Bilateral Tax Treaties Research Articles

Reservations and declarations to tax treaties

The subject of the article.The article represents a research of conceptual properties and issues of applying reservations and declarations to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, developed in frames of implementing the OECD/G20 Action Plan on Base Erosion and Profit Shifting (BEPS). The Multilateral Tax Convention modifies the application of agreements for avoiding double taxation, that are covered by its action. Since January 1, 2021 it has been applied to 34 agreements for avoiding double taxation between the Russian Federation and such countries as the UK, Canada, Latvia, Malta, the Netherlands and France. The Multilateral Tax Convention provides for updating bilateral tax treaties – whether they were developed upon the OECD Model Tax Convention or the UN Model Tax convention. The Convention retains a great degree of flexibility in relation to the implementation of its provisions – especially by the means of reservations, made by the countries.The purpose of the articleis to identify the main characteristics of applying reservations and declarations in international tax law.The methodology.The study is based on empirical methods of comparison and description, theoretical methods of formal and dialectical logic.The main results.Reservations have played a minor role in international taxation until now – usually they reflected disagreement, expressed by an OECD member country with the provisions of the OECD Model Tax Convention or its Official commentary. Reservations were formulated in relation to a non-binding (model) document and their importance was limited. Such reservations cannot be associated with declarations, made in relation to legally binding documents like the Multilateral Tax Convention. Analyzing the general points of scientific dispute upon the mentioned range of issues, the author argues with researchers who deem that the structure of reservations to the Multilateral Tax Convention doesn’t correspond with the provisions over reservations in the Vienna Convention on the Law of Treaties, 1969 and thus recognize those reservations as “legal hybrids”.Conclusions.The structure of reservations to the International Tax Convention is deter-mined by the nature of double taxation agreements. The model lawmaking principle (the use of the OECD Model Tax Convention) allowed developing “umbrella” architecture of relationships between the provisions of the Multilateral Tax Convention and the norms of double taxation agreements. The article categorizes types of reservations as reservations of general nature and treaty-specific reservations. The article also considers the specific properties of reservations made in relation to the provisions of the Convention, which com-pose a minimal standard.

Managing the Dollar Over Its Cycles

The United States has ceded to the rest of the world managing the dollar’s value. For a generation, the U.S. authorities have all but withdrawn from the foreign exchange market. Yet the dollar does not float freely as a result of this hands-off U.S. policy. Instead, other authorities manage the dollar exchange rates, albeit separately. These authorities make heavier purchases of dollars in its downswings than in the upswings, damping its decline. Thus, the Fed finds that accommodative monetary policy transmits less to U.S. manufacturing and traded services, and relies on still lower rates to stimulate interest-sensitive housing and auto demand. The current U.S. dollar policy of naming and shaming surplus-running countries accumulating foreign exchange reserves does not seem to work. Three alternatives warrant consideration. First, the U.S. could reinstate its withholding tax on interest income received by non-residents and even add policy criteria to bilateral tax treaties. Second, the U.S. authorities could retaliate by selling dollars against the currencies of dollar-buying jurisdictions running chronic surpluses. However, either the withholding tax or such retaliatory foreign exchange intervention pose huge practical challenges. Third, the U.S. authorities could re-enter the foreign exchange market, making large-scale asset purchases in foreign currency when the dollar rises sharply against its average value. Such a policy would encourage private investment in U.S. traded goods and service production. The challenge is to set ex ante foreign exchange intervention rules to guide market participants’ expectations, even positioning them to do the authorities’ work.

The Labor Market Effects of Offshoring by U.S. Multinational Firms

Abstract We use firm-level data on U.S. multinationals to show how offshoring affects domestic employment within and across firms. We introduce a new instrument for offshoring, bilateral tax treaties, which reduce the cost of offshore activities. We find substantial heterogeneity in effects. A 10% increase in affiliate employment drives a 1.3% increase in employment at the U.S. parent firm, with smaller effects at the industry and regional levels. In contrast, offshoring by vertical multinationals drives declining employment among nonmultinationals in the same industry, and firms opening new affiliates exhibit smaller domestic employment growth than those expanding existing affiliates.

