Double taxation Treaties
dictionary defines double tax treaties as an agreement between multiple
countries that reduces the amount of tax that a company has to pay in order to
avoid paying tax twice on the same income (Cambridge Dictionary, 2017). Vogel (1986) defines it as the phenomenon of
imposing of comparable taxes in two or in some cases multiple nations on the
same taxpayer with regards to the same subject matter and for similar periods
in time. Double taxation is a major problem when conducting a
trade from one nation to another because the taxpayer’s income is susceptible
to being taxed twice. Therefore, the DTT established between the nations helps
to determine who has the right to levy taxes on the income to prevent double
taxation. Apart from preventing double taxation, DTT also prevent or provide
solutions to facilitate international trade.
There are two main
organizational boards that oversee safe treaty agreements between nations. The
OECD which has member from developed countries and the UN which include members
from developed countries and also from developing countries. (Miller, oats,
Mulligan 2017). These super nationals provide a guideline on how the
transaction between the two states should be carried out. This paper will
critically analyse the concept of bilateral tax treaties stating the main
objectives of tax treaties. It will give detailed insight to which contracting
state has the right to tax the income of a resident. This paper will also discuss the relationship
between domestic laws of the United states and double tax treaties as well as
the relationship of tax treaties and European union law.
ON BILATERAL TAXATION TREATIES
AVOIDANCE OF DOUBLE TAXATION:
Bilateral taxation treaty is an alliance between two
contracting states, to prevent the issue of double taxation. The countries have
different domestic laws on how income should be taxed, this conflict results in
double taxation. Double taxation occurs when a resident of a particular country
generates source income in a different country (Baker 2014). For example, a
resident of country R who gains income in country T will be subject to tax in
the country of residence for worldwide income as well as in the country where
the income was made. Consequently, to prevent the issue of double taxation, the
OECD model of tax treaties allocates the right to tax to the resident country
there by regulating the taxes imposed in the source country. The taxpayer is
giving the options in the resident states to lay claims on tax credits or tax
exemptions on income from the source country (Vogel, K. 1998).
However, Dagan (2000) argues that tax treaties do not
fix the problem of double taxation, it is an absolute myth. The author argues
it is myth because, the tax treaties basically imitate the unilateral policies
established in the different countries without the benefits of. One of the
major advantages of the unilateral solution is that the host country also
benefits from the tax revenue. Unlike the bilateral solution where the resident
country gets all the tax revenue. In a case where the two countries involved are
a developing country and a developed country the developed nation benefits more
from the treaty. Whereas the points argued by Dagan are valid, tax treaties do
not only prevent double taxation. There are other aspects of tax treaties that
benefits the countries involved.
PREVENTION OF TAX
Another reason why countries enter into a tax treaty
with each other is to address the issue of tax evasion and tax avoidance. To
prevent tax evasion, the tax authorities are required to exchange information
about people or corporations who have tax obligations in their country. The
disclosure of information amongst the countries makes it easier to track down
and collect taxes owed (Kysar, 2016)
RIGHT TO TAX
To prevent the problem of double taxation it is
important to determine which jurisdiction has the right to tax the income. It
is important to determine if the taxpayer is considered a tax resident or a
corporation in the country. To be considered a tax resident in most countries,
an individual has to be present in that country for a period of no less than
183 days (Miller, Oats and Mulligan, 2017p. 48). Article 4 of the OECD Model
tax convention give a detailed description as to who a resident is. According
to Article 4 a resident of a contracting state is liable to be taxed if the
individual is domicile or resident in that state.in this case the resident
state has the right to tax income from the source country, since the individual
is considered a resident. In the case where the individual is considered a
resident in both states the OECD model convention Article 4 explains who has
the right to tax. The individual will be considered a resident if they own a
permanent residence available, in the case where the individual does not have a
permanent residence the country where they have a habitual abode is considered
the resident country. Also, in the case where the individual is considered a
national of both states, the resident state will be the place where the
effective management is located.
RIGHT TO TAX
Article 5 in the OECD tax model convention discusses
permanent establishments. This article establishes who has the right to tax the
income of companies. Permanent establishment is defined as a fixed place of
business where business is carried out wholly or partly (OECD 2015). Article 7
establishes that the contracting state cannot tax profits of an establishment received
in the other contracting state unless the business is conducted using a
permanent establishment. For a business to be considered a permanent
establishment it has to be fixed this refers to the geographical location of
the business. A permanent establishment must have a place of business this
means have facilities that are used by the business. The premises must be
available to the enterprise. As earlier stated, business of the enterprise must
be carried out in a fixed a wholly or partially fixed place. Once an enterprise
meets the demands of this rule they are subject to tax in the contracting
ANALYSIS OF DOUBLE TAXATION TREATY IN RELATION TO THE
UNITED STATES DOMESTIC LAW
The United States main source of law is from the US constitution
which lists the power of the three tiers of government. The federal government
is responsible for making tax treaties through the supreme court which
negotiates the treaties on their behalf (Infanti 2006). Under the supremacy
clause article 6, the supreme court has declared tax treaties the supreme law
of the land. In the case where there is a conflict between the state law and
the tax treaty, the treaty has precedence over the state law. Treaty law
usually do conflict with the state law because treaties are conducted with
federal laws. However, some of the nondiscrimination articles in US treaties
affect state laws. Treaty override are usually not common because the discredit
country and make it difficult to enter into an alliance with other countries
because they are no longer seen as credible and trustworthy. However, a treaty
override is indeed possible, the congress is well in their rights to enact a
new law that overrides the international tax laws to clear the conflict amongst
the contracting states (Infanti 2006).
