THE UNITED NATIONS MODEL TREATY – SOME THOUGHTS

ROY ROHATGIMUMBAI – JULY 6, 2012

MODEL TAX TREATIES – HISTORY (1921-1954)

• FIRST BILATERAL TAX TREATY: PRUSSIA – AUSTRIA HUNGARY 1899 • DEVELOPMENT OF MODEL TAX TREATY FROM 1921

LEAGUE OF NATIONS TAKES INITIAITVE (1921-1946)- APPOINTS FOUR ECONOMISTS - THEIR 1923 REPORT: DOUBLE TAX A BARRIER TO FOREIGN

INVESTMENTS - HENCE NEED TO AVOID DOUBLE TAXATION- APPOINTS FINANCIAL COMMITTEE IN 1923 - FIRST DRAFT MODEL FOR AVOIDANCE OF

DOUBLE TAXATION IN 1927: MODEL (ISSUED 1928) FAVOURED RESIDENCE STATES- SETS UP PERMANENT FISCAL COIMMITTEE – 1933 DRAFT MODEL (ISSUED 1935) - DEALT WITH

ALLOCATION OF TAXING RIGHTS E.G. BUSINESS INCOME -- COMBINED 1928 & 1935 MODELS TO DRAFT 1943 MEXICO MODEL – 1946 LONDON MODEL

- - MEXICO MODEL FAVOURED SOURCE TAXATION – LARGELY DEVELOPING COUNTRIES - - LONDON MODEL FAVOURED RESIDENCE TAXATION – LARGELY DEVELOPED COUNTRIES

UNITED NATIONS- LEAGUE OF NATIONS REPLACED BY UNITED NATIONS - WORK TAKEN OVER BY FISCAL COMMISSION

SET UP BY ECONOMIC AND SOCIAL COUNCIL (ECOSOC) OF THE UNITED NATIONS IN 1946

- UNITED NATIONS VOTED IN FAVOUR OF MEXICO MODEL IN 1951 (NOT ACCEPTED BY DEVELOPED CONTRIES)

- WORK OF FIISCAL COMMITTEE SUSPENDED IN 1954

OECD MODEL – HISTORY- POST 1954

OEEC MODEL -OEEC (RENAMED OECD) TOOK OVER THE WORK USING LONDON MODEL TO DRAFT A MODEL FOR DEVELOPED COUNTRIES

BASED ON TWO KEY PRINCIPLES: (I) RESIDENCE COUNTRY WILL RETAIN MOST TAXING RIGHTS AND GIVE CREDIT OR EXEMPTION RELIEF

FOR DOUBLE TAXATION(II) SOURCE COUNTRY WOULD RESTRICT ITS TAXING SCOPE TO REDUCE SOURCE TAXATION AND

REDUCE TAX RATES WHERE TAXING RIGHTS RETAINED (TO ENSURE DOMESTIC TAX SYSTEM RELATIVELY UNAFFECTED SOURCE TAXATION KEPT TO A MINIMUM)

LED TO OECD 1963 MODEL (DRAFT) – OECD MODELS 1977(FINAL) – 1992 – 1994- 1995- 1997 – 2000 – 2003 – 2005- 2008 – 2010 – 2012 ???NOTE: OECD MODEL MEANT FOR USE BY ITS MEMBER STATES (MAINLY DEVELOPED COUNTRIES WITH COMPARABLE TRADING PATTERNS) – TAX REVENUE LOSSES BY SOURCE STATES WERE EFFECTIVELY OFFSET BY REVENUE GAINS IN RESIDENCE STATES – OECD COMMITTEE ACCEPTED IN 1965 THAT IT WAS NOT APPROPRIATE FOR TREATIES WITH DEVELOPING COUNTRIES THIS APPROACH IS NOW QUESTIONED WITH INCREASING SOURCE TAXATION IN DEVELOPED COUNTRIES AND RISE OF DEVELOPING COUNTRIES E.G. INDIA AND CHINA – IMPACT OF MNCs ?

