Model Tax Convention Research Articles

THE ROLE OF THE COMMENTARY TO THE OECD MODEL TAX CONVENTION ON INCOME AND ON CAPITAL IN THE BULGARIAN TAX LAW

The current article aims to outline the role of the Commentary to the OECD Model Tax Convention on Income and on Capital as an interpretative tool in Bulgarian tax case law. Divergent approaches both from the Bulgarian National Revenue Agency and the Bulgarian Supreme Administrative Court constitute divergent practices that, in author’s opinion, may lead to controversial and sometimes not fair tax treatment. According to the author, it is recommendable that the competent Bulgarian authorities apply a unified approach to this issue.

UN MTC Article 26: Inequitable Exchange of Information Regime—Questionable Efficacy in Asymmetrical Bilateral Settings

The United Nations Model Tax Convention between Developed and Developing Countries (UN MTC) Article 26 charts out an exchange of information (EOI) regime “between developed and developing countries”, feigning that it is more favorable to the latter set of nations. Contrarily, the Organization for Economic Cooperation and Development (OECD) MTC Article 26, is professedly geared to protect and promote interests of OECD members—“the club of the rich”. Even a cursory comparative look at the two MTCs intriguingly reveals a lack of dissimilarities, and irresistibly leads to the conclusion that, materially, both provisions are identical. The situation gives rise to a paradox, whereby developing countries that are completely at different levels of development have broken governance structures, convoluted fiscal and criminal justice systems, and struggling tax administrations, and have been yoked into a multilayered EOI regime, which stemmed from an intra-OECD statecraft imperative, and is pre-dominantly beneficial to developed countries. The new normal contributes towards enhancement and deepening of the embedded inequities in the neocolonial economic order. The paper seminally dissects the strains generated by absence of dissimilarities between the two MTCs vis-à-vis Article 26, and posits that, in fact, this fundamentally being a developed country project, developing countries have been exploited as ‘beasts of burden’ merely to promote the economic interests of dominant partners in the relationship, and by doing so, sheds light on and galvanizes the unjustness latent in the international taxes system—an inherently unequal and lopsided affair. It also delves deeper into an axiological normative evaluation of the extant EOI regime, and finding it untenable, urges a larger paradigm shift. In fact, the UN’s meek convergence with the OECD on EOI regime, ditching developing countries and leaving them to fend for themselves in this critical area of international taxation, is the scarlet thread of the paper.

Tax Aspects of the Metaverse: Is a Pillar Three Coming?

The metaverse and Web 3.0 are (again) going to change the digital economy and its business models as we know them and give rise to key issues from a tax perspective. It is thus expected that the current international tax principles, the tax challenges raised by OECD BEPS Action 1 for the digital economy and, more recently, Pillar One new taxing rights (which have yet to be implemented) could soon become outdated. This article illustrates, with the support of some examples, what the future challenges of international taxation might be – considering, among other things, the potential coexistence of the “old” principles under the OECD Model Tax Convention and Pillar One – and how the metaverse might have an impact on business models and the real world (including by considering the role and interactions of cryptocurrencies, NFTs and blockchain technology, which are key to the metaverse’s operations) with a focus on how taxing rights among the different countries involved in the metaverse are to be attributed.

