United Nations Model Tax Convention
Developments 6th Asia/ Africa IFA Conference
Mauritius10 May 2012
Michael Lennard Chief, International Tax Cooperation Section
Financing for Development Office, United Nations [email protected]
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The Essential Background:Monterrey Consensus on
FfD• Financing for Development (FfD)
process is where UN Tax Cooperation "sits":
• Main Ideas:– Up to countries to determine how to
develop (sovereignty);– Joint responsibilities – good
governance is needed and developed countries should support development.
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Monterrey Consensus on FfD1. Domestic resource mobilisation (DRM)
(important tax role in development – schools, hospitals, roads etc.. – it isn't only about avoiding double taxation, even though that's important – see 2).
2. Foreign direct investment (FDI) (importance of investment to development, so decidedly not anti-business).
3. International trade4. Official development assistance (aid)5. External debt
6. "Systemic" issues ("voice and participation" of developing countries in norm-setting – an important tax focus).
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Composition of the UN Tax Committee
• Committee is custodian of UN Model.• Comprised of twenty-five members
nominated by Governments and acting in their personal capacity.
• Selected to reflect an adequate equitable geographical distribution, representing different tax systems.
• Appointed by the UN Secretary-General, after notification to the UN Economic and Social Council (ECOSOC).
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Current Membership (2009-2013)"D’ing" country# experts (15)
MoroccoEgypt South AfricaNigeriaGhanaSenegal
ChinaMalaysiaRepublic of Korea*IndiaPakistan
BarbadosChile*Mexico*Brazil
"D’ped" country# experts (10)
Belgium*Italy*Spain*Germany*
Norway*Switzerland*
United States*New Zealand*Japan*Bulgaria
# Though nominated by countries, Members serve in their own capacity
* Denotes OECD Member
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Mandate of the UN Tax Committee
• (i) Review and update as necessary the United Nations Model Double Taxation Convention between Developed and Developing Countries and the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries;
• (ii) Provide a framework for dialogue with a view to enhancing and promoting international tax cooperation among national tax authorities;
• (iii) Consider how new and emerging issues could affect international cooperation in tax matters and develop assessments, commentaries and appropriate recommendations.
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Mandate of the Committee
• (iv) Make recommendations on capacity-building and the provision of technical assistance to developing countries and countries with economies in transition; and
• (v) Give special attention to developing countries and countries with economies in transition in dealing with all the above issues.
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UN Tax Committee• Term of office is four years (end of
June 2013). • Meet on a yearly basis for no more
than 5 days (so relies on a subcommittee system for papers and continuing work).
• Others actively participate in its Annual Session and Subcommittees – country governments, business, non governmental organisations, advisors and academics.
• A very small secretariat. • Website: http://www.un.org/esa/ffd/tax/
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The 2011 Update• First since (effectively) 1999.• Some Articles and Commentaries have
changed more than others.• Examples both of convergence with and
divergences from OECD Model – depending on what passes the test of benefits to developing countries.
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Threshold for Source Country Taxationof Business Profits
• Article 5 (Permanent Establishment/ "PE")- Updated and clarified.- A key concept – the level of economic
engagement/ footprint required to justify source country taxation of business profits under treaties.
- Generally lower/ more readily met under UN Model.
- So more likely double taxation is avoided by source country being allowed to tax and the residence country of the taxpayer only having residual rights.
10
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Threshold for Allowing Source Country Taxation
• OECD Model – majority view says same rules for whether the level of economic engagement justifies more source country taxation in cases of services as in provision of goods.
• UN Model says the concept of what is sufficient economic engagement differs between goods and services. – shouldn’t be obsessed in looking for offices,
"bricks and mortar" etc in particular geographical parts of your country and examining the connections between those offices.
– if services are being provided over a reasonable period of time in your country – that should be enough. 11
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Threshold for Allowing Source Country Taxation
• Tax treatment of services is a main distinguishing characteristic between the two models.
• In fact, the UN Model has probably influenced the OECD Model to at least include expression of a minority view which reflects the same sort of approach as in the UN Model.
• A major project of examining services taxation in a thoroughgoing way is underway in the UN Tax Committee.
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Attribution of Profit • Once you have a permanent
establishment, you have to attribute profit to it, to determine the amount of profit that the source country can tax (Article 7; Business Profits).
• OECD approach – hypothesising of the PE as if it was a separate legal entity from the rest of the "enterprise", though actually it clearly isn’t. In effect it means you are treated as though you can lend to yourself or pay royalties for yourself.
• UN Model differs – not hypothetically treated as a separate entity – generally cant lend to yourself etc.
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Attribution of Profit • Avoids the difficulty of assuming
hypothetical flows within a single legal body and having to give deductions for notional flows, without having the right to tax those flows.