INCREASING CONCERN OVER ISSUE OF BASE EROSION AND PROFIT SHIFTING

QUESTION: WHY TWO MODELS ? WHY A UNITED NATIONS MODEL

- UNLIKE DEVELOPED COUNTRIES, THEIR TREATIES WITH DEVELOPING COUNTRIES LARGELY HAD INCOME AND CAPITAL FLOWS (AND REVENUE SACRIFICE) WHICH WERE ONE-SIDED - HENCE OECD MODEL NOT SUITABLE IN SUCH CASES

- CONFIRMED BY OECD FISCAL COMMITTEE REPORT OF 1965 PARA. 164 ON FISCAL INCENTIVES FOR PRIVATE INVESTMENT IN DEVELOPING COUNTRIES

- LED TO DEMAND FROM “ECOSOC” FOR A TREATY MODEL SUITABLE FOR DEVELOPING COUNTRIES WITH DEVELOPED COUNTRIES

KEY ISSUE: ALLOCATION OF TAXING RIGHT -- NOT AVOIDANCE OF DOUBLE TAXATION PER SE

1965 OECD REPORT

• “THE ESSENTIAL FACT REMAINS THAT THE TRADITIONAL TAX CONVENTIONS HAVE NOT COMMENDED THEMSELVES TO DEVELOPING COUNTRIES.

• EXISTING TREATIES BETWEEN INDUSTRIALISED COUNTRIES SOMETIMES REQUIRE THE COUNTRY OF RESIDENCE TO GIVE UP REVENUE.

• MORE OFTEN, HOWEVER, IT IS THE COUNTRY OF SOURCE WHICH GIVE UP REVENUE.

• SUCH A PATTERN MAY NOT BE EQUALLY APPROPRIATE IN TREATIES BETWEEN DEVELOPED AND INDUSTRIALISED COUNTRIES AND THE REVENUE SACRIFICE WOULD BE ONE-SIDED”

Source: Report of OECD Fiscal Committee (1965) on Fiscal Incentives for Private Investment in Developing Countries, para. 164

UNITED NATIONS MODEL – ITS COMMITTEE

• IN 1968, ECOSOC SET UP A COMMITTEE OF AD HOC GROUP OF INDEPENDENT EXPERTS (NOT COUNTRY REPRESENTATIVES) ON TAX TREATIES BETWEEN DEVELOPED AND DEVELOPING COUNTRIES – THIS COMMITTEE DEVELOPED AND LAUNCHED THE UN MODEL TREATY (WITH OWN COMMENTARIES) IN 1980

• IN 1980, GROUP WAS RENAMED AS AD HOC GROUP OF EXPERTS ON INTERNATIONAL COOPERATION IN TAX MATTERS WITH 25 MEMBERS (15 FROM DEVELOPING AND 10 FROM DEVELOPED COUNTRIES)

• AFTER THE MONTERRAY DECLARATION IN 2002, THE COMMITTEE NOW COMPRISES OF MEMBERS NOMINATED BY GOVERNMENTS AND ACTING IN THEIR PERSONAL CAPACITY. THEY ARE SELECTED TO REFLECT AN ADEQUATE EQUITABLE GEOGRAPHICAL DISTRIBUTION, REPRESENTING DIFFERENT TAX SYSTEMS. THEY ARE APPOINTED BY THE UN SECRETARY-GENERAL, AFTER NOTIFICATION TO THE UN ECONOMIC AND SOCIAL COUNCIL (ECOSOC).

• EACH COMMITTEE IS APPOINTED FOR FOUR YEARS. AS FROM 2005, ITS STATUS IS NOW AS A FULL UN COMMITTEE OF EXPERTS ON INTERNATIONAL COOPERATION ON TAX MATTERS MEETING ANNUALLY.

• COMMITTEE WORKS UNDER THE ECOSOC COMMITTEE ON FINANCING FOR DEVELOPMENT AT THE UNITED NATIONS

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

MANDATE OF THE UN TAX COMMITTEE

• 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;

• PROVIDE A FRAMEWORK FOR DIALOGUE WITH A VIEW TO ENHANCING AND PROMOTING INTERNATIONAL TAX COOPERATION AMONG NATIONAL TAX AUTHORITIES;

• CONSIDER HOW NEW AND EMERGING ISSUES COULD AFFECT INTERNATIONAL COOPERATION IN TAX MATTERS AND DEVELOP ASSESSMENTS, COMMENTARIES AND APPROPRIATE RECOMMENDATIONS.

• MAKE RECOMMENDATIONS ON CAPACITY-BUILDING AND THE PROVISION OF TECHNICAL ASSISTANCE TO DEVELOPING COUNTRIES AND COUNTRIES WITH ECONOMIES IN TRANSITION; AND

• GIVE SPECIAL ATTENTION TO DEVELOPING COUNTRIES AND COUNTRIES WITH ECONOMIES IN TRANSITION IN DEALING WITH ALL THE ABOVE ISSUES.

HOW DOES THE COMMITTEE OPERATE ?