Taxpayer protection standard in international tax disputes

The research project aims to find the most optimal solution to develop the current level of taxpayers' guarantees in the tax treaty disputes resolution procedures.The subject of the article is the analysis of the case law of the European Court of Human Rights on application and interpretation of Article 6 “Right to a fair trial” of the European Convention on Human Rights in the context of the tax treaty disputes resolution procedures.The Author believes that the standard of protection of human right to a fair trial can be used as a starting point for the development of a taxpayer protection standard in the tax treaty disputes resolution procedures.The methodology of the research includes the logical and analytical methods, such as analysis and synthesis, induction and deduction, as well as formal legal interpretation of the European Convention on Human Rights and the case law of the European Court of Human Rights.The key findings are the following. Currently, the international tax disputes resolution procedures under tax treaties based on the OECD / UN Model Tax Conventions are contrary to Article 6 of the European Convention on Human Rights. The mutual agreement procedure, which provides the taxpayer with the opportunity personal participation, could eliminate such a contradiction.The main results, scope of application. The study showed that two approaches in relation to application of the Article 6 of the European Convention on Human Rights to tax disputes can be defined – (a) formal and (b) “substantial”.Formally, the guarantees of Article 6 of the European Convention on Human Rights do not apply to taxpayers in tax treaty disputes resolution procedures, i.e. mutual agreement procedure and arbitration, at least as long as a taxpayer has access to the national court of one of the contracting states to protect the violated rights. Under the case law of the European Court of Human Rights cross-border tax disputes are not typical category of disputes. At the moment the European Court of Human Rights does not express a position on the merits of such disputes with reference to the wide discretion of states in the field of taxation.Nevertheless, according to the “substantial” approach it is necessary to extend guarantees of the right to a fair trial to taxpayers in the tax treaty disputes resolution procedures. This conclusion is based on the fact that the national courts cannot be treated as an effective means of protection of the rights of taxpayers as it is determined by the Article 13 of the European Convention on Human Rights. This approach is in line with the trend set by EU Directive 2017/1852 on tax dispute resolution mechanisms in the European Union, as well as the idea of foreign researchers to develop a global standard for protecting the rights of taxpayers.In the Author’s view, compliance with the fair trial guarantees requires provision of direct participation of the taxpayers in the tax treaty disputes resolution procedures. In this case, the taxpayer will receive the opportunity to be heard and to review all the evidence and procedural documents on the case. The participation of the taxpayer will mitigate the key drawback of the mutual agreement procedure - the lack of a guarantee of a final decision on the case. This is especially important for those states that do not use arbitration, such as Russia.The main conclusion is that the application of the standard of protection of human right to a fair trial in relation to the taxpayers in the tax treaty disputes resolution procedures is an efficient way to develop the current mutual agreement procedure and arbitration and to increase the confidence of taxpayers in these mechanisms.

Comments on the OECD Proposal for Secret and Mandatory Arbitration of International Tax Disputes

The Organization for Economic Co-operation and Development (OECD) has proposed amendments to its Model Tax Convention and Commentary that would establish a system for the mandatory arbitration of tax disputes between two treaty countries when the tax officials of those countries have been unable to resolve those disputes within a two-year period.' The proposal is undoubtedly well-meaning and does address a small but significant problem - the "rare cases" (as characterized by the OECD) of potential double taxation that are unresolved through the existing tax-treaty mechanism.Nevertheless, as discussed below, the public policy goals of this proposed system are at best obscure, and the risks to sound administration of national tax systems are great. The OECD's goal seems to be to please the international business community when the goal ought to be to advance the public interest in a transparent and unbiased system.

Is Soft Law Making Hard Law Too Hard?

Soft laws are created for many reasons to serve various purposes. This article focuses on acts of soft law that are adopted to facilitate the process of applying hard law (or complying with it) and to standardize the understanding of international agreements. In the field of customs law, one can point, for instance, to opinions adopted by the World Customs Organisation. The Organisation for Economic Co-operation and Development (the OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and the Commentary to the OECD Model Tax Convention on Income and on Capital are globally recognized examples of the tax arena. The side effects of the application of acts of soft law in the fields of tax law and customs law are presented and analysed. Interpretative problems are observed at the international level, whereas clear-cut side effects often occur domestically. customs classification – World Customs Organisation (WCO) – double taxation conventions – Organisation for Economic Co-operation and Development (the OECD) – Model OECD – OECD Transfer Pricing Guidelines – OECD Commentary – interpretation

The Role of 'Commercial Reasons' and 'Economic Reality' in the 'Principle Purpose Test' under Art.29(9) OECD Model Tax Convention 2017

The Role of 'Commercial Reasons' and 'Economic Reality' in the 'Principle Purpose Test' under Art.29(9) OECD Model Tax Convention 2017

Transfer Pricing of Trademark: The Legal Restrictions Regarding the Application and Interpretation of the Arm’s Length Principle – The Finnish Approach – Part I

This article discusses the legal restrictions regarding the application of the arm’s length principle contained in the Finland’s national tax law and how the national arm’s length principle can be interpreted, taking into account the principle of legality and the doctrine of sources of law. In addition, this article includes a brief analysis of the reasons why the national arm’s length principle contained in Finland’s national tax legislation differs from the arm’s length principle contained in article 9 of the OECD Model Tax Convention.