AURES Holdings a.s. (C-405/18) at the Intersection of Cross-Border Loss Relief, Corporate Exit Taxation and Dual Residency Mismatches

This contribution examines the decision of the Court of Justice of the European Union (CJEU) of 27 February 2020 in Case C-405/18 AURES Holdings a.s. on the application of the Marks & Spencer final losses doctrine to dual resident companies that transfer their treaty residence (place of effective management) to another Member State. The CJEU applied a two-step comparability analysis based on Timac Agro and Bevola to exclude current not-subject-to-tax emigration losses (not linked to the ability-to-pay of the immigrated company) from its preferred approach to always take final losses into account somewhere in the internal market. The immigration state was not forced to apply its taxing powers asymmetrically over emigration losses to prevent a conflict with the principle of fiscal territoriality in exit tax cases and international tax practice against base erosion and profit shifting (BEPS). If the immigration state still sovereignly decides to take these losses into account pursuant to a bilateral tax treaty, Article 9(b) of the Anti-Tax Avoidance Directive (ATAD) on dual residency mismatches prevents dual loss utilization. ATAD, Aures, Bevola, comparability, conversion, exit tax, hybrid mismatch, final losses, POEM, Timac Agro.

A perfect symbiosis: Curaçao, the Netherlands and financial offshore services, 1951–2013

Analysing Curaçao as an offshore financial centre from its inception to its gradual decline, we find that it originated and evolved in close concert with the demand for such services from Western countries. Dutch banks and multinationals spearheaded the creation of institutions on the island facilitating tax avoidance. In this they were aided and abetted by their government, which firmly supported the Antilles in getting access to bilateral tax treaties, notably the one with the United States. Until the mid 1980s Curaçao flourished, but then found it increasingly difficult to keep a competitive advantage over other offshore centres. Meanwhile the Curaçao connection had enabled the Netherlands to turn itself into a hub for international revenue flows that today still feed both Dutch tax income and specialised financial, legal and accounting services.

Разработка подходов к совершенствованию механизма налогообложения доходов физических лиц в Российской Федерации в условиях цифровизации налогового администрирования (Development of Approaches to Improving the Mechanism of Taxation of Personal Income in the Russian Federation in the Context of Digitalization of Tax Administration)

Russian Abstract: Работа посвящена перспективам трансформации двусторонних налоговых соглашений в цифровых условиях. Для рассмотрения поставленного вопроса авторами исследованы предпосылки к трансформации налоговых систем в условиях роста использования цифровых технологий, а также выделены ключевые налоговые вызовы. Часть из них решается как через ввод странами односторонних мер, так и через присоединение юрисдикций к глобальным консенсусам ОЭСР. English Abstract: The work is devoted to the prospects of transformation of bilateral tax treaties in digital conditions. To address this question, the authors studied the prerequisites for the transformation of tax systems in an environment of increasing use of digital technologies, and identified key tax challenges.

The Network of Bilateral Tax Treaties of the Slovak Republic – Does It Mirror Challenges of the Globalization through Digitalization? A Cluster Analysis Approach

Research background: Globalisations and movement of production factors - especially capital and workforces, call for elimination of double international juridical taxation and consequently for negotiation of bilateral tax treaties. Recently global network of bilateral tax treaties has reached immense size. Purpose of the article: The purpose of this paper is to analyse the network of bilateral tax treaties of the Slovak republic from the point of view of distance and level of development of the Contracting States. Methods: To reach this goal a cluster analysis method is applied where clustering variables are distance between capital cities of the Contracting States and measures of economic development. Findings & Value added: The main finding is that the Slovak republic’s bilateral tax treaties are clustered into 11 clusters, and three of them are the most numerous. This implies, that Slovak republic follows certain pattern when chosing Contracting Party. It is also found, that geographical location and distance have diminishing roles. Instead economic development and atractiveness of the country in terms of GDP per capita and total FDI inflow play more important role. These findings prove, that Slovakia no more follows old-fashioned pattern of chosing Contracting Parties based predominantly on distances, instead it adjust its policy of concluding bilateral tax treaties to globalization through digitalisation trend.

