un handbook dtt admin tax

8/13/2019 UN Handbook DTT Admin TAX

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United Nations Handbook

on Selected Issues in

Administration of

Double Tax Treatiesfor Developing Countries


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United Nations Handbook

on Selected Issues in

Administration of

Double Tax Treaties

for Developing Countries

Edited by

Alexander Trepelkov, Harry Tonino and Dominika Halka

asdfUnited NationsNew York, 2013


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Copyright June 2013

United Nations

All rights reserved

Te views, opinion and interpreta-

tions expressed in this publication

are those o the authors and are

not necessarily those o the UnitedNations or any o the organizations

that sponsored and/or contributed

to its development.

For urther inormation, please contact:

United Nations

Department o Economic and Social Affairs

Financing or Development Office,

United Nations Secretariat,

wo UN Plaza, Room DC2-2170New York, N.Y. 10017, USA

Tel: (1-212) 963-7633 Fax: (1-212) 963-0443

e-mail: [email protected]


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Preace

Over the past decade, the relationship between the mobilization ofinancial resources or development and international tax coopera-tion eatured prominently in the outcome documents o major UnitedNations conerences and summits on economic and social mat-ters. Tese include the 2002 Monterrey Consensus, the 2008 DohaDeclaration on Financing or Development, as well as the outcomes othe 2009 Financial Crisis Conerence and the 2010 MDG Summit. Inthe Doha Declaration, or instance, Member States recognized multi-

lateral, regional and national efforts aimed at improving developingcountries abilities to negotiate mutually beneficial investment agree-ments and to promote good tax practices.1

ax treaties play a key role in the context o international coop-eration in tax matters. On the one hand, they encourage internationalinvestment and, consequently, global economic growth, by reducingor eliminating international double taxation over cross-border income.

On the other hand, they enhance cooperation among tax administra-tions, especially in tackling international tax evasion.

Developing countries, especially the least developed ones, ofenlack the necessary expertise and experience to efficiently interpret andadminister tax treaties. Tis may result in difficult, time-consumingand, in a worst case scenario, ineffective application o tax treaties.Moreover, skills gaps in the interpretation and administration oexisting tax treaties may jeopardize developing countries capacity to

be effective treaty partners, especially as it relates to cooperation incombating international tax evasion. Tere is a clear need or capacity-building initiatives, which would strengthen the skills o the relevantofficials in developing countries in the tax area and, thus, contributeto urther developing their role in supporting the global efforts aimedat improving the investment climate and effectively curbing interna-tional tax evasion.

ax treaties, and model conventions, generally do not includeany guidance on how the provisions o treaties should be applied,

1A/RES/63/239, annex, paras. 16 and 25.


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leaving this matter to the domestic law o the contracting States.Although there is a vast and growing body o literature, and ample

supply o training materials dealing with the substantive provisions otax treaties and the relationship between them and the provisions oa countrys domestic law, relatively little assistance is available regard-ing the practical application o tax treaties. Tis Handbook, resultingrom a joint project o the Financing or Development Office o theUntied Nations Department o Economic and Social Affairs and theInternational ax Compact, is intended to contribute to filling this gap.

How do tax treaty provisions apply in practice? Tis question is

addressed by the ten chapters comprising this Handbook. Tey werewritten by international tax experts, benefiting rom extensive con-sultations with numerous experts rom the National ax Authoritiesand Ministries o Finance o developing countries. Te Handbookdescribes best practices o countries in administering their tax trea-ties and identifies common denominators to the extent possible. Teemphasis is on the practices o the tax authorities o developing coun-tries. Teir experts may be in a better position to assist other develop-

ing countries with less experience in this area, because they olloweda similar path, ofen not so long ago. An effort is made to keep thematerial basic and practical and to ocus on the procedural aspects oapplying the treaty rather than on its substantive rules.

Tis publication was conceived, written, discussed, revised andpublished during a seven-month period, thanks to the enthusiasm andcommitment o all involved. We hope that it serves to stimulate ur-ther discussions on the topic o the administration o tax treaties,

including at capacity-development events organized by internationalorganizations active in the area o international tax cooperation.

Alexander repelkov

Director, Financing or Development OfficeDepartment o Economic and Social Affairs


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Acknowledgements

We would like to thank the German Federal Ministry or EconomicDevelopment and Cooperation (BMZ) or its generous financial sup-port, which has made the implementation o this project and thepublication o the UN Handbook on Selected Issues in Administrationo Double ax reaties or Developing Countries possible. We wouldalso like to thank our partner, the International ax Compact (IC)or their financial and technical support throughout this project andor acilitating the contacts with the experts within the National ax

Authorities and Ministries o Finance o developing countries.

We would like to express our deepest appreciation and thanksto all the people and organizations involved in implementing the jointUN-IC project and in producing this Handbook during a seven-month period.

We wish to thank the authors o the chapters, which comprisethis Handbook, or delivering such a superb product despite theextreme time pressure. Most o all, we are grateul to Proessor BrianJ. Arnold and Proessor Hugh J. Ault, who, in addition to deliveringtheir respective chapters, wholeheartedly supported this project romits inception and assisted us in securing commitments rom the otherauthors, as well as with invaluable advice and inspiration.

We also wish to acknowledge the contribution o experts romthe National ax Authorities and Ministries o Finance o develop-

ing countries who contributed their views and provided inputs tothe draf chapters, namely: Mr. Ulvi Yusiov (Azerbaijan), Mr. SyedMohammad Abu Daud (Bangladesh), Ms. Sabina Teresa Walcott-Denny (Barbados), Ms. Pen Sopakphea (Cambodia), Mr. Adrienerence ocke (Cameroon), Ms. Natalia Aristizbal (Colombia), Mr.Mario Ricardo Osorio Hernandez (Colombia), Ms. Ana YeseniaRodrguez (Costa Rica), Ms. Evelyn Maria Molina (Costa Rica), Mr.Edgar Octavio Morales (Dominican Republic), Mr. Galo AntonioMaldonado (Ecuador), Mr. Mamdouh Sayed Omar (Egypt), Mr.Hesham Ismail Abdelmonem Khodair (Egypt), Mr. Ruslan Akhalaia(Georgia), Ms. Marine Khurtsidze (Georgia), Mr. Samuel McLordChekpeche (Ghana), Mr. Eric NII Yarboi Mensah (Ghana), Mr.


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Gunawan Pribadi (Indonesia), Ms. Nurgul Akshabayeva (Kazakhstan),Mr. Saythong Ouiphilavong (Lao Peoples Democratic Republic), Mr.

Pusetso Seth Macheli (Lesotho), Mr. Setsoto Ranthocha (Lesotho),Mr. Crispin Clemence Kulemeka (Malawi), Ms. Lala Benchekroun(Morocco), Ms. Najia Bargui (Morocco), Ms. Mya Mya Oo (Myanmar),Ms. Naydine Sharida du Preez (Namibia), Mr. anka Mani Sharma(Nepal), Mr. Adesoji Bodunde Omoyele (Nigeria), Ms. Laura CristinaBarrios Altaulla (Panama), Ms. Leka Nama Nablu (Papua NewGuinea), Ms. Irving Ojeda Alvarez (Peru), Ms. Kim S. Jacinto-Henares(Philippines), Ms. Anastasia Certan (Republic o Moldova), Mr. KayigiHabiyambere Aimable (Rwanda), Mr. Baye Moussa Ndoye (Senegal),

Ms. Phensuk Sangasubana (Tailand), Ms. Patience Emily Rubagumya(Uganda), Ms. etiana Skupova (Ukraine), Ms. Mwantumu MshiraziSalim (United Republic o anzania), Mr. Alvaro Romano (Uruguay),Ms. ran Ti Phuong Nhung (Viet Nam), Mr. Berlin Msiska (Zambia)and Mr. Max Mugari (Zimbabwe).

We also acknowledge with gratitude the important role o mem-bers o the United Nations Committee o Experts on International

Cooperation in ax Matters, namely: Ms. Lise-Lott Kana (Chile), Mr.Wolgang Lasars (Germany), Mr. Enrico Martino (Italy), Mr. MansorHassan (Malaysia), Mr. Armando Lara Yaffar (Mexico), Mr. StigSollund (Norway) and Mr. Ronald van der Merwe (South Arica), whocontributed their expertise to this project on a pro-bono basis.