The Ability to Pay and Economic Allegiance: Justifying Additional Allocation of Taxing Rights to Market States

The OECD/G20 Inclusive Framework and the UN are working intensively on how to change the allocation of taxing rights to cross border income and to adapt the international tax regime to the digitalization of the economy. A stated aim is that more taxing rights should be allocated to the market states. However, during the process it has become clear that it remains uncertain why the allocation of taxing rights should be changed. In this article, it is argued that the allocation should continue to be justified by the principle of economic allegiance in accordance with the ability of the MNEs to pay taxes. On this basis, it is analysed whether the following three measures are justifiable: the new nexus under the Pillar One Blueprint, the inclusion of software in the definition of royalties in the UN Model Tax Convention and the implementation of a shared taxing right for automated digital services in the UN Model Tax Convention. Allocation of taxing rights, ability to pay principle, economic allegiance, single tax principle, Inclusive Framework, Pillar One Blueprint, OECD Model Tax Convention, UN proposals on shared taxing rights, UN Model Tax Convention, automated digital services.

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.

The OECD Model Tax Convention and its commentaries as a source of interpretation of double taxation treaties in Ukraine

Interpretation of double taxation treaties is of utmost importance for application of their norms according to the criteria of good faith in compliance with the provisions of the Vienna Convention on the Law of Treaties. At the same time, there is no consensus in understanding the role of the OECD MC and its Commentaries as means of interpretation of double taxation treaties. As it is demonstrated on the basis of the development of court practice in Ukraine, the present situation does not add certainty to implementation of double taxation treaties and might even have the negative effect on investment climate in a state of source of income. The article does also contain the ways of improvement of application of the OECD MC and its Commentaries during the implementation of double taxation treaties of Ukraine including (1)preparation of the letter on issue of application of the OECD MC and its Commentaries as a source of interpretation of double taxation treaties by the Supreme Court of Ukraine, (2) granting of the technical assistance to tax authorities of Ukrainein the area of application of double taxation treaties in accordance with the international standards such as the OECD MC and its Commentaries and (3) translation of the OECD MC and its Commentaries into Ukrainian language.

Requirements for assuming a permanent establishment under Art. 5 OECD Model Tax Convention

In January 2019, the German Federal Finance Court defined the legally binding requirements with respect to a fixed place of business being a matter of a permanent establishment according to German law, thus the revenue generated being subject to the German taxation.This article addresses the research question ‘Which criteria have to be met by a permanent establishment to be effective for tax purposes?’Regarding the methods, the article reviews relevant literature and case law to identify the prevailing and dissenting opinions on the requirements for assuming a fixed place of business under Art. 5(5) OECD-Model Tax Convention. As to the question whether one can refer to a fixed place of business as a permanent establishment, the courts use to differentiate between Civil Jurisdiction and Common Law. For the sake of clarity, the courts coined the article 5 of the OECD[1] Model Tax Convention. In accordance to the abovementioned Model Tax Convention, binding provisions were defined on the international level for both, countries using the Common Law as well as for those using the Civil Law, with respect to the requirements as to a permanent establishment and the resulting country of taxation to be applied. In doing so, the question arose whether for instance a lockbox would represent a permanent establishment or not.However, the contracting states did not succeed in determining clear requirements as to the existence of the establishment in question. In fact, they left it to the state in question to define their respective double-tax agreements according to their own needs.

In-kind Contributions: Taxation of International Consortium Workers

In 2009, consistent with its objective to support and develop a European research infrastructure, the European Union (EU) created a new organizational form for research collaborations: the European Research Infrastructure Consortium (ERIC). Since then, 21 different ERICs have been established in the EU Member States; the largest being the European Spallation Source (ESS). The financing of this ERIC is dependent on in-kind contributions of goods and labour from the various Member States of the ERIC. This model of financing the ERIC instigates questions about which state has the right to tax that labour. In terms of taxation of the workforce, the ERIC is different compared to EU institutions or international research organizations such as the European Organization for Nuclear Research (CERN) for which taxes are levied at an organizational level rather than at a state level. This entails that the taxation of the workforce of the ERIC becomes more complex as the allocation of taxing rights on a state level is dependent of the applicable tax treaties entered into between the host states of the ERIC and Member States that are contributing towards the construction of the ERIC. Accordingly, the income from the work performed by the personnel may fall both within the scope of Article 15 as well as Article 19 of the OECD Model Tax Convention. European Research Infrastructure Consortium (ERIC), European Spallation Source (ESS), European Organization for Nuclear Research (CERN), OECD, Article 15, Article 19, public legal entities, government service, income from employment, in-kind contribution.

