Model Tax Convention Research Articles

Shell Corporations and Beneficial Owners. Current Criticalities and Future Developments from a Multilevel Perspective

SUMMARY This article takes inspiration from the news leak known as the Panama Papers and focuses on the definition of the beneficial owner clause in both tax and anti-money laundering legislation. Specifically, it analyses the OECD Model Tax Convention, the European Directives and the European Court of Justice case law. This matter is closely linked to the use of offshore corporate vehicles for criminal purposes and the main purpose of the article is to concentrate on the existing gaps in these topics, and to propose effective solutions to combat abusive practices.

The Impact of Double Tax Treaties on Inward FDI in ASEAN Countries

This study aims to assess the impact of double taxation treaties (DTT) on FDI inflows in 10 ASEAN countries from 1989 to 2016. There are two objectives of double taxation treaties. The first one is to alleviate the problem of global double taxation, which has a stimulating effect on FDI. The second objective is the sharing of information between governments, which can prevent tax evasion and thus discourage FDI. The findings suggest that new DTTs in ASEAN have a positive but insignificant impact on the FDI inflows into the region. However, the impact of old DTTs on FDI is significantly negative, suggesting that as the age of ASEAN countries’ DTTs could adversely affect FDI inflows. The possible explanation is that most of the ASEAN member countries are developing countries, which have experienced fiscal and regulatory reforms over the past few decades. Those policy reforms may have overtaken the terms of the prevailing bilateral tax treaty, meaning that some of the treaties, if not ratified, could have become obsolete. In addition, the recent trend in bilateral tax treaty negotiations globally has been towards lower withholding tax rates for investment income. Older treaties, which impose relatively high withholding tax rates, may become an impediment to the region’s cross-border investment and hinder economic growth. An examination of the DTTs signed by ASEAN countries further demonstrates that the member states vary considerably in the design of their treaties, in the way they divide up the tax base between source and resident countries, and also in the level of efforts to keep pace with the latest development in the OECD and UN Model Tax Conventions.

Tax measures to combat brain drain: (In) compatibility issues with double tax conventions and a potential way forward

This article analyzes the interaction between domestic tax legislation applied to avoid or combat a brain drain and the OECD and the UN model tax conventions, the two main models used by states in tax treaty negotiations. After it is demonstrated that brain drain taxes are incompatible with the current tax treaty network, the author presents alternatives that could be included in the model tax conventions, and consequently in tax treaties, to establish the compatibility of the measures, as well as a justification for the adoption of these alternatives in tax treaties involving developing countries.

NORMATIVE REGULATION OF BASIC PERMANENT ESTABLISHMENT IN TAX LEGISLATION OF UKRAINE

The basic permanent establishment has been used in the texts of bilateral double taxation treaties since the conclusion of the first ones in the second half of the XIX century. The article is aimed at the characterization of normative regulation of basic permanent establishment in the tax legislation of Ukraine in comparison with their conformity to the provisions of the OECD Model Tax Convention and its Commentaries. Reference to the OECD Model Tax Convention and its Commentaries as a basis for comparison is determined by the fact that it is a recognized and widely used source of interpretation of the provisions of double taxation treaties including the treaties concluded by Ukraine. The comparison of the provisions of the Tax Code of Ukraine and the OECD Model Tax Convention points out the existence of inconsistencies that might have a negative influence on the efficiency of the concept of a permanent establishment in Ukraine and good faith realization of conventional norms on tax matters in Ukraine. There are a few proposals of changes that might help to avoid the undesirable consequences of the abovementioned differences: 1) to replace the words “permanent place of activity” on “fixed place of activity” (Art. 14(1)(143) of the Tax Code of Ukraine); 2) to add the words “but not limited to” after the word “include” at the second part of Art. 14(1)(193) of the Tax Code of Ukraine; 3) to add the words “notwithstanding the provisions of the provisions of the first part of this Article” after the words “except to services of secondment of employees” and “civil rights and duties” at the second part of Art. 14(1)(193) of Tax Code of Ukraine; 4) to provide the mechanism of realization of provisions of Art. 10 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS concluded in November 2016. Keywords: permanent establishment; OECD Model Tax Convention; tax legislation; double taxation treaties; interpretation.