We are also grateul to the heads and representatives o interna-tional and regional organizations who supported this project, includ-ing: Mr. Logan Wort, Mr. Lincoln Marais and Ms. Elizabeth Storbeck

o the Arican ax Administration Forum (AAF); Mr. Mrcio Verdi,Mr. Socorro Velazquez and Mr. Miguel Pecho o the Inter-AmericanCenter o ax Administrations (CIA); Mr. Robert Maate o the EastArican Community (EAC); and Mr. Paolo Ciocca o the InternationalFund or Agricultural Development (IFAD). In particular, we wouldlike to thank Mr. Pascal Saint-Amans, Ms. Marlies de Ruiter, Mr.Jacques Sasseville and Mr. David Partington o the Organization orEconomic Co-operation and Development (OECD) or sharing their

invaluable expertise and resources.

We would also like to thank the International ax Compact(IC) team, Mr. Roland von Frankenhorst and Ms. Yanina Oleksiyenko,


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or their involvement and support in all activities o this project.We are grateul to Mr. Matthias Witt, Mr. Harald Kueppers and Ms.

Katharina Gunselmann o the Deutsche Gesellschaf r InternationaleZusammenarbeit (GIZ) GmbH, or participating in the project and orsharing their experiences. We also thank Mr. Wolgang Lasars and Mr.Klaus Klotz or representing the German Government in this project.

Last but not least, we also wish to acknowledge the valuable assis-tance o other staff in the Financing or Development Office, namely:Mr. Michael Lennard, Ms. Irving Ojeda Alvarez, Ms. Leah McDavid,Ms. Victoria Panghulan and Ms. Mary Nolan, who provided support

within their respective roles.

Alex repelkov, Harry onino and Dominika Halka

28 June 2013


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Introduction

Tis book is a result o a project, undertaken jointly by the Financingor Development Office (FDO) o the United Nations Departmento Economic and Social Affairs and the International ax Compact(IC), aimed at strengthening the capacity o National ax Authoritiesand Ministries o Finance in developing countries to effectively iden-tiy and assess their needs in the area o tax treaty negotiation andadministration. Te financial contribution or the project was pro-vided by the German Federal Ministry or Economic Development and

Cooperation (BMZ). Within the FDO, the project was implemented,by a small team led by the Director, Mr. Alexander repelkov, and com-prising Ms. Dominika Halka and Mr. Harry onino, Economic AffairsOfficers, with the administrative support o Ms. Victoria Panghulan.

Te ultimate goal o this project was to support the developmento a comprehensive set o capacity-building tools to be used in develop-ing countries, which would be demand driven, reflect adequately the

needs o these countries, and complement the existing capacity tools.

Te project was launched in December 2012. As the first step,two simultaneous technical meetings were held in Rome, Italy, on28-29 January 2013, with the participation o 25 representatives o theNational ax Authorities and Ministries o Finance rom developingcountries, representing all the regions o the world. Te discussion onthe administration o tax treaties, held within several thematic ses-sions, was acilitated by selected members o the Committee o Experts

on International Cooperation in ax Matters (the Committee) andrepresentatives o several international and regional organizations.National experts were rank in sharing their countries experiencesand concerns. Te discussion contributed to: (i) identiying the needso developing countries in the area o tax treaty administration andtaking stock o the available capacity development tools at their dis-posal; and (ii) determining the actual skills gaps and challenges acedby developing countries in administering their tax treaties. A report o

the meeting, which summarizes the main findings and details priorityareas or the purposes o developing relevant capacity-building activi-ties and tools to address these issues, is available at http://www.un.org/esa/ffd/tax/2013CBNA/Summary.pd.


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One practical outcome o the Rome meeting were the terms

o reerence or a series o technical papers, which would address

the specific issues in the administration o tax treaties o interest andconcern to developing countries. Tese terms o reerence were iden-

tified and agreed upon by the national participants in the meeting.

Accordingly, the draf papers were prepared by several international

tax experts and underwent a peer review

Tese papers were then presented by the authors or discus-

sion during the technical meeting, held in New York, on 30-31 May

2013, with the participation o 32 representatives o the National ax

Authorities and Ministries o Finance o developing countries. Eachpaper was discussed in a separate session, which was chaired by a

member o the Committee or by a representative o the relevant inter-

national or regional organization. Following a presentation by the

author, a designated lead discussant representing a developing country

was invited to comment on the paper, ocusing on the specific experi-

ence o their country. Tis was ollowed by an open exchange o views

among all the participants. During the discussion, there were many

practical suggestions on how the papers would better meet the realitieso developing countries tax administrations. Te South-South sharing

aspect emerged very prominently. Te participants rom the develop-

ing countries engaged in an intense discussion among themselves,

offering advice and sharing best practices to countries with less experi-

ence in negotiating and administering double tax treaties. A view was

expressed that experts rom developing countries were ofen in a better

position to assist other developing countries than experts rom devel-

oped countries, as they ollowed a similar path, ofen not so long ago.

Following the meeting, the authors revised their papers taking

into account eedback received rom other experts. Te papers were then

finalized and edited to comprise this UN Handbook on Selected Issues

in Administration o Double ax reaties or Developing Countries.

Te UN Handbookwill be launched and distributed at the OECD

Meeting with non-OECD Economies and International Organizations

preceding the 18th Annual ax reaty Meeting, which will be held in

Paris, on 25 September 2013.


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Te e-version o this UN Handbook will be available ree ocharge at http://www.un.org/esa/ffd/documents/UN_Handbook_D

_Admin.pd.As next steps, FDO is envisioning organizing, together with

partners, an annual Forum on Administration o ax reaties andother capacity-development events, based on the UN Handbook, witha view to promoting South-South sharing in the area o current issuesin the administration o double tax treaties.


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Contents

Preace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix

Chapter I

An overview o the issues involved in theapplication o double tax treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Background: the general relationship between taxtreaties and domestic law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

3. Rules o application in bilateral tax treaties. . . . . . . . . . . . . . . 6

3.1 Te United Nations and OECD Model Conventions . . 6

3.2 Rules o application in actual bilateral tax treaties . . . . 11

4. Rules for the application of tax treaties in domestic law. . . . 12

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

4.2 General or specic application rules. . . . . . . . . . . . . . . . 13

4.3 Legislative or administrative rules . . . . . . . . . . . . . . . . . . 15

4.4 Relationship between the rules for the application oftax treaties and the method o taxation. . . . . . . . . . . . . . 15

4.5 e role of the tax authorities in applying tax treaties . 19

5. Persons entitled to the benefits o tax treaties . . . . . . . . . . . . . 22

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5.2 Identification o persons . . . . . . . . . . . . . . . . . . . . . . . . . . 235.3 Te determination o residence . . . . . . . . . . . . . . . . . . . . 24

5.4 Hybrid and special entities . . . . . . . . . . . . . . . . . . . . . . . . 26

5.5 Beneficial owner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

6. Te application o tax treaties by a country toits own residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

6.2 Relie rom double taxation. . . . . . . . . . . . . . . . . . . . . . . . 30

7. Te application o tax treaties to residents o the othercontracting State (non-residents) . . . . . . . . . . . . . . . . . . . . . . . 36

7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36


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7.2 Identification o the relevant non-resident taxpayers . . 37

7.3 Non-residents earning particular types o income

rom the source country . . . . . . . . . . . . . . . . . . . . . . . . . . 398. Abuse o tax treaties and the relationship between tax

treaties and domestic law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Chapter II

Persons qualiying or treaty benefits . . . . . . . . . . . . . . . . . . . . . . . . . 51

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

2. Persons qualiying or treaty benefits. . . . . . . . . . . . . . . . . . . . 53

2.1 ypes o person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542.2 Identification numbers and registration requirements. 60

3. Residence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3.1 Liability to tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

