Double Taxation Agreements Workshop

Interpretation and Application issues

SAINT LUCIA

24 July 2006Tomas Balco

IBFD

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IntroductionIntroduction

• Achieving the objectives of DTC• Prerequisite – existence of DTC

– Proper and uniform interpretation• Prerequisites

– Cooperation of tax administrations

– Appropriate and continuous training of officials

– Appropriate application• Prerequisites

– Existence of proper legislative & administrative framework

– Cooperation of tax administrations

» Exchange of information

» Sharing of experience, best practices and knowledge

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Objectives of Double Taxation AgreementsObjectives of Double Taxation Agreements

• Objectives• (in the light of 1994 Caricom Treaty)

– 1) AVOIDANCE OF DOUBLE TAXATION– Allocation of exclusive taxing rights– Consultation

– 2) PREVENTION OF FISCAL EVASION• WITH RESPECT TO TAXES ON INCOME, PROFITS

OR GAINS AND CAPITAL GAINS– Transfer pricing adjustments– Exchange of information

– 3) ENCOURAGEMENT OF REGIONAL TRADE AND INVESTMENT

– Non-discrimination

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Allocation of Exclusive taxing rightsAllocation of Exclusive taxing rights

• Article 5– General rule

• “Irrespective of the nationality or State of residence of a person, income of whatever nature accruing to or derived by such person shall be taxable only by the Member State in which the income arises, except for the cases specified in this Agreement.

– Special rules• Immovable property• Capital gains• Business Profits, Shipping and Air Transport• Dividend, Interest, Royalty, Management Fees• Rules related to taxation of physical persons

– Dependent– Independent– Artists, Sportsmen– Government services, Students and Trainees– Pensions

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Special rules – taxing rights of the resident stateSpecial rules – taxing rights of the resident state

• Examples of departure from source principles– Capital gains

• (Art 7/3) alienation of ships, aircraft, or containers operated in international traffic

– shall be taxable only in Member State of enterprise

– Shipping and Air Transport• (Art 9) taxable only in Member State of

enterprise

– Employment• (Art 15) when conditions in paragraph 2 not met

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Objective 1 – Avoidance of Double TaxationObjective 1 – Avoidance of Double Taxation

• Generally achieved– Based on the principles of allocation of taxing rights only 1 country

has taxing rights

• Possible double-taxation?– Interpretation of special clauses

• E.g. – Art 7/4 – gains taxable in state where they arise– Which state is it?– Where assets sold?

» Does contract or location of assets prevail?

– Potential disputes about what activities are performed in what states (Art 8) and what profits are to be attributed to those activities

• Need for special interpretation and application guidance

• Instrument of consultation available - Art 23– Is it being widely used?

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Objective 2 – Prevention of Fiscal EvasionObjective 2 – Prevention of Fiscal Evasion

• Double non-taxation– Some may be intended

• Art 11 – Dividends– Not taxable in any state

– Some may be unintended– Combination of exclusive taxing right and– Not exercised

» E.g. Non-existence of certain type of taxation» Tax incentive (Tax holidays)

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Risks?Risks?• Potential abuse

– Structuring company and business transactions so as to take advantage of these loopholes

• Advantage for larger and multinational enterprises, who can afford sophisticated tax planning

– Can impair gentle equilibrium of competition among enterprises

– Most of such abuse may be within legal limits set by the Caricom Treaty

• Since such tax planning takes advantages of discrepancies between tax systems linked with this treaty

– Limited possibility of prevention (limitation of benefits)

– Only some possibility to fight the double non-taxation through other available instruments

• Transfer pricing (Art 10)– What is the practice?

• Exchange of information (Art 24)– Is it being widely used?

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Solutions?Solutions?

• Both short term and long term solutions possible• but depend on cooperation and coordination among participating

tax administration

– Short term• More rigorous interpretation and application of DTC

– E.g. Residency requirement, beneficial ownership, activities performed and attribution of profits

» Working groups sharing experience and identifying critical issues

– Long term• Consideration of eliminating the legal space for abuse

– Possibility of renegotiation of treaty or negotiating protocol amending the treaty

» Based on the experience derived from knowledge sharing and analysis

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Objective 3 – Encouragement of regional trade Objective 3 – Encouragement of regional trade and investmentand investment

– May be to a large extent achieved by avoiding double taxation

• Double non-taxation may also be positive element as long as enterprises reinvest the tax saved within the Caricom region

– But may be counterproductive, when the tax savings are transferred and exported to 3rd jurisdictions through other tax planning schemes

– May also negatively effect the competition, since the enterprises able to benefit from double non-taxation will be in more favorable situation than domestic enterprises, dully paying taxes

– This objective may be further enhanced by transparent and foreseeable interpretation of treaty and its application

• Allowing taxpayers also understand tax administration’s view

– Coordinated tax treaty policy with 3rd countries may also be of assistance

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Steps aheadSteps ahead

• Building on previous cooperation and networking practice• Possibly enhancing the exchange of experience, best

practices and knowledge• Developing of working groups

– Analysis of experience and practices– Exploring possibility of uniform interpretation and coordinated

application– Identification of potential improvements and enhancements– Exploring feasibility of improvement of the legislative framework

• Least but not last, drawing lessons and learning from the process…