• MOST DETAILED DISCUSSIONS ON SELECTED ISSUES ARE DONE IN SUBCOMMITTEES OF SELECTED MEMBERS AND OUTSIDE EXPERTS THROUGHOUT THE YEAR – THEIR CONCLUSIONS ARE THEN DISCUSSED AND FINALISED BY THE ENTIRE COMMITTEE AT THE ANNUAL MEETING IN GENEVA EVERY OCTOBER. (ONE WEEK).

• ANNUAL MEETING IS ATTENDED BY THE FULL COMMITTEE PLUS OBSERVERS FROM NON-MEMBER COUNTRIES, INTERNATIONAL ORGANISATIONS (IMF, WB, ADB, OECD, ETC.) AND INTERNATIONAL TAX EXPERTS FROM CIVIL SOCIETY. ALL ARE GIVEN TIME TO PRESENT THEIR VIEWS AND TO ACTIVELY PARTICIPATE IN THE DISCUSSIONS

• EFFORT IS MADE FOR ALL DECISIONS TO BE BASED ON CONSENSUS WITH FULL REPORTING OF DIFFERENT VIEWPOINTS. SINCE IT IS DIFFICULT TO FIND A SINGLE SOLUTION IN ALL CASES, LIMITED CHOICES OR ALTERNATIVE TREATMENT ARE PERMITTED. WHEN UNABLE TO AGREE, MATTER IS LEFT TO BILATERAL NEGOTIATIONS (NOTE: ITS RECOMMENDATIONS ARE NOT BINDING)

• THERE IS CONSIDERABLE LOBBYING BY OECD MEMBERS TO ADHERE TO THEIR MODEL AND EXTENSIVE USE OF OECD TEXT AND COMMENTARIESIS IMADE WHERE NOT CONTROVERSIAL HOWEVER, IT IS UNDERSTANDABLE THAT WHAT SUITS 34 LARGELY DEVELOPED OECD MEMBER STATES MAY NOT MEET THE NEEDS OF REMAINING 159 NON MEMEBR STATES WITH DIFFERING NATIONAL TAX AND TREATY POLICIES UNDERLYING THEIR ECONOMIC, SOCIAL AND POLITICAL NEEDS.

• I BELIEVE THE MODEL SHOULD PROVIDE FOR MULTIPLE CHOICES (WITHIN REASON) TO MEET THE NEEDS OF NATIONAL TAX AND TREATY POLICIES AS WELL AS ASPIRATIONS OF VARIOUS COUNTRIES - ONE SIZE CANNOT FIT ALL.-- IT SHOULD PROVIDE MORE FLEXIBILITY TO PRESERVE THEIR SOVEREIGN TAXING RIGHTS AND IMPROVE TREATY COMPLIANCE

UN COMMITTEE OBJECTIVES

• EACH MEMBER STATE HAS SOVEREIGNTY OVER ITS TAXING RIGHTS AND IS FREE TO FOLLOW ITS OWN NATIONAL TAX AND TREATY POLICY. UN MODEL TREATY DOES NOT SET OUT TO PROVIDE A SINGLE UNIVERSAL APPROACH BUT PROVIDE WORKABLE SOLUTION FOR TREATY ISSUES

• UNLIKE OECD MODEL THE UN MODEL AND ITS COMMENTARIES ARE NOT BINDING BUT PERSUASIVE –THEY ARE MEANT TO BE A GUIDE TO ENSURE INTERNATIONAL CONSISTENCY IN DRAFTING AND NEGOTIATING TAX TREATIES AND THEIR APPLICATION

• UN MODEL IS MEANT TO PROVIDES GUIDANCE PARTICULARLY TO DEVELOPING COUNTRIES ON DRAFTING, NEGOTIATING AND IMPLEMENTING. – HENCE EFFORTS MADE TO PROVIDE SIMPLER SOLUTIONS TO ISSUES AS WELL AS CAPACITY BUILDING THROUGH TRAINING, ETC.

• UN MODEL OBJECTIVE IS AVOIDANCE OF DOUBLE TAXATION (NOT DOUBLE NON TAXATION) AND PREVENTION OF TAX EVASION (NOT TAX AVOIDANCE) – HOWEVER INCREASING FOCUS IS NOW GIVEN TO TAX AVOIDANCE AS IN OECD MODEL (BOTH GENERAL AND SPECIFIC)

QUESTION: WILL THERE GENERALLY BE GREATER CONVERGENCE OR DIVERGENCE BETWEEN THE UN AND OECD MODELS IN FUTURE? IF YES, IS IT DESIRABLE OR AVOIDABLE?