New Puzzles in International Tax Agreements

The G-7’s “global minimum tax” accord—followed by a new version of the OECD’s “Two Pillar Solution” and its endorsement by the G-20—is accepted by many as evidence for international tax cooperation. But recent policy discussions offer no answer to a basic question: What can countries cooperate to achieve? This Article shows that the answers provided by proponents of the new international tax agreement are alarmingly ad hoc, misleading, and incoherent. Scholarship on corporate taxation has also long failed to identify potentials for international cooperation. The more successful international agreements purport to be, in other words, the more puzzling they become. I first examine three rationales recently identified for collective action. The first alleges a transformation in the services trade that supposedly undermines premises of traditional international tax design. The second emphasizes the international community’s need to appease the United States and prevent the latter from starting trade wars. Both make unusual and untenable factual and normative assumptions. A third rationale seems more familiar—countries should cooperate to end tax competition and multinational companies’ tax avoidance—but is at odds with both economic theory and the actual content of the OECD’s proposal. Theoretically, ending tax competitions—whether for productive capital or for corporate headquarters—cannot create gains for all countries. And in terms of policy content, the OECD proposal can more plausibly be read as limiting, rather than enhancing, governments’ capacities to tax MNCs. Older and more basic puzzles in theories of international taxation—concerning source-country taxation, residence countries’ unilateral relief from double taxation, and bilateral tax treaties—compound these new puzzles. Arguably, these puzzles have led tax scholars to abandon a basic social scientific template for explaining cooperation. Indeed, much of economic scholarship takes international tax institutions as exogenously given. I contrast this state of affairs with economic theories of trade agreements—in particular, with the way the “terms-of-trade” theory rationalizes the GATT/WTO regime. To emulate the success of the “terms-of-trade” theory, I argue, certain assumptions that have long prevailed in discourses about international taxation may need to be jettisoned. Only a more fundamental reconceptualization of the subject matter of international taxation can shed light on the true past and future grounds for international tax cooperation.

Saudi Arabia Issues Taxpayers Guidance Concerning Mutual Agreement Procedure under Tax Treaties

On 16 June 2020, Saudi Arabia issued taxpayers guidance for a mutual agreement procedure (MAP) to be used for the resolution of disputes under bilateral tax treaties. Based on the guidance, this article describes the MAP, the conditions and procedure, the process and deadlines for its completion and the implementation of the MAP outcome.

Taxes and Custom: Tax Treaties as Evidence for Customary International Law

ABSTRACT Scholars of public international law have not paid attention to international tax law in the past. This article seeks to fill this vacuum and to foster cross-field research by studying customary international law in international tax law. It assesses the value of international tax law’s most prominent feature for the identification of custom: the dense network of almost identical, bilateral double tax treaties. The primacy of source-based taxation for business profits serves as a test case for this purpose. The International Law Commission’s conclusions on the identification of customary international law constitute the theoretical reference point that informs the empirical analysis. Thus, this article simultaneously serves as a treadmill test to appraise whether the International Law Commission’s conclusions actually offer practical guidance. The analysis culminates in the conclusion that tax treaties have only little value for the identification of customary international law. First, tax treaties alone do not entail representative state practice. Second, tax treaties give rise to the pitfalls of the Baxter paradox. Third, the tax treaty network yields no evidence that any state practice originates from opinio juris. Judging by the evidence brought into play so far, states likely display uniform treaty practice in international taxation because they believe it is in their best interest, not due to any legal conviction.

Toward a Neutral Corporate Tax for the Transportation Industry – Rethinking the Transportation Industry Formula of the Common Consolidated Corporate Tax Base Directive Proposal under EU Law

This paper explores how the Common Consolidated Corporate Tax Base (CCCTB) Directive Proposal under the EU law should be designed to allocate cross-border income earned from MNE taxpayers of the transportation industry. The transportation activity is mobile in nature, and thus creates the difficulty of designing the relevant tax law. Allocating sovereign States’ taxing rights on the cross-border income of the transportation industry is inherently disputed. The OECD Model Convention, as an important starting point for negotiating bilateral tax treaties, has established the ‘effective place of effective management’ (POEM) as the criterion for allocating the primary taxing rights to one single State, where a taxpayer‘s effective place of effective management (POEM) is found. It is an all-or-nothing rationale. Formulary Apportionment (FA) follows an opposite rationale other than the all-or-nothing mentality, by using a formula consisting of different weighting factors to allocate taxing rights for all jurisdictions involved. Taking the metaphor of cross-border taxable income as a pie, a formula would be a knife. At the sub-regional level, such as States of the US, FA is widely adopted. The CCCTB Proposal is the EU’s attempt to transplant FA from the US. Some jurisdictions also adopt a formula in their national corporate tax law for the shipping industry. To our surprise, the CCCTB proposal follows the POEM criterion established in the international tax regime and excludes the shipping and airline industry from its scope of application. Therefore, this paper further discusses if the shipping industry provision under the current CCCTB Proposal is still rational. This paper compares the CCCTB to experiences from OECD and US to seek an answer to this question. In conclusion, since the CCCTB has adopted formulary apportionment as its basic setting, it does not need to follow the traditional international tax regime’s approach of ‘POEM’ adopted by OECD, or the residence criterion adopted by the US, because neither of them can reflect the mobile (while highly-integrated) feature of the international transportation industry or address the old tax-planning scenarios. Instead, this paper argues that the CCCTB should include the transportation industry in the scope of application, and uses both ‘departure’ and ‘arrival’, being equally weighted, for the sales factor of the transportation industry.

