payment, as dealt with in Articles 10, 11, and 12 of the Model Convention, respectively. In many double taxation agreements concluded in line with the OECD benchmark agreement, provision is made for a lower rate of withholding tax in cases where the recipient is the 'beneficial owner' of the asset from which the income - be it royalty, dividend or interest income - is derived. Due to the lack of a universally-agreed definition of 'beneficial ownership', the area has historically presented substantial challenges for tax practitioners and tax authorities alike.

Although there is no hard-and-fast interpretation, generally beneficial ownership provisions are incorporated into double tax agreements as an anti-avoidance mechanism, to restrict the provision of lower withholding tax rates to recipients that have the right to the end use of the income, unconstrained by any contractual or legal obligation to transmit this income to a third party, particularly a connected party. The provision was introduced to prevent entities triangulating payments through other nations that have more beneficial double tax arrangements with the country in which the payee resides. The practice, commonly referred to as treaty shopping, is a contentious issue that has most notably soured international relations between Mauritius and India.

The discussion draft does not seek to amend Articles 10, 11 and 12 of the OECD Model Tax Convention but instead proposes to revise the OECD commentary used to interpret these Articles. The OECD has invited comment on the discussion draft before December 15, 2012, for review in February 2013.

In an initial response, PwC welcomed the OECD's efforts to provide clarity given the considerable uncertainty that has historically existed, but said that the updated commentary had fallen short on a number of areas. Richard Collier, tax partner at PwC, said: "The concept of beneficial ownership has been mired in confusion and controversy over recent years. The OECD has provided some clarification on how payments being passed on affect beneficial ownership of income received, but not enough. For instance the new wording refers to 'unrelated payments' without any explanation of what it means for a payment to be related or unrelated. Beneficial ownership is a big issue for many international businesses which must comply with complex international and domestic tax rules. Given the current focus on corporate tax affairs, it is more important than ever that the rules affecting the level of tax paid are clear."

Emission Credits

In another recent consultation, the Committee on Fiscal Affairs has invited public comment on a revised discussion draft on tax treaty issues related to emissions permits/credits. This analysis addresses the application of the provisions of the OECD Model Tax Convention to the cross-border trading of emissions permits.

Again, the consultation is driven by the results of a public discussion draft entitled ‘Tax treaty issues related to the trading of emissions permits’, released in May 2011. The few comments received on the discussion draft included the suggestion that the scope of the discussion draft be expanded to cover tax treaty issues arising from the trading of CERs (Certified Emission Reduction credits) and ERUs (Emission Reduction Units) as well as tax treaty issues arising from the issuance, as opposed to the trading, of emissions permits, CERs and ERUs.

In accordance with these suggestions, the CFA, through its Working Party 1 on Tax Conventions and Related Questions, has refined the analysis included in the discussion draft to cover the trading of CERs and ERUs as well as treaty issues that would arise if a State decided to tax emissions permits, CERS and ERUs at the time of their issuance rather than upon their alienation.

This consultation closes on January 15, 2013 and comments will be reviewed at the February 2013 meeting of Working Party 1.

 

 

Tags: tax | business | interest | withholding tax | agreements | services | insurance | tax rates | trade | India | Mauritius | fees | dividends | law | royalties | investment



Latest News


NZ-Samoa DTA Lowers Withholding Tax Rates 1/2/2016
Concessionary rates of withholding tax in the New Zealand-Samoa double tax agreement became effective on February 1.

Read full story


Russian Agreement Advances Hong Kong's DTA Priorities 20/1/2016
Hong Kong's newly signed double tax deal with Russia is said to support the territory's ongoing efforts to expand its tax treaty network with jurisdictions along "the Belt and Road."

Read full story


Canada, Taiwan Sign Double Tax Treaty 19/1/2016
Canada and Taiwan have signed a double tax agreement that will limit the withholding tax rates on income from dividends, interest, and royalties, and provide for the exchange of tax information.

Read full story


Denmark Establishes Tax Treaty Task Force 19/1/2016
Danish Tax Minister Karsten Lauritzen has created a new government-industry task force that will support the Government to broaden and improve Denmark's network of double tax agreements.

Read full story


UK Tax Treaties With Croatia, Bulgaria In Force 12/1/2016
The UK tax authority, HM Revenue and Customs, has announced that new double tax avoidance treaties with Bulgaria and Croatia have entered into force.