Treaty Allocation Rules, Corresponding Adjustments and Binding Arbitration: A Coherent Method to Prevent Double Taxation

In bilateral tax treaties each self-interested state confers benefits to another State because it extracts from that specific treaty benefits that are superior to those it would extract without resorting to such a treaty (cooperation based on reciprocity). Tax treaties can be modelled as coordination games in which both States’ dominant strategy is to make the same choice (neither of the two States has a dominant strategy). In a bilateral tax treaty, there are two Contracting States (hereinafter ‘CSs’). Each CS can act, depending on the situation, either as the treaty residence-country (hereinafter ‘RC’) or as the treaty source-country (hereinafter ‘SC’). So, for example, in the treaty between France and Japan, in a certain transaction, France is the RC and Japan is the SC, while in other transactions Japan is the RC and France is the SC. So tax treaties are bilateral, are based on reciprocity and regulate the tax aspect of bilateral investments. The following analysis will use the OECD Model Tax Convention on Income and on Capital (hereinafter the ‘Model’ or ‘Convention’ ) as a proxy of existing tax treaties. In most cases, tax treaties operate through so-called attribution rules (or conflict rules) that, depending on the specific types of income, attribute treaty taxing power only to the RC, only to the SC or both to the RC and the SC (Articles 6-22).

Revisiting the Fiscal and Social Security Status of Highly Mobile Workers in the Road and Railway Transportation: Quo Vadis?

The increasing mobility due to globalization and the increasingly integrated nature of regional economies, for example in the European Union, provides an excellent opportunity to subject the fiscal and social security status of international highly mobile workers employed in the road and railway transportation to a critical evaluation. As far as the international taxing rights over cross-border employment income are concerned, most double tax treaties, based on Article 15 of the OECD Model Tax Convention, use ‘the actual physical place of employment’ as the main starting point. However, the criterion of the state where the employee is physically present is insufficiently attuned to the situation of highly mobile workers carrying out activities in the international road and railway transportation. Because of their mobility and the cross-border nature of their activities, highly mobile workers are exposed to complex interpretation and application problems. An excessive fragmentation of (the exercise of) the place of employment by multiple working states can increase the exposure to conflicting characterizations of facts, additionally on the basis of differences across domestic laws, thereby giving rise to a greater potential for unrelieved double taxation. Further inconveniences may arise from the fact that the obligations demanded by social security law are not always geographically aligned with those determining the place of employment for tax purposes. The special focus of the present contribution lies in a critical comprehensive, in-depth attitude and evaluation of the interpretation and application problems with regard to (1) the place of exercise of employment of international transportation workers, and (2) the affiliated (dis) coordination between the tax allocation rules (double tax treaties) and the social security law rules (Regulation (EC) No 883/2004). Suggestions are made for a minimization of the detected application and interpretation problems regarding the tax jurisdiction over employment income of international transportation workers and the provision for better coordination between fiscal and social security law.

Forgotten Commentary on Article 21 of the (1977-2017) OECD Model Concerning Dual Residents: Original Intention of Article 4(1), 2nd Sentence?

A forgotten part of the commentary on Article 21 of the OECD Model Tax Convention posited that, in triangular cases, dual residents could only be considered to be comprehensively liable to tax in the winner state. This is in line with the post-2008 commentary on Article 4. Thus, the discovery of the forgotten commentary appears to contradict the generally accepted idea that the post-2008 commentary on Article 4 altered the interpretation of Article 4. This article examines whether this contradiction is indeed valid.

The Dual System of OECD Model Tax Conventions from the Evolutionary Perspective

This article attempts to analyse, from the evolutionary perspective, the dual system of OECD Model Tax Conventions that arguably came into existence as a result of a tax policy choice that was introduced from the very beginning of works on bilateral model solutions concerning the elimination of international juridical double taxation. So far, this duality has attracted little attention in the literature despite its theoretical importance. This article attempts to fill in this research lacuna. The presented analysis is also important to consider a much needed shift in the tax policy of the OECD towards taxes on gratuitous wealth transfers mortis causa and inter vivos.

Retroactive Application of the OECD Transfer Pricing Guidelines for Interpretation in Transfer Pricing Issues

The position of soft obligations as legal sources is a continuously discussed topic in international law. As policy documents, guidelines and non-binding agreements often are regularly updated, the question of the applicability of different editions to various points in time may arise. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) were revised most recently in July 2017, and these timing issues therefore appear in, for example, the undertaking of historical transfer pricing reviews and audits of years prior to the release of the updated OECD Guidelines. This article explores the arguments for using the new edition of the OECD Guidelines by comparison to an approach discussed in literature on finding guidance from different versions of the OECD Model Tax Convention (OECD Model) and its Commentary.