Impact of OECD Beps Action 7 Proposals on Modification of Articles 5(4), 5(5) and 5(6) of OECD Model Convention - An Evaluation of Action 7 on the Future of Intra-Group Transactions and Business Models of MNEs in their Cross-Border Investments

The notion of permanent establishment (PE) is one of the most important issues in treaty-based international fiscal law; it is perhaps the single most important and dynamic one, too. With openness in economies, globalisation and rapid development of e-commerce business models, there is a complete change in the way business is carried out throughout the world by multinational companies (MNE). Traditional ways of doing business have given way to modern and rather flexible ways of operating globally. Naturally, taxing rules need to keep up the pace at which businesses are evolving. It is extremely crucial that taxes are paid at the place where substantial activity and operations of multinationals effectively take place. To achieve this, the Organisation of Economic Co-Operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Project identifies Action 7 to prevent the issues of artificial avoidance of PE status. This Action seeks to revamp the definition and scope of PE as is currently existing in Article 5 of the OECD Model Convention on Income and on Capital. Whilst examining the recommendations of BEPS Action 7, the authors will analyse how the existing rules of Article 5(4) (dealing with preparatory and auxiliary activities), Article 5(5) (dealing with Agency PE rule) and Article 5(6) (dealing with exclusion for Independent Agents) are likely to be modified. The authors will also evaluate how these changes are likely to have an impact on Singapore’s existing treaties (if these changes are re-negotiated in existing treaties, whether bilaterally or through the BEPS Multilateral Instrument (MLI)). The paper will also shed light on how these changes could impact business models and supply chains in a post-BEPS world. It must be noted that BEPS Action 7 recommendations are proposed to give effect to the PE Article in existing treaties by way of the MLI, under development by the OECD as per BEPS Action 15 (Developing a Multilateral Instrument to Modify Bilateral Tax Treaties).

Digitization of Taxation in the Changing Business Environment & Base Erosion & Profit Shifting (Beps) Special Reference to India

The ever-increasing digitization of businesses around the world is forcing tax authorities to re-look at the way they regulate compliance of tax rules by the tax payers and collect more efficiently taxes that are due. Most of the tax laws were framed in the 20th century and may no longer be relevant in the digitized world of the 21st century. This paper looks at the need for enhanced methods of tax administration and collection in view of the digitization of businesses, the threat of Base Erosion and Profit Shifting (BEPS) and the need for rapid digitization of tax administration. The paper also focuses on the role played by the Organization for Economic Cooperation and Development (OECD) and the advancement in tax administration achieved by various countries with special reference to India. It is observed that as many as 115 countries are aggressively moving towards digitization as a result of call by OECD for greater co-operation. India, though not part of the OECD, has implemented many measures, especially bilateral tax treaties with 50 countries and is also earnestly pursuing digitization to improve tax collection.

Treaty principal purpose test and domestic business purpose rule for transboundary income in the russian tax law

For twenty-five years, the main purpose test has been present in Russia bilateral tax treaties, but has not been applied. In the case of disputes over the use of bilateral tax treaties, the tax administration applied an internal rule of business purpose. The Federal Tax Service of Russia in 2018 noted the growing role of this internal rule for international taxation. However, with the implementation of the BEPS plan, the treaty rule of the principal purpose test enters into Russian international tax law, and it begets questions. How similar are the Russian domestic rule and treaty rule? Is it possible to apply the practice of applying an Russian domestic rule to a treaty rule?

