Following five days of intense negotiations in Geneva at the end of October, the Committee of Experts on International Cooperation in Tax Matters adopted the 2011 Update of the UN Model Double Taxation Convention between Developed and Developing Countries. This culminated the work of the Committee over the past 10 years, since the last update of the UN Model in 2001.
This new revision of the UN Model has been long-awaited by the international community, especially by developing countries which seek assistance in negotiating modern bilateral double-tax treaties reflecting their current circumstances and policy priorities.
The UN Model Tax Convention, as well as the OECD Model Tax Convention have had a profound influence on international treaty practice. They form the basis for most of the treaties between countries, aiming at protecting taxpayers against double taxation, with a view to improving the flow of international trade and investment as well as the transfer of technology, while retaining appropriate taxing rights to Governments.
The particular aim of the UN Model is to facilitate entering of bilateral tax treaties by developing countries, which would contribute to attaining their development goals. The similarities between the models of the UN and OECD reflect the importance of achieving consistency, while the important areas of divergence reflect different memberships and priorities of the two organizations.
The UN Model generally preserves a greater share of tax revenue to the “source State”, the country where investment or other activity takes place. While the OECD Model preserves a greater share to the “residence State”, the country of the investor, trader, etc. The UN Model thus normally allows developing countries more taxing rights on income generated by foreign investments in these countries.
The main updates of the UN Model are: (1) it provides for mandatory binding arbitration (for countries wishing so) when a dispute cannot be resolved under the usual Mutual Agreement Procedure, (2) it confirms and clarifies the importance of exchange of information under the UN Model; (3) it provides the rules under which States may assist each other in tax collection; (4) it addresses possible tax evasion related to taxing capital gains; and (5) it deals with income from independent personal services in line with the OECD Model.
The Committee also addressed other important areas of its work, including the Practical Manual on Transfer Pricing for Developing Countries. The complete draft Manual is expected to be adopted at the 2012 session, providing much needed assistance to developing countries in practical application of the arm’s length principle.
It also discussed its future work, including the agenda for its 2012 session. It decided to devote substantial attention to the Manual on Transfer Pricing as well as the Manual for the Negotiation of Bilateral Tax Treaties. The Committee also decided to establish a Working Group on Tax-treaty Issues relating to Climate Change mechanisms, including Emissions Permits and Clean Development Mechanism credit. The next annual session will be held on 15-19 October 2012 in Geneva.