Issue of Tax Conflict Qualification and its Solution Based on UN Model Tax Convention

Issue of Tax Conflict Qualification and its Solution Based on UN Model Tax Convention

Are International Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules? A Technical and a Political History Approach for a Normative Result

It is difficult to answer the question of whether Tax Treaties Compatible with Controlled Foreign Corporation (CFC) Rules, because there is no explicit mention of CFC rules in the text of tax treaties. It is especially difficult with the OECD Model Tax Convention on Income and on Capital treats corporate entities as separate taxpayers for purposes of applying domestic tax laws and tax treaties. Indeed, there is no tax court with international jurisdiction to solve these issues-so it is important to look at the decisions from various domestic Supreme Courts. The ECJ tries not to answer issues of tax treaties between countries. The crux of this main contention seems to be that CFC rules result in attributing CFC profits to controlling shareholders in the country of corporate residency-the shareholders out of parent subsidiary, that is-even though such profits were never distributed by the subsidiary the CFC. This fundamentally contradicts the basic structure of the OECD model because there were never profits distributed cross-border and there was no application of Article 7 of the treaty or withholding taxes. Indeed, the only cognizable time when this problem could arise is when there is actual base erosion and profit shifting that would trigger use of the CFC rules by a tax administration.

The Meaning and Scope of the Ancillary Principle Under Model Tax Conventions

This article discusses the meaning and scope of the ‘ancillary principle’ as laid down in various provisions of the OECD, UN and US Model Tax Conventions and the Commentaries thereon, i.e. the principle according to which if, under a mixed contract, an activity is ancillary to another main one, the former transaction is to receive the tax treatment accorded to the latter. Although the ancillary principle is specifically considered in various articles of the Model Tax Conventions and the Commentaries thereon, neither the meaning of the word ‘ancillary’ nor the scope of such rule is precisely clarified. The term ‘ancillary’, in fact, takes on different meanings and, thus, has divergent scopes in the relevant provision of each tax treaty. This may eventually cause two states to understand and apply the principle in a given case differently, thus leading to situations of double taxation or non-taxation. Moreover, a far-stretched interpretation of the principle could result in an erosion of the source state’s taxing rights in favour of exclusive residence-based taxation. Lastly, despite being influenced by the need to simplify taxpayers’ obligations and to facilitate their monitoring by tax authorities, the application of the ancillary principle raises several concerns in terms of potential competitive distortions between domestic and international businesses.

Confronting Conflicts of Qualification in Tax Treaty Law: The Principle of Common Interpretation and the New Approach Revisited

The principle of common interpretation and the new approach to article 23 A/B of the OECD Model Tax Convention are two concepts in tax treaty interpretation to avoid double taxation and double non-taxation resulting from conflicts of qualification. Against the backdrop of the introduction of similarly working approaches, namely the linking rules of BEPS Action 2, it seems appropriate to re-evaluate the doctrinal foundation and practical applicability of both concepts. Since the effectiveness of the principle of common interpretation and the new approach depends on their international recognition, the analysis is based on a comparative study including six jurisdictions, representing common and civil law: Australia, Belgium, Canada, Germany, the United Kingdom and the United States. In the first part of this article, the principle of common interpretation is examined, while the second part assesses the new approach. The third part concludes and gives proposals for the development of a joint methodological understanding of both concepts.

The Use of Value Chain Analysis in a Profit Split

This article provides an introduction to the profit split method (PSM), giving a quick look into its evolution throughout time and explaining how it shall be identified and applied as the most appropriate transfer pricing method, while demystifying the terms “value creation” and “value chain analysis” (VCA) and explaining why they were introduced by the OECD in the Action Plan on Base Erosion and Profit Shifting (hereinafter BEPS Actions). This article elaborates on what a VCA should consider, how it should be conducted and what should be the outcome, and addresses the practical aspects of the use of the PSM in a VCA, based on a numerical example in the light of the OECD’s recommendations in, inter alia, the OECD Model Tax Convention, the OECD Transfer Pricing Guidelines, the BEPS Actions, discussion drafts and public consultations on the application of the PSM.

Virtual Permanent Establishments: Indian Law and Practice

The virtual permanent establishment (virtual PE) was first proposed to tackle growing concerns that multinationals could artificially avoid PE status by rendering cross border supplies of goods and services through electronic means. The virtual PE concept therefore sought to link taxation with value creation: in most cases, this involved the application of source taxation to non-resident entities that had no physical presence in the source state. With increasing digitalization, the virtual PE concept has become crucial to addressing tax avoidance and base erosion, particularly by multinational enterprises and cross border suppliers of goods and services. This article traces the evolution and treatment of the virtual PE concept under Indian law against the background of the broad framework prescribed under international and comparative tax law. Based on an analysis of Indian judicial precedents on the topic, the authors believe that Indian courts have progressively watered down the requirements necessary to trigger the existence of a PE. Although the lowering of thresholds is in the context of digital businesses where the courts have sought to tax income in India through any tangible or physical nexus, the lower thresholds could arguably be applied in other situations. Furthermore recent reservations by India to the revised OECD Model Tax Convention on Income and on Capital (OECD Model) and changes in the domestic tax laws introduced in the 2018 Budget also indicate an intent to lower the threshold for the creation of nexus, for both digital and other businesses operating in the Indian market. This potentially raises the level of uncertainty with regard to many transactions which, in the past, were not questioned as being undertaken by a PE and which may, in certain instances, lead to absurd results. Additionally, the struggle between adopting a multilateral solution such as the virtual PE appears to be slowly giving way to uncoordinated and unilateral levies, such as India’s recent equalization levy. Several European countries are now considering similar unilateral measures. This would lead to double taxation, have a chilling effect on cross border trade, and undercut the foundation of the international tax order by bypassing a stable and clear treaty network. Therefore, there is a need to address the complexity of the concept of a virtual PE and achieve consensus before the world crosses a tipping point, after which unilateral solutions may become the norm. From an Indian perspective as well, this is crucial if India is to achieve its publicly stated goal of a USD 1 trillion digital economy in the next four years.