3.2 Criteria or liability to tax . . . . . . . . . . . . . . . . . . . . . . . . . 67

3.3 Dual residence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

3.4 Limitation on benet articles . . . . . . . . . . . . . . . . . . . . . . 73

3.5 Articles or which no residence is required . . . . . . . . . . 75

4. Income for which treaty protection is claimed. . . . . . . . . . . . 76

4.1 Derived by, paid to, etc. . . . . . . . . . . . . . . . . . . . . . . . . 76

4.2 Benecial ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

5. Conduit structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

5.1 Characteristics o conduit structures . . . . . . . . . . . . . . . 83

5.2 Residence issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

5.3. Issues related to the income or which treaty

protection is claimed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

6. Special cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

6.1 Exempt entities (pension unds) . . . . . . . . . . . . . . . . . . . . 88

6.2 Partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

6.3. ransparent/hybrid entities and corporategroup regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

6.4 Trusts and trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Bibliography on beneficial ownership . . . . . . . . . . . . . . . . . . . . . . . 104Bibliography on trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105


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Chapter III

axation o residents on oreign source income. . . . . . . . . . . . . . . . . 109

1. Impact o tax treaties and elimination o double taxation. . . . 1091.1 Source o income must be determined by

general principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

1.2 ax treaties do not limit the scope o a residencecountrys right to tax oreign income . . . . . . . . . . . . . . . 111

1.3 ax treaty limitations on the manner in whichresidence country taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

1.4 Unilateral foreign tax relief. . . . . . . . . . . . . . . . . . . . . . . . 120

2. Administering the mechanics o eliminationo double taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

2.1 Exemption method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

2.2 Credit method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

2.3 Deduction o expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

2.4 Underlying relief. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148

3. Administering anti-avoidance rules . . . . . . . . . . . . . . . . . . . . . 153

3.1 Application o domestic rules . . . . . . . . . . . . . . . . . . . . . . 1543.2 Rules targeted at oreign source income . . . . . . . . . . . . . 154

4. General issues in administering the taxation of foreignsource income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157

4.1 Collection of information. . . . . . . . . . . . . . . . . . . . . . . . . 158

4.2 Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

4.3 Dispute resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

4.4 Collection of tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

Chapter IV

axation o non-residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

1.1 Scope o the chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173

1.2 Ensuring compliance with domestic tax law bynon-residents generally . . . . . . . . . . . . . . . . . . . . . . . . . . . 174

1.3 Te connection between tax compliance and

source withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

1.4 Eect of tax treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178


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2. Registration requirements or non-residents. . . . . . . . . . . . . . 179

3. Appointment o local representatives or agents . . . . . . . . . . . 181

4. Procedures for claiming treaty benets under variousmethods o assessment and collection . . . . . . . . . . . . . . . . . . . 182

4.1 Filing tax returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182

4.2 Administrative waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . 184

4.3 Information provided to resident payers. . . . . . . . . . . . . 185

4.4 Refund claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

5. Inormation gathering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

5.1 ypical treaty provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 185

5.2 Exposure to exchange o inormation requests . . . . . . . 186

6. Assistance in collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

6.1 ypical treaty provisions . . . . . . . . . . . . . . . . . . . . . . . . . . 187

6.2 Convention on Mutual Administrative Assistancein ax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

7. Non-discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

8. Anti-avoidance rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

9. ime limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

10. Burden o proo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190

11. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Chapter V

axation o non-residents on business profits . . . . . . . . . . . . . . . . . . 193

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193

2. ax inormation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

2.1 What type o inormation? . . . . . . . . . . . . . . . . . . . . . . . . 196

2.2 Sources o inormation . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

3. Identiying the non-resident taxpayer . . . . . . . . . . . . . . . . . . . 202

3.1 Steps in applying treaty provisions . . . . . . . . . . . . . . . . . 202

3.2 Identiying the taxpayer . . . . . . . . . . . . . . . . . . . . . . . . . . 202

3.3 Determining the resident status o the taxpayer . . . . . . 203

3.4 Determining which treaty provision(s) might apply. . . 204

4. Treaty framework for taxing business prots. . . . . . . . . . . . . 204

4.1 Business and prots . . . . . . . . . . . . . . . . . . . . . . . . . . . 204

4.2 Taxation of business prots under various articles . . . . 205


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4.3 reshold for source taxation . . . . . . . . . . . . . . . . . . . . . . 206

4.4 Electronic commerce and business activities

carried out in the absence o a PE/fixed base . . . . . . . . . 2074.5 Non-discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

5. Permanent establishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

5.1 General threshold and the effectively connected rule 209

5.2 Fixed place o business without specifictime requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

5.3 Building site, project or supervisory activity lastingmore than six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

5.4 Physical presence for more than 183 days . . . . . . . . . . . . 211

5.5 Collection o insurance premiums or insuranceo risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

5.6 Te nature and level o activity o agents . . . . . . . . . . . . 212

5.7 Subsidiary versus PE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

6. Attribution o profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

6.2 Force o attraction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2146.3 ranser pricing issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215

6.4 Deductibility of expenses . . . . . . . . . . . . . . . . . . . . . . . . . 216

6.5 Source rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

6.6 rading accounts, books and records andapportionment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

6.7 ime limits and burden o proo . . . . . . . . . . . . . . . . . . . 218

7. ax collection and enorcement . . . . . . . . . . . . . . . . . . . . . . . . 218

8. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219

Chapter VI

axation o non-resident service providers. . . . . . . . . . . . . . . . . . . . . 221

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221

2. Source taxation o services income. . . . . . . . . . . . . . . . . . . . . . 221

1.1 Article 5 and Article 7 Business profits. . . . . . . . . . . . 223

1.2 Article 8 International transport . . . . . . . . . . . . . . . . . 225

1.3 Article 14 Independent personal services . . . . . . . . . . 225

1.4 Article 15 Dependent personal services . . . . . . . . . . . 226


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1.5 Article 16 Directors and top-level managers . . . . . . . 227

1.6 Article 17 Artistes and sportspersons . . . . . . . . . . . . . 227

1.7 Article 19 Government service . . . . . . . . . . . . . . . . . . . 2281.8 Article 20 Students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

1.9 Other treaty provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 229

2. Administrative issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232

2.1 Residence o service provider . . . . . . . . . . . . . . . . . . . . . . 232

2.2 Characterization o income. . . . . . . . . . . . . . . . . . . . . . . . 235

2.3 Source o income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

2.4 resholds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2472.5 Amount o income taxable in source country . . . . . . . . 252

2.6 Method o taxation and collection. . . . . . . . . . . . . . . . . . 256

Chapter VII

axation o investment income and capital gains . . . . . . . . . . . . . . . 261

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

2. Relevant aspects o domestic law and tax treaties. . . . . . . . . . 262

2.1 General legal and administrative ramework. . . . . . . . . 2622.2 Domestic definition and source o investment

income and capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . 263

2.3 Hybrid financing and thin capitalization . . . . . . . . . . . . 266

2.4 Ways of assessment and enforcement of the taxes. . . . . 267

2.5 Effect o tax treaties and their application . . . . . . . . . . . 269

3. reaty allocation o taxing rights and treaty definitionswith respect to investment income and capital gains . . . . . . 271

3.1 General aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271

3.2 Income rom immovable property. . . . . . . . . . . . . . . . . . 271

3.3 Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273

3.4 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

3.5 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280

3.6 Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283

3.7 Qualification issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286

4. Legal framework, administrative procedures for grantingtreaty benefits to taxpayers, and responsible tax authorities. 287

4.1 Approach taken Source and residenceState perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287


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4.2 More specic legal framework and aspects regardingthe tax administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289

4.3 Income from immovable property. . . . . . . . . . . . . . . . . . 2914.4 Dividends, interest and royalties . . . . . . . . . . . . . . . . . . . 293