The Tax Treaty Implications of the Remuneration as Royalties of Intellectual Property and Intangibles

Transferring intellectual property from a higher-tax country where R&D takes place to a lower-tax country is one channel facilitating BEPS and this generates a flow of the remuneration of intangibles from high-tax countries to low-tax countries. These remunerations are defined as “royalties”, but they can assume different legal forms and denomination. These cross-border flows of royalties are regulated by a host of bilateral tax treaties between OECD and non-OECD countries amounting in total to more than three thousands. These treaties generally follow the OECD Model, but also a UN Model exist, while certain countries such as the U.S., adopt their own model (which does not differ dramatically from the OECD Model). In this Article the provisions of the OECD Model will be used as a proxy for the provisions of the numerous existing treaties.

From Source-oriented to Residence-oriented: China’s International Tax Law Reshaped by BRI

The Belt and Road Initiative (BRI), as one of the most remarkable events of international economic cooperation nowadays, has noticeable implications for many areas of study. This article is to explore how BRI, an initiative proposed and championed by China, has influenced China’s international tax system. To answer the question, the article sets two guideposts for depicting a country’s position of international tax policy, namely, the source-oriented tax system and residence-oriented tax system. Based on that, this article puts forward the proposition that there is a trend that China’s international tax system is transforming from source-oriented to residence-oriented. To verify the proposition, this article uses a conceptual and factual approach to analyze the rule-based changes driven by BRI. And those changes are from two aspects, the domestic tax law and the bilateral tax treaty. In addition to them, the top design of BRI with particular reference to international tax policy will be discussed beforehand. In the end, the article is concluded by regarding the proposition as tenable.

Senate Gives Advice and Consent to Ratification of Four Bilateral Tax Treaties

In July of 2019, the U.S. Senate gave advice and consent to protocols updating tax treaties with Spain, Switzerland, Japan, and Luxembourg, after a nearly decade-long period during which no tax treaties were approved by the Senate. This drought was primarily due to the privacy concerns of a single senator, Rand Paul of Kentucky, who deployed the Senate's procedural rules to increase the difficulty of the advice and consent process. Tax treaties with Hungary, Chile, and Poland, as well as a protocol to a multilateral tax convention, remained pending in the Senate Foreign Relations Committee as of mid-August of 2019.

Does Customary International Tax Law Exist?

Customary international law is law that “results from a general and consistent practice of states followed by them from a sense of legal obligation.” “International agreements create law for states parties thereto and may lead to the creation of customary international law when such agreements are intended for adherence by states generally and are in fact widely accepted.” Does customary international law (CIL) exist in tax? There are over 3,000 bilateral tax treaties, and they are about 80% identical to each other, but do they create CIL that binds in the absence of a binding treaty, like for example the Vienna Convention on the Law of Treaties binds the US, which has not ratified it? This chapter will argue that the answer is yes, using four examples: jurisdiction to tax, the permanent establishment (PE) threshold, the arm’s length standard, and non-discrimination.

The OECD BEPS Multilateral Instrument and the Issue of Language

This article discusses the OECD BEPS Multilateral Instrument (MLI) in respect of its policy to implement equally authoritative English and French texts. It evaluates this choice against the background of the policies implemented in the final clauses of all existing bilateral tax treaties and proposes possible solutions to resolve the problems resulting from the MLI final clause. The global tax treaty network is modelled based on a sample of 3,358 tax treaties currently concluded.

The Development of China's Tax Treaties Policy: Taking the Tax Treaties Revisited and Signed by China in the Last Decade as the Sample

This paper argues that, the past ten years is an unprecedented “golden decade” for tax treaties policy in China to take shape. The rapid developments have been closely interwoven with the economic, legal and institutional reforms that have taken place within the country in the larger scale, and deeply affected by the dynamic changes in the global realm of international taxation. Based on the examination of several key provisions under 29 tax treaties China signed and revisited since 2008, this research aims to offer answers to a set of questions such as: what are the differences between the BTTs that China signed with the developed countries and the developing countries? To what extent may the China’s tax treaties network facilitate the outbound investment, particularly the “one-belt-one road” initiative? How will the signature of BEPS multilateral convention (2017) affect China’s existing bilateral tax treaties?