DOUBLE TAXATION TREATIES IN RELATION TO EUROPEAN UNION LAW:
Cross boarder double taxation occurs where two
different countries try to collect tax for the same income or property
belonging to a taxpayer for the same tax period (European commission, 2017).
Generally, there are no EU laws set up to eliminate double taxation as most EU
countries have bilateral tax treaties set up amongst themselves (European
commission, 2017). The European Unions’ Court of Justice ruled that in the
absence of an EU wide measure to eliminate double taxation, EU member countries
retain the power to define the criteria for allocating their power of taxation
amongst them through the use of double taxation treaty or unilateral taxation.
In the EU, double tax treaties are subject to the model convention drawn up by
the OECD, some of the OECD basic principle include guides on how to deal with
situations of tax residence, double tax relief, pension, mutual agreement
procedure amongst other principles (European commission, 2017).
On the 10th of October 2017, the EU
enacted new rule that would aid the better resolution of tax disputes, these
rules were set up to ensure that citizens and businesses can resolve disputes
that relate to the interpretation of tax treaties are quickly and efficiently
(European commission, 2017). These new rules apply to situations where more
than one country claim the right to tax the same income or the same profits
from a company or taxpayer, it is estimated that in the EU there are around 900
cases of double taxation issues, this might be as a result of a difference in
the interpretation of bilateral treaties between member countries (European
The adoption of these new laws gives taxpayers a
greater sense of certainty when they seek a resolution of dispute to their
interpretation of tax treaties or double taxation problems; the laws allow for
a wider range of cases to be handled efficiently and in a timely fashion as the
EU laws have placed deadlines on resolution of cases (European commission,
The agreement ensures that taxpayers with tax
disputes can start procedure where the member state involved must do all that
is possible to resolve the dispute with two years of the case (European
commission, 2017). However, the European Union requires that if no resolution
is reached within this stipulated period, then the member states must set up an
advisory commission to take up arbitration of the case, and id this isn’t done
then the taxpayer has the right to bring the case before the national court to
do so (European commission, 2017). According to the rules the advisory
commission will compromise of three independent but competent members and
representatives of the country in question and will have a six-month time limit
to deliberate on the case and deliver a decision which would be binding and
immediately enforceable (European commission, 2017).
Figure 1: the above table shows the key aspects of
the rules (European commission, 2017).
treaties are complex phenomenon and thus a precise definition is difficult to
come by as exemplified by the OEEC Fiscal Committee in 1958 (Sanaya, n.d).
Compared to bilateral tax treaties there are very few multilateral tax treaties
because they tend to be more difficult to agree upon. The important
multilateral tax treaties to be aware of include: The Convention on Mutual
Administrative Assistance in Tax Matters (1988); this is the most comprehensive
multilateral tax instrument that assists inter-state co-operation to combat tax
evasion and avoidance and was drawn up in a collaboration between OECD and the
council of Europe (Georgetown Law Library, 2017). The Protocol Amending the
Convention on Mutual Assistance in Tax Matters of 2010 is another important
multilateral tax treaty to look at, it is a protocol to the 1988 convention
that makes provision for the exchange of information, multilateral simultaneous
tax examinations and across the border help in the collection tax (Georgetown
Law Library, 2017). Finally, there is the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent BEPS of 2017; according to the
Georgetown Law Library (2017) this treaty was drafted to assist the OECD in the
implementations of the recommendations made by it BEPS project, this is to
combat the base erosion and profit shifting. It also aids in the fight against
abuse of treaties and the improvement of dispute resolution mechanisms.
OF OECD AND UN TAX MODEL
One of the major
roles of tax treaties is to eliminate the problem of tax avoidance and tax
evasion as established from the research in this paper. To tackle this issue
down the OECD and UN have come up with tax planning strategies Base Erosion and
profit sharing. This is an ongoing process to eliminate profit shifting schemes
that corporations and individual tax payers partake in. BEPS has 15 action
plans which are designed to reform international tax standards to include
coherence, substance and transparency. Transparency in exchange of information
between contracting states to prevent tax evasion (BEPS OECD).
Conclusively, this essay analyses the concepts of tax
treaties which is an alliance between two contracting states. It gives a clear
understanding of who has the right to tax the income of the taxpayer which is
important to prevent and eliminate the issue of double taxation. This paper
also gives insight into the different types of treaties, aside from bilateral
treaties which is an agreement between two contracting states on who has the
right to tax a taxpayer for a particular tax item in a particular period. There
are also multilateral treaties which is an alliance
between multiple states that exists to conduct international transaction. In
this essay, it is also evident the roles the super nationals the OECD and UN play
in combating tax evasion, double taxation using BEPS. Finally, bilateral
treaties give taxpayers a level of certainty that they are not going to be
taxed twice on the same tax item between the contacting states.
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Infanti, A.C (2006)
“Domestic Law and Tax Treaties: The United States=”. University of
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Accessed 6 Dec. 2017.
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