OECD – UN MODEL KEY DIFFERENCE – TAX TREATY AS AN INSTRUMENT OF ECONOMIC POLICY

OECD MODEL : PRIMARILY AVOIDANCE OF DOUBLE TAXATION AND DOUBLE NON-TAXATION THROUGH ALLOCATION OF TAXING RIGHTS (RESTRICTED TO FISCAL CONSIDERATIONS ONLY)

UN MODEL: •CONSIDERS NON-FISCAL NATIONAL INTERESTS WITH EMPHASIS ON PROMOTION OF ECONOMIC, SOCIAL, AND POLITICAL DEVELOPMENT THROUGH INCREASED CROSS BORDER INVESTMENT AND TRADE FLOWS (MAY PERMIT DOUBLE NONTAXATION)•FAIRER ALLOCATION OF TAXING RIGHTS WITH EMPHASIS ON SOURCE STATE RIGHTS TO GENERATE FINANCING FOR DEVELOPMENT THROUGH WIDENING DOMESTIC SOURCE STATE TAXING RIGHTS•DOES NOT DICTATE TREATY TEXT OR THE COMMENTARIES E.G. PERSUASIVE ONLY AND ALLOWS EACH STATE TO APPLY ITS OWN TAX AND TREATY POLICY AND TAX SOVEREIGNTY•MEET THE EXPECTATIONS OF 193 COUNTRIES WITH SOVEREIGN TAX AND TREATY RIGHTS AND MINIMISE TREATY DISPUTES UNDER DIFFERING TAX SYSTEMS •UN MODEL IS A MODIFIED OECD MODEL IN STRUCTURE BUT DOES NOT PRESUME EITHER THE CORRECTNESS OF THE OECD POLICY POSITIONS OR ITS LANGUAGE OR COMMENTARIES

DOMESTIC ANTI-AVOIDANCE RULES

UN MODEL: IMPROPER USE OF TAX TREATIES (JUNE 2009):• MODELLED ON OECD COMMENTARY WITH SOME

DIFFERENCES• EASIER TO FOLLOW THAN OECD COMMENTARY• CLARIFICATION OF COMMENTARY E.G. REFERENCETO

DOMESTIC LAW DEFINITIONS WITH RESPECT TO SAARS (E.G. ART. 3(2) AND 10(3))

• RECOGNISES LEGAL CERTAINTY AND TAXPAYERS’ RIGHTS• DETAILED EXAMPLES OF IMPROPER USE (PARAS. 42 – 103)• BALANCE TAX REVENUE, LEGAL CERTAINTY AND TAXPAYERS’

EXPECTATION (PARA. 9)

2011 UN MODEL UPDATE SOME KEY CHANGES

• ARTICLE 5 -- PERMANENT ESTABLISHMENT• ARTICLE 7 -- PE PROFIT ATTRIBUTION (UNCHANGED) • ARTICLE 11 – ISLAMIC BANKING• ARTICLE 13 – CAPITAL GAINS• ARTICLE 14 - INDEPENDENT PERSONAL SERVICES• ARTICLE 25 - MUTUAL AGREEMENT PROCEDURE• ARTICLE 26 – EXCHANGE OF INFORMATION• ARTICLE 27 - COLLECTION OF TAX DEBT (NEW – COPIED OECD)

SOME KEY ISSUES FOR FUTURE UPDATE• TAXATION OF INCOME FROM SERVICES• REVIEW OF TRANSFER PRICING GUIDELINES (Article 9)

ARTICLE 5 (PERMANENT ESTABLISHMENT/ "PE")

- THRESHOLD FOR SOURCE COUNTRY TAXATION OF BUSINESS PROFITS UPDATED AND CLARIFIED.

- A KEY CONCEPT – THE LEVEL OF ECONOMIC ENGAGEMENT/ FOOTPRINT REQUIRED TO JUSTIFY SOURCE COUNTRY TAXATION OF BUSINESS PROFITS UNDER TREATIES.

- GENERALLY IT IS LOWER AND MORE READILY MET UNDER THE UN MODEL

ARTICLE 7: 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 IS NOT. IN EFFECT IT MEANS YOU ARE TREATED AS THOUGH YOU CAN LEND TO YOURSELF OR PAYING ROYALTIES TO YOURSELF.