The Independent Agent Exception and Group Membership

This article considers the independent agent exception to the dependent agent permanent establishment rule in income tax treaties. The author analyses the impact of group membership on the availability of the independent agent exception under the 2014 and 2017 versions of Article 5(6) the OECD Model Tax Convention. Whereas the 2014 version did not explicitly take into consideration group membership for the application of the independent agent exception, the 2017 update marks a shift in policy as the quasi-exclusivity of the action of an agent on behalf of closely related enterprises now excludes the independent agent exception. After analysing in depth the Commentary on the two versions of Article 5(6) of the OECD Model, the policy reasons justifying this shift are investigated, in particular the possible presumption of tax avoidance that seems to be pinned on multinational enterprises. The author emphasises how the change brought to Article 5(6) relates to the lower threshold for a dependent agent PE under the new Article 5(5), the general principles of transfer pricing, and the additional guidance for the attribution of profits to permanent establishments. The author concludes that the change brought to Article 5(6) is mostly one of principle, but that to the extent that this amendment has a material effect on the taxation of multinational enterprises, it expresses more a tax policy concern than a need to prevent tax avoidance.

EVOLUTION OF THE BENEFICIAL OWNERSHIP CONCEPT: MORE THAN HALF OF CENTURY OF UNCERTAINTY AND WHAT HISTORY CAN TELL US

The beneficial ownership concept has constituted for more than half a century one of the most fundamental and debated issues in the application of tax treaties. This article goes back to routes of this term explaining the reason of its original inclusion in the OECD Model Tax Convention and why ultimately such inclusion may have not been necessary. Then it analyses the historical developments of beneficial ownership in the OECD Model Tax Convention. For that purpose it considers different interpretations adopted by jurisdictions (particularly in China) and local courts delving into some of the landmark cases on the subject. Finally it provides a detailed analysis of the current meaning of beneficial ownership considering the most recent developments in the Commentary to the OECD Model Tax Convention.

The Role of the ‘Other Income’ Article Within the Structure of Tax Treaties

Article 21 of the OECD Model Tax Convention on Income and on Capital has seldom captured the attention of commentators, perhaps because of its elusive nature and yet Article 21 plays an important role within the system of the tax treaties. Indeed Article 21 has a simple structure as it consists of just an allocation rule (Article 21 § 1) together with a rule on the force of attraction on other income effectively connected to a permanent establishment (Article 21 § 2). Article 21 it also has two essential dimensions that attribute to it a central role in the structure of the Model: the ‘catch-all dimension’, and the ‘third-country dimension’. The ‘catch-all dimension’ is that Article 21 plays a residual role in respect of all the other classes of income regulated by tax treaties and focuses on income ‘other than’ that falling in other treaty rules (the so-called ‘other income’): by taxing the other income Article 21 fills gaps in the structure of the treaty but does not create new taxable situations. The ‘third-country dimension’ is that Article 21 is the only treaty rule that deals expressly with income sourced in third countries (i.e. countries that are neither the treaty residence-country nor the treaty source-country. The combination of these two essential dimensions of Article 21 provides a matrix in which the analysis of Article 21 in this article is divided into two main parts: first, the analysis of other income ‘not dealt with by other articles of the treaty’, i.e. sourced in the SC (section 1); and second, the analysis of other income ‘from sources not expressly mentioned’, i.e. sourced in third countries (section 2).

Related Parties as Used in Transfer Pricing

There is a need to provide more clarity about the meaning of the term “associated enterprise” in article 9 of the OECD Model Tax Convention (OECD Model), as it serves the objective of the elimination of economic double taxation and ensures that transactions between associated enterprises are conducted at arm’s length. Given the increasing focus on transfer pricing, a rise in the number of transfer pricing disputes is expected, and correspondingly article 9 of the OECD Model and the relevant tax treaties will be applied more often and to a greater extent to eliminate economic double taxation.

The use of the OECD Model Tax Convention as an inrpretative aid: The static vs ambulatory approach debate considered from a South African perspective

Most tax treaties (including South Africa