• Avoids the complexity of the OECD Article – a broader concern that developing countries tend to disproportionately suffer from complex "solutions" to perceived problems.
• Who should bear the cost of complexity?
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• Article 11 (Interest)– Certain Islamic financing issues
addressed. –Q. How can an interest Article apply
when there is no interest?–A. It isn’t interest, but should be
treated in the same way for the purposes of avoiding double taxation.
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Islamic Financing
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• Article 13 (Capital Gains)• As a result of work done by the UN Tax
Committee in past years on the "improper use of treaties", paragraph 5 of Article 13 will be amended as follows:– "Gains, other than those to which paragraph
4 applies, derived by a resident of a Contracting State from the alienation of shares of a company which is a resident of the other Contracting State, may be taxed in that other State if the alienator, at any time during the 12 month period preceding such alienation, held directly or indirectly at least __ per cent (the percentage is to be established through bilateral negotiations) of the capital of that company."
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Capital Gains
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• Article 14 (Independent Personal Services) – Deleted from OECD Model. – UN Tax Committee discussed possible
deletion, while seeking to preserve source state taxing rights through Articles 5 and 7.
– But a lot of support for Article 14 as differentiated from Art. 5 (e.g. fixed base vs. PE, Article 24 Non Discrimination consequences?)
– It will stay, will be examined for possible improvements, and deletion will only be an option addressed in Commentary. 17
Independent Personal Services
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• Article 25 – the Mutual Agreement Procedure– Differences can exist between
countries, such as interpretations about how the double tax treaty operates. This can mean double taxation results.
– The Mutual Agreement Procedure Article in tax treaties allows designated representatives (the "competent authorities") from the governments of the two countries to try to resolve the differences and avoid double taxation.
Dispute Settlement
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– Generally does not compel competent authorities actually to reach an agreement and resolve their tax disputes. They are obliged only to use their "best endeavours" to reach an agreement and that may not solve the issue if, e.g. different interpretations or different calculations.
Dispute Settlement
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• Article 25 – the Mutual Agreement Procedure choices where there is no resolution:– Leave unresolved under treaty (e.g. leave to
domestic law) or– Force a decision.
• Mutual Agreement Procedure Arbitration – New Alternative Art 25 B will include a mandatory arbitration option where put in a bilateral treaty – still within Competent Authority (CA) process.
• Pros and cons of mandatory arbitration for countries – requires close consideration in the light of your own circumstances.
Dispute Settlement
Arbitration Under the OECD Model
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Standard OECD Model
MAPissue unresolved
after 2 Years?
Unresolved issues arising from thecase submitted to arbitration if
taxpayer requests
Yes
Decision binds countries
Arbitration Under the UN Model
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UNModel followed
MAPIssue unresolved
after 3 Years?
Unresolved issues arising from thecase submitted to arbitration if
either CA requests
Yes
Decision binds countries unless both CAs agree
Art. 25 B (mandatory
binding arbitration) option preferred
Art. 25 A (no arbitration)
option preferred Yes
Unresolved issues arising from thecase may remain unresolved
if domestic law can’t solve
No Arbitral decision
to bind countries
Differences to OECD Model• While the OECD Model
Convention provides that arbitration must be requested by the person who initiated the case, UN Art. 25B provides that arbitration must be requested by the competent authority of one of the Contracting States.
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Differences to OECD Model• UN Art. 25B, unlike the OECD
Model Convention provision, allows the competent authorities to depart from the arbitration decision if they agree to do so within six months after the decision has been communicated to them. But both would need to agree.
• Inherently optional, so no need for OECD footnote.
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The Choice?• Why you might prefer no
arbitration clause– satisfied with the combination of
MAP and domestic law; – feel lack of experience in MAP may
make it harder to succeed in arbitration;
– consider it hard to find arbitrators who fully understand developing country issues;
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The Choice?– costs of arbitrator, facilities
translation etc must be borne by the countries (and foreign exchange may be required) – concern that might unduly pressure less well-off countries to "cave-in";
– possible concerns that arbitrators may instinctively identify with more regular "clients" (big countries);
– possible criticisms of undue abrogation of sovereignty? 26
The Choice?• Why you might prefer
mandatory binding arbitration– more certainty to taxpayers – better
investment climate (though they can’t initiate under UN Model);
– domestic remedies may not solve (in fact they may be "timed-out");
– encourages solving within 2 (OECD) or 3 (UN) years;
– you may consider third party aspect actually reduces pressure on you from larger countries/ multinationals;
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The Choice?– use of arbitrators can adjust for
gaps in domestic experience and can be a learning process;
– limiting sovereignty in this way has benefits to a country.
• Different countries, different circumstances, different conclusions.
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Exchange of Information (EOI)• Expanded Article 26.• Basically the same as the OECD Model now,
because a strong EOI provision was seen as particularly important for developing countries in combating tax avoidance and evasion.