• UN MODEL DIFFERS – DOES NOT HYPOTHETICALLY TREAT A PE AS A SEPARATE ENTITY – GENERALLY CANNOT LEND TO YOURSELF, ETC.

ARTICLE 7 - ATTRIBUTION OF PROFIT

• UNLIKE OECD MC, THE UN MODEL HAS RETAINED THE OLD ATTRIBUTION RULES (E.G. UNCHANGED)• 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 – THIS IS A BROADER CONCERN THAT DEVELOPING COUNTRIES TEND TO DISPROPORTIONATELY SUFFER FROM COMPLEX "SOLUTIONS" TO PERCEIVED PROBLEMS. WHO SHOULD BEAR THE COST OF COMPLEXITY?

ARTICLE 11 : ISLAMIC BANKING

ARTICLE 11 (INTEREST)

– CERTAIN ISLAMIC FINANCING ISSUES ARE ADDRESSED.

Q. HOW CAN AN INTEREST ARTICLE APPLY WHEN THERE IS NO INTEREST?

A. ALTHOUGH IT IS NOT INTEREST, IT SHOULD BE TREATED IN THE SAME WAY FOR THE PURPOSES OF AVOIDING DOUBLE TAXATION UNDER THE TREATY.

ARTICLE 13 - CAPITAL GAINS

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."

ARTICLE 14 - INDEPENDENT PERSONAL SERVICES

– HAS BEEN DELETED FROM OECD MODEL EARLIER – UN TAX COMMITTEE DISCUSSED POSSIBLE DELETION, WHILE

SEEKING TO PRESERVE THE SOURCE STATE TAXING RIGHTS THROUGH ARTICLES 5 AND 7.

– BUT THERE WAS 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, BUT WILL BE EXAMINED FOR POSSIBLE IMPROVEMENTS, AND DELETION WILL ONLY BE AN OPTION ADDRESSED IN THE COMMENTARY.

ARTICLE 25 – THE MUTUAL AGREEMENT PROCEDURE

DIFFERENCES CAN EXIST BETWEEN COUNTRIES, SUCH AS INTERPRETATION ON HOW THE DOUBLE TAX TREATY OPERATES. THIS CAN RESULT IN DOUBLE TAXATION RESULTS.

THE MUTUAL AGREEMENT PROCEDURE ARTICLE IN TAX TREATIES PROVIDES COMPETENT AUTHORITIES") FROM THE TWO COUNTRIES TO TRY TO RESOLVE THE DIFFERENCES AND AVOID DOUBLE TAXATION.

THEY GENERALLY DO 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 THERE ARE DIFFERENT INTERPRETATIONS OR DIFFERENT CALCULATIONS.

ARTICLE 25 – THE MUTUAL AGREEMENT PROCEDURE CHOICES WHERE THERE IS NO RESOLUTION: CH CASES: NEW ARBITRATION PROCEDURES

UN MODEL UPDATE 2011 PROVIDES FOR OPTIONAL ABITRATION

(A)(A)LEAVE UNRESOLVED UNDER TREATY (E.G. LEAVE TO DOMESTIC LAW) LEAVE UNRESOLVED UNDER TREATY (E.G. LEAVE TO DOMESTIC LAW)

(B)(B)OR FORCE A DECISIONOR FORCE A DECISION

MUTUAL AGREEMENT PROCEDURE ARBITRATION – NEW MUTUAL AGREEMENT PROCEDURE ARBITRATION – NEW ALTERNATIVEALTERNATIVE ART ART 25 B WILL INCLUDE A MANDATORY ARBITRATION OPTION WHERE PUT IN A 25 B WILL INCLUDE A MANDATORY ARBITRATION OPTION WHERE PUT IN A BILATERAL TREATY – STILL WITHIN COMPETENT AUTHORITY (CA) PROCESS. BILATERAL TREATY – STILL WITHIN COMPETENT AUTHORITY (CA) PROCESS. PROS AND CONS OF MANDATORY ARBITRATION FOR COUNTRIES – REQUIRES PROS AND CONS OF MANDATORY ARBITRATION FOR COUNTRIES – REQUIRES CLOSE CONSIDERATION IN THE LIGHT OF YOUR OWN CIRCUMSTANCES.CLOSE CONSIDERATION IN THE LIGHT OF YOUR OWN CIRCUMSTANCES.

ARTICLE 25 -- ARBITRATIONDIFFERENCES FROM 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.

• 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.

