INTRODUCTION
Tax treaties represent an important aspect of the international tax rules of many countries. Over 3,000 bilateral income tax treaties are currently in effect, and the number is growing. The overwhelming majority of these treaties are based in large part on the United Nations Model Double Taxation Convention between Developed and Developing Countries (United Nations Model Convention) and the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (OECD Model).
Tax Treaties
Tax treaties (also often referred to as double taxation conventions or double tax agreements) are international agreements entered into by countries and hence subject to general international law on treaties as codified in the Vienna Convention on the Law of Treaties. Most tax treaties are bilateral, that is, involve two countries only, and cover income and capital taxes, though there are some examples of multilateral tax treaties. There are well in excess of 1,000 tax treaties and the number is growing rapidly.
Relationship between Tax Treaties and Income Tax Law
The provisions of tax treaties are intended to have precedence over any inconsistent provisions of Income tax law. Again, how this is effected is a matter for the constitutional law of the countries concerned. A common practice is to insert such a provision either into the law giving effect to the treaty or into the Income tax law itself. The usual result of such a provision under the law of most countries is that, apart from the administrative treaty provisions on the mutual agreement procedure and the exchange of information, a treaty sets limits on the operation of Income Tax law but does not expand its operation.
Issues of Tax Treaties
A number of provisions found in tax treaties are not usually reflected in Income Tax law. This section briefly describes these provisions, together with their effect on Income Tax law, specifically nondiscrimination, exchange of information and assistance in collection, and the mutual agreement procedure.
Nondiscrimination : The nondiscrimination article of tax treaties is designed to ensure that foreign investors in a country are not discriminated against by the tax system compared with domestic investors. The OECD Model nondiscrimination provision is narrower, however, than similar provisions found in other areas of international law, such as trade. This difference is necessary because the international tax system operates on the residence and source principles and so necessarily distinguishes the tax position of residents and nonresidents. Hence, it is not usually regarded as discriminatory to collect flat-rate gross withholding taxes from a resident of the other state without a permanent establishment when a resident is taxed on the same income on a net assessment basis.
Exchange of Information and Assistance in Collection : Most countries have a Income Tax law rule that they will not directly or indirectly assist another country in the collection of its taxes. This rule means that exchange of tax information and other forms of assistance in collection of taxes are not possible without a tax treaty that overrides this rule in domestic law. The tax secrecy rules of many countries also prevent the exchange of information. Exchange-of-information provisions are found in virtually all tax treaties, but other forms of assistance are less commonly provided for. The standard OECD and UN Model exchange-of-information article requires a country to obtain information for its treaty partner where the information is necessary for carrying out the provisions of the treaty or of the country’s Income tax law. Exchanged information is required to be kept secret in accordance with the secrecy rules of domestic law of the recipient country and in accordance with the express treaty rules on this topic. In addition, the standard treaty article provides that information need not be exchanged when it involves commercial or trade secrets. Tax secrecy is often not as strong an institution in developing or transition countries as it is in industrial countries and so can be a very sensitive topic in tax relations between treaty partners.
Mutual Agreement Procedure : The final provision of tax treaties that requires comment is the article on the mutual agreement procedure. Under the Model versions, this article performs three functions: it provides a dispute resolution mechanism in relation to the application of the provisions of tax treaties to specific cases; it allows the countries to settle common interpretations and applications of their tax treaty; and it allows them to resolve cases of double taxation not otherwise dealt with by their treaty. Some countries find that the third function and often the second are difficult to reconcile with their Income Tax laws and procedures and therefore omit them from their treaties. In practice, it is dispute resolution for the specific case that predominates, whatever the precise form of the article. The ground on which the taxpayer can invoke this procedure is that the actions of one of the states result or will result in taxation not in accordance with the treaty. The taxpayer has three years to invoke the procedure from the first notification of the act complained of. The states are obliged under the article to consult on the problem raised by the taxpayer if the state with which the problem is raised is unable or unwilling to resolve it unilaterally, but they are not obliged to resolve the case. If a resolution is agreed to by the states, then under the Models it is to be implemented notwithstanding domestic time limits on amending tax assessments. Some countries are unwilling to agree to such overriding of domestic time limits in their tax treaties.
CONCLUSION
No specific procedure is provided, but it is made clear that the tax administrations can make contact directly and do not need to go through diplomatic channels. The major issue that arises in practice is the relationship between domestic appeal procedures provided for in Income tax laws and the treaty dispute resolution mechanism. To avoid competition or conflict between domestic appeals and the mutual agreement procedure, some countries provide in their Income tax laws or procedures that the taxpayer must waive or suspend appeal rights under Income Tax law, while other countries will not actively pursue the competent authority procedure until domestic appeal periods have expired and the taxpayer has not utilized them.
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