4.5 Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

5. Enorcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302

5.1 General aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302

5.2 Aspects o domestic law . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

5.3 Aspects o international law . . . . . . . . . . . . . . . . . . . . . . . 306

5.4 Foreign Account Tax Compliance Act . . . . . . . . . . . . . . 306

Chapter VIII

Dispute resolution: the Mutual Agreement Procedure . . . . . . . . . . . 309

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309

1.1 Function o the Mutual Agreement Procedure . . . . . . . 309

1.2 How the MAP operates . . . . . . . . . . . . . . . . . . . . . . . . . . . 310

1.3 Outcomes o the MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

1.4 Relation between the MAP and domesticlegal remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311

2. axpayer-initiated MAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313

2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313

2.2 Basic requirements or a taxpayer-initiated MAP . . . . . 313

2.3 Evaluation by the competent authority o theMAP request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317

2.4 Unilateral resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318

2.5 Structure o bilateral MAP negotiations . . . . . . . . . . . . 318

2.6 Implementation o the MAP result . . . . . . . . . . . . . . . . . 320

2.7 Application o the MAP to cases arising underArticle 9 dealing with transer pricing . . . . . . . . . . . . . . 321

3. General best practices in structuring a MAP . . . . . . . . . . . 324

3.1 Developing guidelines and procedures or taxpayersaccess to a MAP (United Nations Guide to the MAP,paragraph 92) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324

3.2 Competent authorities should make every effort toresolve cases on a principled and air basis(United Nations Guide to the MAP, paragraph 49) . . . 325


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3.3 Audit settlements should not require the taxpayer torelinquish subsequent recourse to a MAP(United Nations Guide to the MAP, paragraph 80). . . . 325

3.4 Separation of the MAP and audit functions(United Nations Guide to the MAP, paragraph 62). . . . 325

3.5 Liberal use o the MAP under Article 25 (3) (MEMAP,Best Practice 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

4. Arbitration under Article 25 (5) . . . . . . . . . . . . . . . . . . . . . . . . 326

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326

4.2 Arbitration and the United Nations Model Convention 327

4.3 Dierences between the OECD and United Nationsversions o Article 25 (5) . . . . . . . . . . . . . . . . . . . . . . . . . . 330

4.4 Basic features of the United Nations arbitrationprovision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332

4.5 Procedural aspects of arbitration under Article 25(alternative B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333

Annex: examples and analyses o MAP cases . . . . . . . . . . . . . . . . . 338

Example 1: Article 5/Article 7 MAP case. . . . . . . . . . . . . . . . . 338

Example 2: Article 9 MAP case . . . . . . . . . . . . . . . . . . . . . . . . . 339

Chapter IX

Exchange o inormation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341

2. Overview o inormation exchange. . . . . . . . . . . . . . . . . . . . . . 342

2.1 Core eatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342

2.2 Major issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346

2.3 Options or inormation exchange. . . . . . . . . . . . . . . . . . 348

3. Contemporary context o inormation exchange . . . . . . . . . . 348

3.1 ax competition work and the developmento a model IEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

3.2 Te withholding tax alternative to exchangeo inormation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351

3.3 Te bank secrecy crisis and the rise o IEAs . . . . . . . . 352

4. Exchange of information under Article 26 of theUnited Nations Model Convention. . . . . . . . . . . . . . . . . . . . . . 353

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353


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4.2 Operation of exchange under Article 26 . . . . . . . . . . . . . 358

4.3 Comparison to the OECD Model Convention . . . . . . . . 371

5. Other mechanisms or inormation exchange. . . . . . . . . . . . . 3755.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375

5.2 ax Inormation Exchange Agreements . . . . . . . . . . . . . 375

5.3 Multilateral Convention on Mutual Assistancein ax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378

5.4 Regional agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380

5.5 Other paths or acquiring inormation . . . . . . . . . . . . . . 380

Chapter XImproper use o tax treaties, tax avoidance and tax evasion . . . . . . 383

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383

1.1 Preventing the improper use o tax treaties . . . . . . . . . . 383

1.2 Te relationship between domestic anti-avoidancerules and tax treaty provisions . . . . . . . . . . . . . . . . . . . . . 384

1.3 Supplementing domestic anti-avoidance rules. . . . . . . . 384

1.4 e Commentary to the United Nations ModelConvention and tax avoidance . . . . . . . . . . . . . . . . . . . . . 385

1.5 A note on terminology Avoidance, evasion andraud; abuse o tax treaties. . . . . . . . . . . . . . . . . . . . . . . . . 385

2. Improper use o tax treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387

2.1 Te ways in which a country may ensure that atax treaty is not used improperly . . . . . . . . . . . . . . . . . . . 387

2.2 Some common examples o transactions involvingpotential abuse o tax treaties . . . . . . . . . . . . . . . . . . . . . . 391

3. Te relationship between domestic anti-abuse rulesand tax treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395

4. Detecting and combating aggressive tax avoidanceschemes involving tax treaties . . . . . . . . . . . . . . . . . . . . . . . . . . 396

4.1 Exchange of information . . . . . . . . . . . . . . . . . . . . . . . . . . 397

4.2 Assistance in the collection of taxes . . . . . . . . . . . . . . . . 399

4.3 Internal organization within the tax authority to

detect and combat aggressive tax avoidance schemes . 4005. Concluding comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400


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Chapter I

An overview o the issues involved in theapplication o double tax treaties

B J. A*

1. Introduction

Over the last ew decades, the number o bilateral tax treaties hasincreased dramatically. Te United Nations Model Double axationConvention between Developed and Developing Countries1 (UnitedNations Model Convention) and the Organisation or EconomicCo-operation and Development Model ax Convention on Incomeand on Capital2 (OECD Model Convention) provide models orcountries to use in negotiating the terms o their treaties and areregularly updated. Te United Nations Model Convention was mostrecently revised in 2011 and the OECD Model Convention in 2010.3Developing countries are increasingly entering into tax treaties withdeveloped and other developing countries in order to acilitate cross-border trade and investment. Although there is a vast and growingbody o literature dealing with the substantive provisions o tax trea-ties and the relationship between those provisions and the provisionso a countrys domestic law, relatively little inormation is availableabout the practical application o tax treaties.

Tis chapter is intended to provide an overview o the issuesinvolved in applying the provisions o bilateral tax treaties. In this

*Senior Adviser, Canadian ax Foundation, oronto, Canada.1United Nations, Department o Economic and Social Affairs, United

Nations Model Double axation Convention between Developed and Develop-ing Countries(New York: United Nations, 2011).

2Organisation or Economic Co-operation and Development,Model axConvention on Income and on Capital(Paris: OECD, 2010) (loose-lea ).

3Any reerences to the United Nations Model Convention and Commen-tary are to the 2011 version, unless otherwise noted. Similarly, any reerencesto the OECD Model Convention and Commentary are to the 2010 version,unless otherwise noted.


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regard, it provides an introduction to the other chapters in thisHandbook, which deal in more detail with the most important aspects

o the application o tax treaties. In general terms, the application othe provisions o tax treaties involves questions that are ancillary tothe substantive rules in the treaty, and are related to how a taxpayerobtains the benefits o the treaty. Ofen these ancillary questionsinvolve procedural issues, such as filing and inormation requirementsand the burden o proo.

Tere is no generally accepted definition o what is involved inthe application o the provisions o tax treaties. In general, the term

application is used to indicate that the ocus is not on what the provi-sions o the treaty say, but how they are applied in a procedural sense.Tereore, one way to view issues involved in the application o tax trea-ties is to differentiate between the substantive rules o the treaty andthe procedural aspects o applying those rules. Tis distinction is notcompletely clear, however, because substantive and procedural issuessometimes blend together. For example, the substantive provisions o atreaty require interpretation beore they can be applied. Tis interpre-

tive aspect o tax treaties can be considered to relate to the substanceo the provisions or to their application, or to both. Nevertheless, orthe purposes o this overview, a discussion o treaty interpretation hasbeen excluded.

Tis chapter begins with a discussion o the different ways inwhich countries implement tax treaties into their domestic legal sys-tems because the method o implementation may affect the require-ments that countries impose on taxpayers seeking to obtain the

benefits o a tax treaty. It then examines the rules provided in tax trea-ties that govern the way in which the provisions o the treaties areapplied. In general, ew rules o application are provided in the trea-ties themselves. For the most part, tax treaties leave the method orthe application o the provisions o the treaties up to the domestic lawo the contracting States. Tereore, the next section deals with theprovisions o domestic law dealing with the application o tax treaties.It includes a discussion o how tax authorities determine whether tax-

payers qualiy or treaty benefits, how the treaty benefits are provided,and how the tax authorities o countries deal with the application otax treaties rom an organizational viewpoint. Te chapter then dis-cusses in general terms how the provisions o tax treaties are applied


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by a country to its residents and to residents o the other country. Teapplication o the provisions o tax treaties in light o a countrys anti-

avoidance rules presents special difficulties that are discussed brieflyin the final section.

