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Development Account Projects

Strengthening the capacity of national tax administrations in developing countries to effectively negotiate and apply double tax treaties for the financing of sustainable development

Background:

Double tax treaties play a critical role in promoting international investment. As international law places very few limits on the tax sovereignty of countries, income from cross-border investments and activities may generally be taxable both in the country where investment or other activity takes place and in the country of the investor or trader, according to their respective domestic tax laws. Such double taxation usually serves as a deterrent to cross-border investment, which is an important engine of development.

Double tax treaties are bilateral agreements between two countries, which allocate taxing rights over such income from cross-border investments and activities between those countries and thus prevent double taxation of the income. The prevention or elimination of international double taxation is a significant aspect of the investment climate of countries, which is essential for investment flows between countries, the exchange of goods and services, the movement of capital and persons, and the transfer of technology. Moreover, double tax treaties enhance cooperation among tax administrations, especially in tackling international tax evasion.

The two models most widely used by countries as a basis for the negotiation of their bilateral tax treaties are the United Nations Model Double Taxation Convention between Developed and Developing Countries and the Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital. The similarities between the OECD Model and the United Nations Model reflect the importance of achieving consistency where possible. On the other hand, the divergences between them reflect the different memberships and priorities of the two Organizations. The key differences relate in particular to the issue of to what extent a country should forgo, under bilateral tax treaties, taxing rights, which would otherwise be available to it under domestic law, with a view to avoiding double taxation and encouraging investments. In general terms, the United Nations Model tends to preserve a greater share of taxing rights for the country where investment or other activity takes place. The OECD Model, on the other hand, favours the retention of a greater share of taxing rights by the country of the investor or trader. Thus, the United Nations Model would normally allow developing countries more taxing rights on income generated by foreign investments in those countries. By protecting the specific interest of developing countries in retaining a greater share of taxing rights over the income sourced in those countries, the United Nations Model-based treaties contribute to the generation of revenue, which can be used to meet development needs. On the other hand, however, the provisions of the United Nations Model take into consideration that taxation in the source country should not be too high so as not to discourage investment, and recognize the appropriateness of the sharing of revenue with the country providing the capital.

Many developing countries lack an adequate understanding of the provisions of the United Nations Model, especially those of its new, 2011 version. Accordingly, the project will focus on strengthening developing countries’ capacity to effectively utilize tax treaties, drawing on the United Nations Model, with a view to encouraging investment while combating tax abuse. This outcome will contribute to a broader objective, which is to strengthen the capacity of developing countries to support more effective and efficient tax systems for the financing of sustainable development. The above-mentioned outcome will be achieved as a result of efforts to address skill and knowledge gaps in the national tax administrations of developing countries through the organization of training seminars and the institutionalization of a self-sustained training programme.

Objective:

To strengthen the capacity of the national tax associations and ministries of finance of developing countries in the Latin American and Caribbean region and Asia to effectively negotiate and apply double tax treaties, drawing on the United Nations Model, with a view to improving the investment climate, increasing tax revenue and combating tax evasion

Expected accomplishments:

  • Strengthened capacity of the national tax associations and ministries of finance in the Latin American and Caribbean region and Asia to effectively negotiate and apply double tax treaties
  • Strengthened capacity of national tax associations and regional organizations in the Latin American and Caribbean region and Asia to institutionalize capacity development and knowledge in the area of the negotiation and application of double tax treaties

Implementation status:

In progress.