The United Nations Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (2019) is a compact training tool for beginners with limited experience in tax treaty negotiation. It seeks to provide practical guidance to tax treaty negotiators in developing countries, in particular those who negotiate based on the United Nations Model Double Taxation Convention between Developed and Developing Countries. It deals with all the basic aspects of tax treaty negotiation and it is focused on the realities and stages of capacity development of developing countries.
While every country should form its own policy considerations and define its objectives in relation to tax treaties, this Manual seeks to provide practical guidance on all aspects of tax treaty negotiation, including on how to prepare for and conduct negotiations. Treaty negotiators in developing countries, especially those with limited experience, are therefore encouraged to use this Manual in preparing for tax treaty negotiations, in the light of their country’s policy framework and the intended outcomes they wish to achieve.
Section I of the Manual introduces the main principles which underlie double tax treaties, including the concepts of residence and source. Tax treaties aim to address issues related to double taxation, as well as other tax barriers which can act as a deterrent to cross-border trade and investments. This section deals with methods for the elimination of double taxation, as well as the risks associated with excessive source taxation, tax discrimination and uncertainty and complexity in the tax environment. In addition, it prefaces how tax treaties may help in addressing tax avoidance and evasion and in preventing tax base erosion and double non-taxation.
Section II of the Manual addresses a fundamental question: Why negotiate tax treaties? Then, it elaborates on the importance of developing a tax treaty policy framework and a country model before entering into negotiations. Finally, this section provides a comprehensive overview of the practical steps to be taken before, during and after the negotiation of each tax treaty.
The core of the Manual is contained in Section III, which introduces the different Articles of the United Nations Model Double Taxation Convention between Developed and Developing Countries (United Nations Model Convention). This section is not intended to replace the Commentaries thereon, which remain the final authority on issues of interpretation, but rather to provide a simple tool for familiarizing less experienced negotiators with the provisions of each Article. Following the structure of the United Nations Model Convention, the Articles are organized in seven chapters, as follows:
- Chapter I (Scope of the Convention) presents Articles 1 and 2, which deal with persons and taxes covered.
- Chapter II (Definitions) analyses the definitions of key terms used in the United Nations Model Convention, as provided in Articles 3 to 5. These include the definitions of “Resident” and “Permanent establishment” (PE). Negotiators are encouraged to exercise particular care when defining terms, in order to avoid unintended consequences, in particular where differences exist between the United Nations Model Convention and the OECD Model Tax Convention on Income and on Capital.
- Chapter III (Taxation of income) deals with the distributive rules contained in Articles 6 to 21, which determine the allocation of the taxing rights between the treaty parties with respect to different categories of income. Special attention is devoted to some of the most controversial aspects of tax treaty negotiations, including the issues regarding the concept of PE and its application for the purpose of taxing business profits, and the determination of rates of withholding taxes applicable on payments of dividends, interest, royalties and fees for technical services.
- Chapter IV (Taxation of capital) briefly describes the provisions contained in Article 22 dealing with taxes on capital.
- Chapter V (Methods for the elimination of double taxation) illustrates the operation of Article 23, which requires the country of residence of the taxpayer to provide relief from double taxation by one of two methods, that is to say, either the exemption method or the credit method.
- Chapter VI (Special provisions) analyses Articles 24 to 29, including the provisions dealing with non-discrimination, mutual agreement procedure, exchange of information, assistance in collection and entitlement to treaty benefits.
- Chapter VII (Final provisions) covers the procedures of entry into force and termination of treaties, as included in Articles 30 and 31.
Section IV of the Manual deals with the issue of improper use of tax treaties, which may occur, for instance, when taxpayers perform certain transactions specifically for the purpose of obtaining treaty benefits which would not otherwise be available to them. This section of the Manual encourages countries to consider carefully how to prevent these behaviours—which are contrary to the spirit of the provisions included in a treaty—while ensuring a stable and certain legal framework. To this end, it refers to the anti-abuse of provisions of the UN Model, and primarily those of Article 29 (Entitlement to benefits) and provides an overview of a number of other approaches that can be applied to address the improper use of tax treaties, including specific and general legislative anti-abuse rules or judicial doctrines found in domestic law and specific and general anti-abuse rules found in tax treaties.
The Draft Toolkit on Tax Treaty Negotiations is a joint effort by partners in the Platform for Collaboration on Tax (IMF, OECD, UN, World Bank) to provide capacity-building support to developing countries on tax treaty negotiations, building on existing guidance, particularly from the UN Manual. The PCT is welcoming public comments on the draft toolkit until 10 September 2020.