Although this chapter deals with practical issues in the appli-cation o tax treaties generally, it ocuses in particular on the needso developing countries, which ofen have less experience with taxtreaties than developed countries. While the United Nations ModelConvention and Commentary provide guidance to developing coun-tries concerning the substantive provisions included in their treaties,

they do not provide much guidance with respect to the problems acedby developing countries in applying their treaties. Tis Handbook isintended to provide such guidance.

Te terms used in this chapter conorm to standard interna-tional usage. Te term source country is used to denote the countryin which income is earned or rom which a payment is made, whilethe term residence country is used to describe the country in whichthe person who earns the income or receives the payment is residentand usually taxable on the income or payment. Developing countriesare typically source countries. Moreover, the provisions o bilateral taxtreaties based on the United Nations and OECD Model Conventionsofen require the source country to reduce its taxes on amounts earnedin the source country by residents o the residence country.

2. Background: the general relationship between tax

treaties and domestic law

Te status o tax treaties in a countrys legal system may affect howthe country applies the provisions o its bilateral tax treaties. Telegal status o tax treaties is essentially a question o the relationshipbetween tax treaties, or treaties in general, and domestic law.4 Tistopic is well beyond the scope o this chapter. However, it has impor-tant consequences or the application o tax treaties in many, i not all,countries. For example, i a country considers treaties (and interna-tional law generally) to be the highest source o law in its legal system,

4See, generally, Te Relationship between ax reaties and Domestic Law,Guglielmo Maisto, ed. (Amsterdam: IBFD, 2006).


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Te scholarly debate about monism, dualism and moderatedualism is not important or this chapter. What is important, however,

or the application o tax treaties is the extent to which a country con-siders the provisions o tax treaties to prevail over domestic law in theevent o a conflict. For countries that consider international law andtreaties always to prevail over domestic law, the adoption o domesticrules to implement a treaty will not be allowed to diminish the benefitso the treaty. For some countries, the priority accorded to treaties maybe a constitutional requirement, in which case rules or the applicationo a treaty raise issues o constitutional validity. However, or coun-tries that consider the relationship between treaties and domestic law

to be more nuanced, it may be possible to adopt domestic rules thatmay restrict or qualiy access to the benefits o a treaty and, in extremecases, may deny treaty benefits entirely (so-called treaty overrides). Forederal States, the issue may be even more complex because tax treatiesmay not be legally binding on the subnational governments.

Another significant actor concerning the status o tax treatiesis that in some countries they must be incorporated into domestic law

in order to have legal effect. ax treaties are special in this regard. Teyapply to the contracting States on a State-to-State basis once each Statehas ratified the treaty. However, in many countries tax treaties do notconer any rights on taxpayers unless they become part o domes-tic law, which may require additional steps. For example, in severalcountries tax treaties are incorporated into domestic law by means olegislation that ormally declares the treaty to be part o domestic lawand gives priority to the provisions o the treaty to the extent that theyconflict with domestic law. In some cases the implementing legisla-tion may prescribe procedures or conditions or the application o thetreaty. Tis raises the potential or conflicts between the implementinglegislation and the treaty.

Another related issue that may arise is the relationship betweenthe provisions o tax treaties and those o other international agree-ments, such as trade and investment agreements, that a country mayenter into. Te issue that arises is which treaty or agreement should

prevail in the event o a conflict between them. Te general practice ocountries, as illustrated by the provisions o the agreement governingthe World rade Organization, is to ensure that tax issues are dealt


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with by the tax treaty by carving tax issues out o the trade and invest-ment agreements.

In summary, most countries appear to have considerable ree-dom and flexibility rom the perspectives o both international law anddomestic law regarding the method or the application o bilateral taxtreaties. Such reedom and flexibility exist despite the widely varyingdifferences with respect to the status o tax treaties vis--vis domesticlaw. Nevertheless, these general considerations concerning the statuso tax treaties may impose limitations on the way in which a coun-try applies the provisions o its tax treaties. One especially important

aspect o this issue is the relationship between a countrys tax treatiesand its domestic anti-avoidance rules. Tis issue is discussed in thefinal section.

3. Rules o application in bilateral tax treaties

3.1 Te United Nations and OECD Model Conventions

For purposes o both the United Nations and OECD Model Conventions,it is assumed that any rules or the application o the provisions othose Model Conventions are a matter or the domestic law o the con-tracting States. Consequently, there are no general rules in the ModelConventions or in the Commentaries on how the provisions o thetreaty should be applied. Tere are, however, a ew specific rules withrespect to application issues that are discussed briefly in this section.

Articles 10 (2) and 11 (2) o both Model Conventions and Article12 (2) o the United Nations Model Convention, which provide limi-tations on the rate o source-country tax on dividends, interest androyalties respectively, include the ollowing sentence:

Te competent authorities o the Contracting Statesshall by mutual agreement settle the mode o applicationo these limitations.

Te use o the word shall seems to require the competentauthorities to agree on the method or the application o the limita-tions on source-country tax in those Articles. However, the respective


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Commentaries indicate that the source country is ree to apply itsdomestic law.9In particular, they provide that the source country is

entitled to impose its tax by requiring the payer o the dividends, inter-est or royalties to withhold tax rom the payment or by assessing thenon-resident recipient o the payment or the tax directly. Not surpris-ingly, most countries have chosen to collect the taxes on dividends,interest and royalties by way o withholding taxes because this hasproven to be an effective mechanism or collecting the tax on thesetypes o payments to non-residents.

Te Commentaries also clariy that because procedural issues

are not dealt with in the Model Conventions, each country is enti-tled to adopt its own procedural requirements. Tereore, a countrycan either limit the rate o tax imposed on the relevant payment tothe maximum rate provided in the treaty or it can impose tax on therelevant payment at the rate provided in its domestic law and requirethe non-resident recipient to apply or a reund o the tax to the extentthat it exceeds the rate provided in the treaty.10For example, i a coun-try imposes a withholding tax at a rate o 25 per cent on payments

9Paragraph 18 o the Commentary on Article 10 o the OECD ModelConvention and paragraph 13 o the Commentary on Article 10 o the Unit-ed Nations Model Convention, quoting paragraph 18 o the Commentaryon Article 10 o the OECD Model Convention; paragraph 12 o the Com-mentary on Article 11 o the OECD Model Convention and paragraph 18o the Commentary on Article 11 o the United Nations Model Convention,quoting paragraph 12 o the Commentary on Article 11 o the OECD Model

Convention. Although there is no comparable provision in the Commentaryon Article 12 (2) o the United Nations Model Convention, it seems likely thata similar result would apply.

10Paragraph 19 o the Commentary on Article 10 o the OECD ModelConvention and paragraph 13 o the Commentary on Article 10 o the Unit-ed Nations Model Convention, quoting paragraph 19 o the Commentaryon Article 10 o the OECD Model Convention; paragraph 12 o the Com-mentary on Article 11 o the OECD Model Convention and paragraph 18o the Commentary on Article 11 o the United Nations Model Convention,

quoting paragraph 12 o the Commentary on Article 11 o the OECD ModelConvention. Although there is no comparable provision in the Commentaryon Article 12 (2) o the United Nations Model Convention, it seems likely thata similar result would apply.


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o dividends by a resident company to a shareholder resident in theother contracting State and Article 10 (2) o the treaty between the two

countries limits the rate o tax on dividends to 15 per cent, the countrycan either reduce the obligation on the resident company to withholdtax to 15 per cent o the dividend paid to the non-resident shareholderor require the resident company to withhold tax at the ull domesticrate o 25 per cent and require the non-resident shareholder to applyor a reund o the tax withheld in excess o the treaty rate.