The Principal Purpose Test’s Burden of Proof: Should the OECD Commentary on Article 29(9) Specify Which Party Bears the Onus?

Unlike many other provisions of the OECD Model Tax Convention on Income and on Capital (2017), the principal purpose test (PPT) of article 29(9) is new and untested by domestic tax authorities and national courts. Much remains unknown about how the PPT will be implemented in practice, particularly with respect to its burden of proof. Recent academic literature has raised the concern that divergent interpretation and application of the PPT’s burden of proof may either undermine the PPT’s own purpose or unfairly favour one party over the other. This article examines whether these concerns are justified and, if so, whether the Commentary on Article 29(9) should include more prescriptive language with respect to the burden of proof in order to address them.

Tax treaties between Slovakia and the Middle East countries

The objective of this article is to provide a basic systematic review of tax treaties between Slovakia and the Middle East States and their similarities and differences as compared to the standard OECD/UN Model Tax Conventions. The methods used include abstraction, comparison, analysis, synthesis, induction, deduction, and summarization. Findings include diverging practice concerning the scope and objective of double tax treaties such as criteria for residency, zakat provisions, transfer pricing rules, and anti-abuse rules. Taking into account the context of Slovak administrative practice and lack of experience with double tax treaties this diverging practice may lead to occasions of tax treaty override.

Because not always B comes after A: Critical Reflections on the new Article 12B of the UN Model Tax Convention on Automated Digital Services

On April 20th, 2021, the UN Tax Committee approved the final version of the new Article 12B to be incorporated into the 2021 version of the UN Model Tax Convention. In the absence of a Permanent Establishment or physical presence of the service provider in the Source State, Article 12B allows a Contracting State to tax income from automated digital services paid to a resident of the other Contracting State on a gross basis at the rate negotiated bilaterally with an option to the taxpayer to pay tax on a net profit basis. The paper analyzes the new article from a critical perspective and argues that: 1) The new article is unnecessary as the alleged need for the new article is only the result of the restrictive and incorrect reading of Article 12A of the UN Model Tax Convention 2017 made by the Commentaries to the Model. 2) The new article is not only unnecessary but also counterproductive as it jeopardizes the institutional prestige of the Committee on Fiscal Affairs, extraordinarily and unnecessarily reduces the scope of application of Article 12A, exacerbates the already severe problems of conceptual delimitation between Fees for Technical Services and Automated Digital Services and, therefore, between Articles 12A and 12B and, finally, introduces serious asymmetries in the treatment of these two types of services. The paper closes with some advice for those States that have negotiated conventions containing Article 12A or similar provisions and intend to retain their taxing rights on automated digital services without the need to renegotiate their conventions.

International Tax Planning: A Perspective on the Principal Purpose Test

This article provides a detailed review and analysis of the commentary on article 29(9) of the Organisation for Economic Co-operation and Development's (OECD's) model tax convention, the so-called principal purpose test (PPT). The PPT is intended to deny a treaty benefit where obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in the relevant circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty. The analysis distills the various principles that are reflected in the OECD commentary, compares those principles with principles developed in Canadian jurisprudence involving similar tests applied under the Income Tax Act, and highlights some uncertainties; but ultimately, it is intended to contribute to the process of better understanding how the PPT may affect the interpretation and application of Canada's numerous income tax treaties.