• 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;

ARTICLE 26 -- 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 DOES NOT SEEM TO BE A CONSISTENT USE OF THESE TERMS

• PART OF A PACKAGE OF CHANGES TO COMBAT ABUSES (ARTICLE 1 COMMENTARY – IMPROPER USE OF TREATIES - AND IN ARTICLE 13(5)).

ARTICLE 27 : MUTUAL ASSISTANCE IN ENFORCING TAX DEBTS (NEW)

•TRADITIONAL "REVENUE RULE" - ONE COUNTRY DOES NOT ENFORCE A REVENUE JUDGMENT OF ANOTHER NATION. SOMETIMES SEEN AS AN EXERCISE OF THAT COUNTRY’S SOVEREIGN POWER. WIDELY RECOGNISED THAT THIS IS TAKEN ADVANTAGE OF TO AVOID TAX OBLIGATIONS.

NEW OPTIONAL ARTICLE ALLOWS ENFORCEMENT AS IF IT WAS THE COUNTRY’S OWN DEBT. THERE ARE PROTECTIONS AGAINST ABUSE

•COPIES PROVISION FROM OECD MODEL BECAUSE IT IS SEEN AS POTENTIALLY USEFUL FOR DEVELOPING COUNTRIES IN COMBATING AVOIDANCE AND EVASION, BUT WITH GREATER RECOGNITION OF THE BURDEN THIS CAN PLACE ON SMALLER DEVELOPING COUNTRIES - CONTRIBUTION TO COST OBLIGATIONS PERHAPS CLEARER UNDER THE UN MODEL.

COMPARISON WITH OECD MODEL COMMENTARIES

• UN MODEL 2011 MADE SEVERAL CHANGES TO INCLUDE OECD MODEL CHANGES SINCE 1997 WHEN HELPFUL FOR DEVELOPING COUNTRIES, PARTICULARLY EFFECTIVE SOURCE-BASED TAXATION.

• OTHER PARTS HAVE NOT YET BEEN FULLY CONSIDERED (E.G. OECD PARTNERSHIPS REPORT ISSUES)

• 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.

UN MODEL – ARTICLE 9 :

COMMENTARY PARA. 3

(2001 UPDATE)

• 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."

UN MODEL ARTICLE 9 : PARAGRAPH 3

(AS MODIFIED)

• 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

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.

TRANSFER PRICING MANUAL(to be released in October 2012)

• 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?

SOME KEY FUTURE ISSUES FOR NEXT UPDATE

• TRANSFER PRICING

• TAXATION OF SERVICES

TAXATION OF SERVICES

• TAX TREATMENT OF SERVICES IS A MAIN DISTINGUISHING CHARACTERISTIC BETWEEN THE TWO MODELS, PARTICULARLY AFFECTING ALLOCATION OF TAXING RIGHTS. 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 NOW IN THE UN TAX COMMITTEE

• SOME KEY ISSUES :- WHAT SHOULD BE THE SCOPE OF TAXATION OF SERVICES BY SOURCE STATE UNDER THE UN MODEL? - WHAT SHOULD BE THE THRESHHOLD FOR ALLOWING SOURCE COUNTRY TAXATION OF SERVICES ?-HOW SHOULD THE PROFIT BE ATTRIBUTED TO SERVICES PERFORMED IN SOURCE STATE? RESIDENCE STATE?

ELSEWHERE?SHOULD THERE BE SPECIAL RULES FOR TAXING ELECTRONIC COMMERCE OR IT ENABLED SERVICES ?- WHAT GUIDANCE SHOULD IT PROVIDE SOURCE STATES WHICH CURRENTLY TAX SERVICES UNDER THEIR DOMESTIC TAX

LAWS AND TREATIES?WHAT PROVISIONS ARE NEEDED FOR BASE EROSION AND PROFIT SHIFTING IN CASE OF SERVICES PROVIDED BY RELATED

PARTIES? - HOW EFFECTIVELY CAN TRANSFER PRICING RULES AVOID SOME OF THESE CONCERNS IN DEVELOPING COUNTRIES?

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. – SHOULD NOT 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.

ABOUT INTERNATIONAL TAX RULES

• Everyone wants a single path.• We just want different single paths because we have different

situations and aspirations.

…….. but we do need to think about ways of minimising problems .. but we do need to think about ways of minimising problems when the paths crunch up against each other…when the paths crunch up against each other…

Michael LennardChief – International Tax CooperationFinancing for Development United Nations

THE UNITED NATIONS MODEL TREATY

THANK YOU

Acknowledgement:I wish to thank Michael Lennard for permission to use

many of his slides from his IFA Mauritius presentation in May 2012.