Te Commentary on Article 1 o the OECD Model Conventionreiterates the principle that the contracting States are ree to adopt

procedures to implement the provisions o the treaty.11

However, thatCommentary expresses a preerence or the automatic reduction in therate o withholding as the more appropriate method or providing thebenefits o the treaty the reduced rate o source-country tax inan expeditious ashion. Tat Commentary also emphasizes that, ia country uses a reund mechanism, the reund should be providedexpeditiously, unless interest is paid on the amount o the reund.

Te provisions o Articles 10 (2) and 11 (2) o both ModelConventions and Article 12 (2) o the United Nations Model Convention,requiring the competent authorities o the contracting States to agreeon the method by which the reductions in source country tax are tobe applied, are not widely used. Te competent authorities are notobligated to agree and most countries have not in act entered intocompetent authority agreements as to the mode o application o theseprovisions.

Aspects of Article 24 (Non-discrimination) of both the UnitedNations and OECD Model Conventions may affect the method oapplication of other provisions of the Model Conventions. Article 24(1) provides that nationals o one country shall not be subject to taxa-tion or any requirement connected therewith by the other countrythat is different or more burdensome than the taxation and connectedrequirements to which nationals o the other country are subject. Asimilar requirement applies to stateless persons under Article 24 (2)

11Paragraph 26.2 o the Commentary on Article 1 o the OECD ModelConvention. Tere is no comparable statement in the Commentary on theUnited Nations Model Convention.


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and to enterprises o one contracting State owned or controlled byresidents of the other State under Article 24 (5). e Commentaries

indicate clearly that the reerence to any requirement connected totaxation in Article 24 (1), (2) and (5) is intended to cover proceduralaspects related to the application o the provisions o the treaty, suchas the filing o tax returns, terms o payment o tax, time and otherrelated requirements.12However, the Commentaries on Article 24 (5)o both Model Conventions indicates that most countries do not con-sider that the imposition o additional inormation requirements ora reversal o the burden o proo with respect to transer pricing orenterprises owned or controlled by non-residents would be discrimi-

natory, in violation of Article 24 (5).13

e other aspects of Article 24 the prohibition of discrimi-nation against a permanent establishment in the source country o aresident of the other country under Article 24 (3) and against residententerprises with respect to the deduction o payments to residents othe other country compared to the deduction o such payments toresidents of the source country under Article 24 (4) do not extend

to requirements connected with taxation. Accordingly, a country isnot precluded rom imposing different requirements concerning theapplication o the provisions o the treaty to a permanent establish-ment, as long as the taxation on it is not less avourable than thetaxation imposed on resident enterprises in similar circumstances. Asthe Commentaries indicate, under Article 24 (3) it is the result alonethat counts.14Tus, it is permissible or countries to apply a differentmode o taxation and related procedural requirements to non-residents

12Paragraph 15 of the Commentary on Article 24 of the OECD ModelConvention and paragraph 2 of the Commentary on Article 24 of the UnitedNations Model Convention, quoting paragraph 15 o the Commentary onArticle 24 of the OECD Model Convention.


14

Paragraph 34 of the Commentary on Article 24 of the OECD ModelConvention and paragraph 2 of the Commentary on Article 24 of the UnitedNations Model Convention, quoting paragraph 34 of the Commentary onArticle 24 of the OECD Model Convention.


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with permanent establishments. Similarly, although the deduction opayments by a resident o the source country to a resident o the other

country must be allowed under the same conditions as paymentsto residents of the source country, Article 24 (4) does not prevent theapplication to payments to non-residents o different procedural andother related rules, such as additional inormation requirements.15

Article 25 o both the United Nations and OECD ModelConventions provides a mutual agreement procedure whereby thecompetent authorities o the contracting States can settle questionsrelating to the interpretation and application o the Convention16and

resolve difficulties arising out o the application o the Conventionin the broadest sense o the term.17Tese questions and difficultiesinclude procedural aspects o the application o the provisions o thetreaty. Article 25 (1) allows a taxpayer to invoke the mutual agree-ment procedure i the actions o a contracting State result or willresult in taxation that is not in accordance with the provisions o thetreaty. According to the Commentaries, the term actions has a broadmeaning, including all acts or decisions relating to the charging o

tax.18

As a result, it appears unlikely that the mutual agreement proce-dure can be invoked with respect to procedural and other applicationrules that do not result directly in the charging o tax.

Article 25 (3) o both the United Nations and OECD ModelConventions provides a more general rule that requires the competentauthorities to endeavour to resolve by mutual agreement any difficul-ties or doubts arising as to the application o the Convention. Te


16Paragraph 2 o the Commentary on Article 25 o the United NationsModel Convention.

17Paragraph 1 o the Commentary on Article 25 o the OECD ModelConvention.

18

Paragraph 14 of the Commentary on Article 25 of the OECD ModelConvention and paragraph 9 o the Commentary on Article 25 o the UnitedNations Model Convention, quoting paragraph 14 of the Commentary onArticle 25 o the OECD Model Convention.


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Commentaries indicate that the power o the competent authoritiesunder Article 25 (3) can be used to resolve any problems resulting rom

the implementation o procedures or the limitation o source-countrytax on dividends, interest and royalties.19Te mutual agreement pro-cedure is discussed in detail in chapter VIII, Dispute resolution: theMutual Agreement Procedure, by Hugh J. Ault.

Articles 26 and 27 o both the United Nations and OECD ModelConventions, dealing with exchange o inormation and assistance inthe collection o taxes, clearly have an impact on the application o theother provisions o the treaty and on the enorcement o domestic tax

generally. Most o the distributive articles o the Model Conventionsrely on the need or accurate inormation about the taxpayers and theincome derived by them. Article 26 is an important mechanism tosupplement the inormation-gathering powers o the tax authoritiesunder domestic law. Te exchange o inormation under tax treatieshas recently been enhanced through the elimination o bank secrecy,the broadening o Article 26 and the work o the Global Forum onransparency and Exchange o Inormation or ax Purposes.20

Article 27 is a relatively recent addition to the United Nations andOECD Model Conventions, and thus it has been included in only aew treaties and there is little experience with its practical application.Te exchange o inormation under Article 26 is discussed in detail inchapter IX, Exchange o inormation, by Diane M. Ring.

3.2 Rules o application in actual bilateral tax treaties

Given that the Model Conventions do not contain rules or the applica-tion o their provisions, it is not surprising that ew individual bilateral

19Paragraph 51 o the Commentary on Article 25 o the OECD ModelConvention and paragraph 10 o the Commentary on Article 25 o the Unit-ed Nations Model Convention, quoting paragraph 51 o the Commentary onArticle 25 o the OECD Model Convention.

20See OECD, Global Forum on ransparency and Exchange o Inorma-tion or ax Purposes, at www.oecd.org/tax/transparency/. Te Global Forum

was established in 2002 under the auspices o the OECD. As o early 2013, itcomprised 120 member countries. Te Global Forum has established stand-ards or the exchange o inormation on request and a peer review process toensure effective exchanges o inormation.


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tax treaties contain such rules. Italy is an exception in this regard, asit includes a provision in its treaties that requires non-residents to

apply or a reund o amounts withheld in excess o the reduced rateprovided in the treaty.21Tis provision also makes the time limits odomestic law applicable and requires a certificate rom the tax authori-ties o the residence country that the requirements o the treaty havebeen satisfied.

4. Rules or the application o tax treaties in domestic law

4.1 Introduction

Given the reedom provided by tax treaties to the contracting Statesto deal with the methods by which the provisions o tax treaties areapplied, it is not surprising that country practices in this regard varywidely. Consequently, it is important or countries, especially devel-oping countries, to be aware o the different methods that are avail-able and to adopt methods that best serve their needs in light o their

resources. Te development o best practices or the application otax treaties would be a useul tool or both developing and developedcountries.

Tis section o the chapter raises several issues with respect tothe application o tax treaties that countries should deal with in theirdomestic law. Although it attempts to identiy these issues comprehen-sively, it does not discuss them in detail as most o them are consideredin more depth elsewhere in this Handbook. Te purpose o this sec-tion is to provide a comprehensive ramework or thinking about howcountries might provide or the application o their tax treaties in theirdomestic law.