Taxation of cross-border digital transactions: development of approaches to income classification

The subject. The developing approaches towards the classification of various types of income received as a result of electronic transactions for the purposes of domestic tax legislation and double tax treaties at the level of international tax governance and at the level of Russian tax legislation and practice. The aim of this paper is to test the hypothesis that the legal approach and criteria developed in the course of work of global tax governance institutions (OECD and UN) towards income classification from cross-border transactions in electronic form can be used as a basis for legal approach towards this issue in Russia. The authors use the methods of comparative legal analysis and logical-analytical method. In particular authors perform the detailed review of the related provisions of OECD and UN Model Tax Conventions, commentaries to them and global tax governance expert group’s position and contrast it against the Russian legal practice relating to the subject. The main results, scope of application. Uncertainty in the income classification may arise for almost any type of digital transactions, since income received can fall under at least three different categories. Incorrect legal classification may result in double taxation, non-taxation and distortion of neutrality. There is still ambiguity in the development of international consensus approach towards the issue. There are developing approaches to the characterization of income in the comments to the OECD and UN Model Tax Conventions, however, they can hardly be called fully elaborated due to the specific nature of the digital transactions. The similar situation can be observed in Russian tax legislation where the issue of digital transactions creates a lot of uncertainty. The analysis of domestic court practice indicates the absence of the national approach to the classification of income due to the small number of court cases. On this basis, an attempt was made to form a theoretical and methodological model of classification of digital payments for the purpose of applying the corporate income tax, based on the provisions of domestic law and recommendations of OECD and the UN. Conclusions. The authors find that despite of the presence of some guidance towards characterization of income from digital transactions at the level of OECD and UN a stable legal framework is strongly needed in the domestic tax law. The approach towards classification proposed in this article can be used as a reference point for further academic and practical discussion.

Double Taxation Treaty Interpretation: Lessons from a Case Down Under

In the Australian case of Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation (the Bywater case) the Australian High Court dealt with the question of whether certain companies were resident in Australia for income tax purposes. The majority answered this question by applying Australian domestic law. In a separate but concurring judgement, Gordon J also discussed the interpretation and application of the relevant double taxation treaty. This contribution analyses Gordon J's judgment to extract guidance from it for the South African courts on their interpretation of double taxation treaties.
 It is submitted that South African courts should also follow the "first step" proposed by Gordon J when interpreting double taxation treaties. South African courts may find Gordon J's judgment "instructive" when dealing with the interpretation of the "place of effective management" concept in both domestic law and double taxation treaties. In his judgment Gordon J favours the goal of common interpretation and it is argued that South African courts should follow this example and explicitly support this notion in applicable cases. From Gordon J's judgment and the judgement in Krok v Commissioner, South African Revenue Service, it is deduced that the positions in South Africa and Australia are similar in that the courts in both countries will be bound by the principles of Articles 31 and 32 of the Vienna Convention on the Law of Treaties when interpreting double taxation treaties. Moreover, Gordon J's judgment indicates that the domestic principles of interpretation should not be used in the interpretation of double taxation treaties. Recent South African cases have suggested that there are no differences between the South African domestic principles of interpretation and those contained in Articles 31 and 32 of the Vienna Convention on the Law of Treaties. This contribution submits that there are many similarities between the two, but that the rules are not exactly the same. South African courts should be aware of these differences and rather apply the rules of public international law, including those contained in the Vienna Convention on the Law of Treaties, when they interpret double taxation treaties. Gordon J specifically identifies the category of the Vienna Convention on the Law of Treaties in which he places the Commentary on the OECD Model Tax Convention, to rely on it for his interpretation of the relevant double taxation treaty. South African courts may well learn from this approach, to create more certainty in the process of interpreting a double taxation treaty.

Fiscally Transparent Entities in Tax Treaty Law: Navigating Bermuda’s Triangle

Typically, the tax treaty entitlement to fiscally transparent entities (‘FTEs’) has been a matter of debate in the arena of international tax. FTEs are not taxed at the entity level but at the level of the persons who have an ownership interest in that entity. Hands down, it is one of the most complex spheres of the tax treaty law. The crux of this complexity lies in the divergent principles applied by various nations concerning entity characterization rules, i.e., the tax treatment of an entity as ‘taxable unit’ or ‘fiscally transparent’. This technical paper concentrates on examining the contours of FTEs in the international tax realm with this background. The paper first discusses the basic tax structure of partnerships in a global context. This analysis is followed by the tax treaty framework for FTEs, the nuances under the select articles of model tax convention impacting tax treatment of FTEs, and the position of the global judicial precedents on this contentious topic. The paper also discusses the position of Indian judicial precedents and the triangular cases in this context.