Read full story


Singapore-Luxembourg DTA Lowers Tax Rates 6/1/2016
The revised Singapore-Luxembourg double tax agreement entered into force on December 28, 2015, and became effective on January 1, 2016.

Read full story


Switzerland, Italy Agree Tax Deal For Cross-Border Workers 23/12/2015
Switzerland and Italy have initialed an agreement on the taxation of cross-border workers.

Read full story


SARS Explains 2015 Tax Administration Amendments 22/12/2015
On December 17, the South African Revenue Service issued an explanatory memorandum on the 2015 Tax Administration Laws Amendment Bill.

Read full story


Phlippines Ratifies Tax Treaties 17/12/2015
Legislation for the ratification of double tax avoidance treaties between the Philippines and the governments of Germany, Italy, and Turkey has been approved by the Filipino Senate.

Read full story


Andorra, Malta Sign Double Tax Agreement 17/12/2015
Andorra and Malta have signed an agreement on the avoidance of double taxation and prevention of fiscal evasion.

Read full story


Macau, Taiwan Sign Aviation DTA 15/12/2015
An aviation double taxation agreement signed between Taiwan and Macau on December 10 is expected to boost air transport, commerce, and tourism flows between the two places.

Read full story


Cyprus, Ukraine Agree To Replace Temporary DTA 14/12/2015
Cyprus and Ukraine have agreed the text of a double tax agreement that will likely replace their existing pact from January 1, 2019.

Read full story


India, Japan To Exchange Tax Info 11/12/2015
India and Japan have signed a protocol to add information exchange provisions to their double tax treaty.

Read full story


EC Investigates Luxembourg's Tax Rulings For McDonald's 4/12/2015
The European Commission has launched a formal investigation into Luxembourg's tax treatment of McDonald's and said that its preliminary view is that a tax ruling granted to the company may have afforded it advantageous tax treatment in breach of European Union state aid rules.

Read full story


UK Gov't Amends View On DTA Residence Articles 1/12/2015
UK tax authority HM Revenue and Customs has announced a change of view on the interpretation of the company residence articles in 16 double taxation agreements.

Read full story


Canada, UK Agree On Application Of DTA Arbitration Provisions 27/11/2015
Canada and the UK have reached a deal on the application of the arbitration provisions of their double tax agreement.

Read full story


Dutch DTA With Japan Questioned By EU Commission 23/11/2015
The European Commission has requested that the Netherlands amend the limitation on benefits clause in its double tax treaty with Japan.

Read full story


Germany, Australia Sign New DTA 16/11/2015
Australia and Germany have signed a new double tax agreement that lowers withholding tax rates on cross-border income and introduces new anti-abuse and prevention of non-taxation rules.

Read full story


DTA Approvals Sent For US Senate Vote 13/11/2015
Eight tax treaties and protocols were passed forward for a ratification vote by the full US Senate at a business hearing of the Committee on Foreign Relations on November 10.

Read full story


Swiss Council Adopts Dispatch On Albania DTA Protocol 12/11/2015
The Swiss Federal Council has adopted a dispatch on a protocol to the double tax agreement with Albania.

Read full story


UAE Welcomes TIEA With Norway 11/11/2015
The United Arab Emirates announced on November 4, 2015, that it has signed a tax information exchange agreement with Norway.

Read full story


Mexico, Argentina Sign Double Tax Avoidance Agreement 11/11/2015
Mexico and Argentina have signed an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital.

Read full story


Swiss Federal Council Approves Liechtenstein, Norway DTAs 3/11/2015
The Swiss Federal Council has adopted dispatches on a new double tax agreement with Liechtenstein and a protocol to the agreement with Norway.

Read full story


US Administration Pushes For Swiss DTA Update Ratification 2/11/2015
Robert Stack, US Treasury Deputy Assistant Secretary (International Tax Affairs), initiated a further push for ratification of the pending protocol to the US tax treaty with Switzerland at a hearing of the Senate Committee on Foreign Relations on October 29.

Read full story


DTAs Key For Hong Kong's Fund Sector: Report 29/10/2015
Hong Kong needs more double tax agreements to grow its exchanged-traded funds market, according to a new report from the Financial Services Development Council.

Read full story


More News