Some countries have no rules in their domestic law with respectto the application o tax treaties. Te absence o any application rulesis understandable because, when a country first decides to enter into

21

Andrea Manganelli, Italy, in International Fiscal Association,Cahiers de droit scal international, supra note 5, 435-54, note 3, at 441-42.However, by Italian ministerial resolution, under certain conditions Italian-resident payers are entitled to apply the reductions in tax directly.


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tax treaties with other countries, it is usually preoccupied with devel-oping its negotiating positions on the provisions o either the United

Nations or the OECD Model Convention. Countries accept as a gen-eral principle that the provisions o any tax treaties that they enter intowill take priority over any conflicting provisions o domestic law. Asnoted above, countries that require some legislative action to incor-porate the provisions o tax treaties into domestic law must considerhow that will be accomplished. But otherwise, it ofen appears to beassumed that tax treaty provisions apply more or less automatically,or that any issues concerning their application will be dealt with on acase-by-case basis as they arise.

I a country has rules or the application o tax treaties in itsdomestic law, several general issues must be considered. First, do thoserules apply to all tax treaties or are different rules adopted or differenttreaties? A second issue is whether any domestic application rules areadministrative or legislative in nature. Tird, the rules or the applica-tion o tax treaties may be dependent on the basic method or meth-ods o taxation sel-assessment, assessment by the tax authorities or

withholding tax adopted by a country. Closely related to, or part o,the method o taxation are the issues o the burden o proo and timelimits with respect to claims or treaty benefits. Fourth, several gen-eral considerations arise with respect to the role o the countrys taxauthorities in applying its treaties. For example, the effectiveness andefficiency o domestic rules may be impacted by the location o respon-sibility or applying tax treaties within the organizational structureo a countrys tax authority. Moreover, do the tax authorities have thenecessary powers, such as the power to gather inormation and collecttax, to enable them to apply the provisions o tax treaties effectively?Finally, to what extent do the tax authorities provide administrativeguidance to taxpayers concerning the application o tax treaties, andwhat orm does that guidance take?

Each o these general considerations is discussed briefly below.

4.2 General or specific application rules

It may seem obvious, especially or countries with sizeable tax treatynetworks, that a country should have general rules to govern the


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application o all o its tax treaties. Such general rules would apply uni-ormly to all treaties and would provide certainty or taxpayers and tax

officials. Although the desirability o general rules or the applicationo tax treaties seems obvious, very ew countries have comprehensivegeneral rules.22Some countries may consider that rules or the appli-cation o tax treaties are unnecessary because the ordinary proceduralaspects o their domestic tax law are adequate to deal with any issues.23

For many countries, the rules or the application o tax treatieshave developed over time on a piecemeal basis in response to specificproblems arising with respect to a specific treaty or a specific article.

In some cases, application o the rules may have emerged rom caselaw rather than legislation. Such a system o specific rules may lackcoherence and consistency. More importantly, the complexity o sucha system may result in the denial o treaty benefits i those benefitsare conditional on a taxpayers aithul adherence to the applicationrules. Because o these problems, it would be worthwhile or countriesentering into tax treaties to seriously consider promulgating generalrules (legislative or administrative see section 4.3 below) for the

application o tax treaties. Such general rules should deal with issuessuch as the requirements or claiming treaty benefits (filing tax returnsor other orms, inormation disclosure requirements, burden o proo,time limits, etc.).

Moreover, the promulgation o general rules or the applicationo tax treaties could require a country to apply all o its tax treatiesuniormly. Such uniormity would ensure that taxpayers are treatedairly in terms o access to treaty benefits irrespective o the particular

tax treaty that applies. However, this type o equal treatment mightbe viewed as inappropriate in some circumstances. ax treaties arebilateral rather than multilateral agreements and thereore differencesbetween a countrys tax treaties are to be expected. In some cases, theparticular treaty negotiated between two countries may involve notonly the substantive provisions o the treaties but also the method oapplication or those provisions. Tereore, the only firm conclusion

22

Williams, supra note 5, at 32-35.23Tis is apparently the situation in Belgium. See Tierry Denayer, Bel-gium, in International Fiscal Association, Cahiers de droit fiscal interna-tional, supra note 5, 245-64 at 245-46.


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concerning the equal application o a countrys tax treaties is that,in principle, it is a desirable objective, although it may be subject to

exceptions based on particular treaties.

4.3 Legislative or administrative rules

Country practices vary concerning the use o legislative or adminis-trative rules, or a combination o both, to deal with the application otax treaties. What type o law is used to deal with the application o taxtreaties is a question o domestic law. In some countries, issues con-cerning the application o tax treaties are treated as matters o generaladministrative law. In other countries they are matters or tax law.24Further, there is the additional question o whether application rulesshould be the subject o binding rules o law or non-binding adminis-trative pronouncements rom the tax authorities. Tere are advantagesand disadvantages associated with each approach. For example, theuse o binding rules provides more certainty or taxpayers and tax offi-cials but the use o administrative guidance may provide more flex-ibility, as such guidance can usually be more easily revised to reflect

changing circumstances.

4.4 Relationship between the rules or the application otax treaties and the method o taxation

In general, there are three primary methods used by countries toestablish the amount o tax payable by a person: assessment by thetax authorities, sel-assessment and withholding. Under a system that

requires the tax authorities to assess the amount o tax payable, thetaxpayer is typically obligated to provide certain specified inorma-tion and the tax authority is obligated to assess the tax payable basedon that inormation. In contrast, under a sel-assessment system, thetaxpayer is obligated to file a return containing specified inormationand to determine the amount o tax payable. Under a withholding tax(which must be distinguished rom a system o interim withholding

24

Te character o the rules or the application o tax treaties may haveimplications or the resolution o tax disputes concerning those rules. Suchdisputes may be subject to the jurisdiction o the administrative courts orspecialized tax courts.


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on account o tax payable), the payer o certain amounts is obligated towithhold the amount o tax imposed, usually at a flat rate on the gross

amount paid, and remit such tax to the tax authorities. As a generalmatter, countries appear to use a combination o withholding taxes oncertain payments to non-residents together with either sel-assessmentor assessment by the tax authorities or other amounts.

Te method o taxation can have an important effect on howthe provisions o tax treaties are applied. Under a system o assessmentby the tax authorities, the responsibility or applying the provisionso a tax treaty rests with the tax authorities in the same way that they

must apply other aspects o the tax law. Nevertheless, some countriesrequire taxpayers to make a specific request or treaty benefits andprovide the inormation necessary to support the claim. Tis type orequirement makes good sense or practical reasons. axpayers are ina much better position than the tax authorities to know which treaty,and which provisions o it, are relevant.

I taxpayers are not required to make specific requests or treatybenefits, the tax authorities will be required to analyse the inormationprovided by the taxpayer and thereafer determine whether the provi-sions o a tax treaty are applicable. Te administrative burden imposedon the tax authorities in this regard may be onerous, depending on thesize o the countrys tax treaty network, the quality o the inormationprovided by the taxpayer and the sophistication and experience o thetax authorities with respect to tax treaties. Apart rom the adminis-trative issues, requiring taxpayers to make specific requests or treatybenefits raises the question o the consequences i a request or treaty

benefits is not made in the proper manner or within the time limitestablished or filing the request. It is arguably inappropriate, and per-haps a violation o the treaty, to deny the benefits o the treaty becauseo a ailure to comply with procedural requirements o domestic law.

Under a sel-assessment system, the onus is on the taxpayer toclaim any treaty benefits that may be applicable. Te taxpayer appliesthe relevant provisions o a treaty in the first instance usually whenfiling a tax return and the tax authorities then have the responsibil-ity to veriy the taxpayers claim. Even under a sel-assessment system,some countries require taxpayers to disclose specifically any claims


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or exemptions, credits or reduced rates o tax based on tax trea-ties.25Te same effect may be accomplished in countries (or example,

Australia)

26

that impose penalties or ailure to disclose questionablepositions that turn out to be incorrect. Some countries may deny sel-assessment to non-residents making claims or treaty benefits becauseo concerns about protecting the domestic tax base. However, this con-cern is limited to business profits because most countries enorce taxeson payments to non-residents by withholding, as discussed below.

