HIEP DINH THUE 15468446513

INTERNATIONAL TAXATION Đặng Thị Bạch Vân (MA) bachvan@ueh.edu.vn INTERNATIONAL TAXATION CHAPTER TAX TREATIES CONTENT A A OVERVIEW Legal nature and effect of tax treaties Objectives of tax treaties Model tax treaties Revisions of treaties and treaty overrides Interpretation of tax treaties CONTENTS OF A TYPICAL TAX TREATY INTRODUCTION • • • Tax treaties represent an important aspect of the international tax rules of most countries OECD model treaty & UN model treaty What is the relationship between the tax treaties and domestic law? Legal nature and effect of tax treaties A treaty is an international agreement concluded between states and governed by international law (The Vienna convention on the Law of treaties)  Confer rights and impose obligations on the contracting states  Do not confer rights on citizens or residents of the two states unless the provisions of the treaty are enacted into law in the same way as domestic legislation Legal nature and effect of tax treaties • • • Most tax treaties not impose tax Tax treaties limit the taxes otherwise imposed by a state Apply to all income taxes imposed by the contracting states, including taxes imposed by provincial (state), local, and other subnational governments Objectives of tax treaties The objective of tax treaties, broadly stated, is to facilitate cross-border trade and investment by eliminating the tax impediments to these cross border flows This broad objective is supplemented by several more specific, operational objectives Objectives of tax treaties The most important operational objective of bilateral tax treaties is • • To eliminate double taxation; To limit or eliminate the source country tax on certain types of income and require residence countries to provide relief for source country tax either by way of foreign tax credit or an exemption for the foreign source income Objectives of tax treaties • • One of the most important effects of tax treaties is to provide certainty for taxpayers  facilitating cross-border investment; Tax treaties have an average life of approximately 15 years Model tax treaties • • influential model tax treaties – the OECD model tax convention on income and on capital; the UN model double taxation convention between developed and developing countries; Most countries have their own model tax treaties See history of OECD model treaty/p107 Special treaty issues • • • • Nondiscrimination Treaty shopping Resolution of disputes Administrative cooperation Nondiscrimination The most important type of legal protection against discrimination for tax purposes is the nondiscrimination article of bilateral tax treaties Even the nondiscrimination provisions of the General Agreement on Tariffs and Trade essentially provide that tax discrimination is to be dealt with in accordance with bilateral tax treaties Nondiscrimination The typical nondiscrimination article of a tax treaty prohibits the contracting states from imposing tax consequences on the citizens or residents of the treaty partner that are less favourable or more adverse than the tax consequences imposed on their own citizens or residents See ex/p128 • • National treatment Most-favoured-nation Treaty shopping Only residents of a contracting state are entitled to benefits under an income tax treaty \ Taxpayers who are not residents of a contracting state have frequently sought to obtain the benefits of a tax treaty by organizing a corporation or other legal entity in one of the contracting state to serve as a conduit for income earned in the other contracting state Treaty shopping Although a taxpayer may engage in treaty shopping to obtain any special treaty benefit not otherwise available, most treaty shopping has involved attempts of taxpayers to obtain reduced withholding rates on dividends, interest, and royalties Treaty shopping Form of treaty shopping: • • Use of unrelated financial intermediaries located in a treaty country to make investments for taxpayers who are not themselves eligible for treaty benefits Use of a controlled corporation organized in a treaty country See ex/p130 Resolution of disputes Procedure for resolving disputes: • • A resident of a contracting state who believes that the action of one or both contracting states will cause him/her to pay a tax not in accordance with the treaty may appeal to the “competent authority” of the state of which he or she is a resident The competent authority is typically an official in the country’s tax office or its ministry of finance (treasury department) Different types of disputes: • • • The proper interpretation of treaty language; The tax base The application of the arm’s length principle to cross-border transaction  sometime, APA is used to avoid future disputes Administrative cooperation • • Exchange of information concerning tax matters Tax haven  Information obtained by the tax department of a contracting state under an exchange of information article must be kept confidential, although release of the information in court proceedings generally is allowed Administrative cooperation Rather than waiting for a reluctant foreign government to check up on their taxpayers, a tax department often prefers to audit those taxpayers itself Under international custom, however, the tax authorities of one country cannot visit another country for the purpose of auditing a taxpayer’s records unless invited to so by the foreign government Administrative cooperation  Some governments consider it inappropriate to make such a visit without also obtaining the concurrence of the taxpayer  Several countries have addressed this problem by conducting joint audit programs under which a particular taxpayer is audited by the tax authorities of both countries EXAMPLES Example Which of the following statements is TRUE? The OECD model tax convention covers all taxes The OECD model tax convention covers taxes on income and capital The OECD model convention covers taxes on income, capital and VAT EXAMPLES Example McGinley Ltd, a UK resident company, has won a contract to install thermal insulation in all government buildings in Ruritania The company will send a team of men to Ruritania in January 2017 They envisage that all installation work will be complete by November 2017 Will McGinley Ltd have a permanent establishment in Ruritania under the terms of the OECD Model Treaty? EXAMPLES Example Clarke Limited, a UK resident company, has 10% of the share capital in Overseas Ltd, a company resident in a country that has a tax treaty with the UK in line with the model convention Overseas Ltd declares a dividend of £500,000 You are required to explain the rules set out in Article 10 of the double tax treaty in relation to the taxing of this dividend ANSWERS Answer 1: Only the second statement is true Answer Provided the installation is completed within 12 months there will not be a PE (Article 5(3)) Answer Article 10 provides that the dividend will be taxable in the UK, as this is where the recipient Clarke Ltd is resident In addition the dividend may also be subject to tax where it arises – the withholding tax permitted for a 10% holding is up to 15% Thus Clarke Ltd may receive its share of the dividend net of 15% withholding tax