• Main difference makes clear a purpose of exchanging information to assist in combating both "tax avoidance" and "tax evasion" - useful as there doesn’t seem to be a consistent use of these terms – best to clarify.
• Part of a package of changes to combat abuses (Article 1 Commentary – Improper Use of Treaties - and in Article 13(5)).
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• New Article 27.• Traditional "Revenue Rule" - one
country does not enforce a revenue judgment of another nation.
• Sometimes seen as an exertion of that country’s sovereign power.
• Widely recognised that this is taken advantage of to avoid tax obligations.
Mutual Assistance in Enforcing Tax Debts
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• New optional Article allows enforcement as if it was the country’s own debt. There are protections against abuse.
• Picks up provision from OECD Model because seen as potentially useful for developing countries in combating avoidance and evasion, but with greater recognition of the burdens this can place on smaller developing countries - contribution to costs obligations perhaps clearer under the UN Model.
Mutual Assistance in Enforcing Tax Debts
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• A lot of the 2011 changes pick up aspects of the OECD Model that have changed since 1997 but are seen as helpful for developing countries – including in assisting effective source-based taxation.
• Other parts not yet fully considered (e.g. OECD Partnerships Report issues) are not picked up.
Other Relationships to the OECD Model?
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• Will there generally be greater convergence or divergence between the UN and OECD Models?
• Illuminating recent debate on the Article 9 Commentary of the UN Model.
Other Relationships to the OECD Model?
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• Used to say:– "3. With regard to transfer pricing of goods,
technology, trademarks and services between associated enterprises and the methodologies which may be applied for determining correct prices where transfers have been made on other than arm's length terms, the Contracting States will follow the OECD principles which are set out in the OECD Transfer Pricing Guidelines. These conclusions represent internationally agreed principles and the Group of Experts recommend that the Guidelines should be followed for the application of the arm's length principle which underlies the article."
Paragraph 3 of the UN Model Commentary on Article 9
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• Now it will:– Put that statement in context as one made by the
former UN Group of Experts;– Note the issue has not been fully considered by the
current Committee;– Refer to the public records of Committee's Annual
Sessions for the debate so far; and– The records of the 2011 Annual Session of the
Committee will note that the recommendation may need to note that the Guidelines are for guidance only and that some Members have expressed reservations.
– Acknowledge agreement on Arm's Length and …– Make clear no change to direction of Practical UN
Transfer Pricing Manual …
Paragraph 3 of the UN Model Commentary on Article 9
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Subcommittee on Transfer Pricing – Practical Issues
• Mandate: – develop a practical manual on transfer pricing,
based on the following principles: a) That it reflects the operation of Article 9 of the
United Nations Model Tax Convention, and the Arm's Length Principle embodied in it, and is consistent with relevant Commentaries of the UN Model [i.e. "recommendation" of following the OECD Guidelines].
b) That it reflects the realities for developing countries, at their relevant stages of capacity development.
c) That special attention should be paid to the experience of other developing countries [i.e. South-South sharing of experiences]; and
d) That it draws upon the work being done in other fora.
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Transfer Pricing Manual• Complete draft manual for adoption
to the 2012 Tax Committee Annual Session (October 15-19).
• Integrated into renewed UN (and hopefully other) capacity building efforts.
• Next meeting in Shanghai (June 14-16)
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Transfer Pricing Manual• Areas of focus:
– What sort of approach might be appropriate for a developing country at its particular stage of development, in line with its own sovereign priorities?
– TP should be understood as a journey – how should it be planned – a staged approach? initial focus areas?
– Integration with other aspects, e.g. general investment promotion policy.
– Can arm's length pricing (ALP) approach be addressed in a way that better works for Developing Countries (especially by allowing focus of limited resources on areas of greatest concern at a point in time, and by reducing levels of data seeking and crunching required for each individual case) and still be ALP?
– How do we most fairly deal with the imprecision and complexity of ALP and distribute its burdens?
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About International Tax Rules
• Everyone wants a single path.• We just want different single paths
because we have different situations and aspirations.
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About International Tax Rules
4141
About International Tax Rules
….. but we do need to think about ways of minimising problems when the paths crunch up against each other…
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About International Tax Rules
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Is It Too Much to Ask?• At the domestic level we recognise:
– Importance of reducing complexity (including law simplification) and compliance burdens;
– Special rules for small and medium taxpayers – recognising in part their more limited resources and the cost to them of complexity and paperwork;
• Do we do the same at the international level for developing countries with limited tax administration capabilities?– Or do we tend to be more resistant to departing
from a single rule; – Not taking into account these factors may reduce
a sense of international "ownership" or "buy-in" for the rules and could in fact lead to dozens of bumpy roads rather than 2 or three highways of country practice.