Claiming treaty benefits under a sel-assessment system raisesa serious concern where a taxpayer claims exemption rom source

country tax as a result o the treaty. For example, a resident enterpriseo one country doing business in the other country claims that it isnot taxable in the other country because it is not carrying on businessthrough a permanent establishment in the other country. Te issueraised by this situation is whether the enterprise is required to file atax return in the other country even though it claims to be exemptrom tax by that country. I the taxpayer is not required to file a return,the tax authorities o the source country may never get notice about

the taxpayers situation and never get an opportunity to veriy thetaxpayers claim or exemption. Tereore, in such circumstances, it isappropriate to require taxpayers to file a return or otherwise disclosethe claim or exemption.27

Te importance o disclosing exemptions claimed under taxtreaties also applies to residents o a country claiming an exemption orreduction in residence country tax as a result o the application o a taxtreaty. For example, under the provisions o the tax treaty, a taxpayer

may claim exemption rom residence country tax under Article 23 or

25For example, section 6114 of the United States Internal Revenue Coderequires taxpayers to disclose i they are claiming treaty benefits.

26See Roger Hamilton, Australia, in International Fiscal Association,Cahiers de droit fiscal international, supra note 5, 217-23 at 217. Under thistype o penalty regime, taxpayers are induced to disclose any tax positions,including tax treaty positions, which are risky.

27

Such a requirement would not be discriminatory under Article 24 (3),even i it is imposed only on non-residents claiming exemption, because thisprovision does not extend to requirements connected with taxation, as dis-cussed above in section 3.1.


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income that is taxable in the source country. Te taxpayer should berequired to disclose the claim or exemption so that the tax authori-

ties can veriy that claim. Moreover, although the residence countryexempts the oreign source income rom residence country tax, it maytake that income into account in determining the rate o tax on thetaxpayers other income (exemption with progression) or or otherpurposes. In this case, the residence country requires inormationconcerning the amount o the income earned in the source country.

Many countries use withholding at source as an effective meanso collecting tax. In some cases (or example, salaries o the employees)

the withholding may be imposed on an interim basis. Afer the end othe year, taxpayers are required to pay any tax deficiency or claim areund or any excessive tax withheld or the year. In other cases, ofeninvolving payments o dividends, interest, rent and royalties to non-residents, the amount withheld is imposed as a final tax without thepossibility o any urther payment or reund. In either case, the obliga-tion to withhold is imposed on the payer o the amount. In most cases,the payer will be a resident o the country or a non-resident with a

permanent establishment in the country. Te provisions o tax treatiesdo not deal with withholding per se. Consequently, the application owithholding as an interim measure or as a withholding tax is a matteror domestic law. Tus, even i a treaty provides or a maximum taxrate o 15 per cent on the amount o a dividend paid by a resident com-pany to a shareholder resident in the other country, the domestic lawmay require the company to withhold at a higher rate or a lower rate,or it may exempt the payment rom residence country tax completely.I the country requires withholding at a rate higher than the rate o taxspecified in the treaty, it must provide a reund o the excess tax with-held. In this case, the non-resident is usually required to file a claimor a reund, which the tax authorities have an opportunity to veriy.

Many countries align the obligation to withhold imposed ona resident payer and the rate o taxation specified in the treaty. Inthis situation, the obligation to apply the provisions o the treaty isimposed, in the first instance, on the withholding agent. I the with-

holding agent ails to withhold the required amount, it is ofen madeliable to pay that amount as tax on behal o the non-resident. Again,the issue is: how do the tax authorities get notice that the amount o


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withholding has been reduced pursuant to the provisions o a tax treatyso that they have an opportunity to veriy that the claim or reduced

tax is legitimate? As mentioned above, this concern must be balancedagainst the interest o taxpayers receiving the benefits o reduced with-holding taxes under tax treaties in a timely manner.

4.5 Te role o the tax authorities in applying tax treaties

4.5.1 Introduction

Since the provisions o tax treaties require interpretation and applica-tion, the role o tax authorities o a country in perorming these unc-tions is important. In this section, three aspects o the role o the taxauthorities with respect to applying tax treaties are discussed: the loca-tion o responsibility or applying tax treaties; the powers o the taxauthorities relating to the application o tax treaties; and administra-tive guidance or taxpayers concerning the application o tax treaties.

As a general matter, the development o expertise by the tax

authorities with respect to tax treaties is a critical prerequisite or theirproper application. Such expertise is relatively scarce, even in the taxadministrations o developed countries with extensive and longstand-ing treaty networks. Te development o such expertise in the taxadministrations o developing countries is a serious challenge.

4.5.2 Location o responsibility or applying tax treaties

One important aspect o how the tax authorities o a country applythe provisions o tax treaties is where the responsibility or that unc-tion is located in the organizational structure o the tax administra-tion. Tere are many possibilities in this regard and although no singleoption is right or all countries, it is a matter that all countries shouldconsider seriously. Some o the considerations that should be takeninto account include:

Whether issues involving the application o tax treaties aredealt with by a centralized unit o tax treaty specialists or bydecentralized tax auditors as part o their general assessmentand audit unctions. I the responsibility or tax treaties is


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decentralized, there should be some mechanism or ensuringco-ordination between the decentralized units. I the responsi-

bility or tax treaties is centralized, it is important or the localauditors to be able to identiy tax treaty issues so that they canbe reerred to the central unit responsible or tax treaties.

How the tax administration is organized to deal with inter-national issues in general. Te provisions o tax treaties affectboth residents o a country earning oreign source income andnon-residents earning domestic source income. Tereore, i acountry allocates responsibility or dealing with residents earn-

ing oreign source income and non-residents earning domesticsource income to different units, responsibility or applyingtax treaties could be allocated on the same basis. However, ormany developing countries, the taxation o non-residents earn-ing domestic source income is likely to be more important thanthe taxation o residents on their oreign source income.

I responsibility or applying tax treaties is allocated to differ-ent groups or units within the tax administration, their workshould be coordinated to avoid duplication and inconsistency.

Te relationship between the competent-authority unction andthe application o tax treaties to taxpayers.

4.5.3 Te powers o the tax authorities relating to the applicationo tax treaties

Te tax authorities must have the powers to properly investigate claimsor treaty benefits. Tese powers include the ability to gather inorma-tion and to collect tax. Tese powers are not peculiar to tax treatiesand a detailed discussion is beyond the scope o this overview.

Te power to obtain inormation rom a countrys treaty part-ners is particularly important or the verification o claims or treatybenefits. Article 26 o both the United Nations and OECD ModelConventions provides or the exchange o inormation necessaryto carry out the terms o the treaty.28 In addition, as noted above,

Article 27 o both the United Nations and OECD Model Conventions

28See chapter IX, Exchange o inormation, by Diane M. Ring.


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allows the treaty partners to provide assistance in the collection oeach others taxes.

4.5.4 Administrative guidance or taxpayers concerningthe application o tax treaties

It is obviously important or the tax authorities to provide as muchinormation as possible to taxpayers on how the provisions o thecountrys tax treaties will be applied. At the very least, the tax authori-ties should provide the text o the tax treaties that the country hasentered into with other countries, preerably in electronic ormatreely accessible to taxpayers and their advisers. Other inormationthat could be provided includes treaties signed, but not yet ratified,and an up-to-date list o countries with which negotiations or a taxtreaty have commenced. Te provision o this type o basic inorma-tion is especially important or developing countries in which suchinormation may not be readily available rom commercial publishers.

In addition, the tax authorities should provide inormation

about any procedures that must be ollowed, or orms that must befiled to obtain treaty benefits, including any related time requirements.It is desirable that such inormation be provided in a readily accessiblemanner on the tax authorities websites. reaty benefits should not bedenied because taxpayers cannot easily discover and comply with anyprocedural requirements. Similarly, any orms should also be readilyavailable on those websites.

Te use o orms is a common and effective way used by several

countries to allow taxpayers to claim treaty benefits. o the extent thatsuch orms may impose procedural requirements, however, they m

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