Analysis of Imbalanced Tax Treaties of Developing Countries
Insights From the Tax Treaties Explorer Database
By Aiwei Feng, Shristi Joshi and Quinn McGannon
This report will start from exploring the historical background, theoretical frameworks, and practical implications of tax treaties, with a specific focus on their impact on developing countries. Utilizing diverse literature and datasets, including the Tax Treaties Explorer (TTE) from the International Centre for Tax and Development, it aims to identify restrictive tax treaties and provisions disadvantageous to developing nations. The methodology involves desk reviews, data analysis, and case studies to offer insights into challenges faced by developing countries in international taxation. By scrutinizing key provisions like those concerning permanent establishment and withholding taxes, it aims to highlight how treaties affect revenue generation, economic sovereignty, and development outcomes of South Centre Member States. South Centre Member States have been chosen for the purpose of this study due to their status as developing countries with much to gain from renegotiating their existing tax treaties.
Ultimately, this study intends to fill the gap in terms of treaty research and development of tax treaties of South Centre Member States by identifying their restrictive tax treaties and provisions therein with Organisation for Economic Co-operation and Development (OECD) countries. The choice of OECD countries reflects their status as mostly developed countries. At the same time, the study also intends to supplement tax treaties literature so far dominated by legal and economic analyses by focusing specifically on identifying specific restrictive provisions.
Status of Permanent Establishments under GloBE Rules
By Kuldeep Sharma
The objective of this Research Paper is to comprehensively identify and analyse all Permanent Establishment (PE) related provisions under the global minimum tax of the Organisation for Economic Co-operation and Development (OECD), which is implemented through the Global Anti Base Erosion (GloBE) Model Rules. The analysis has led to the conclusion that PEs hold a significant position and facilitate application of GloBE Rules.
The GloBE Rules have introduced certain new facets involving application of PE provisions when there is no tax treaty; no Corporate Income Tax (CIT) in the source state, and have brought in the concept of stateless PEs. These newly-introduced facets have widened the scope of PEs to enable application of the GloBE Rules in specific situations which would otherwise have remained outside the ambit of taxation.
The paper concludes with an observation that the OECD’s Inclusive Framework is drafting the provisions of Amount A in a manner that results in consistency with GloBE Rules. Likewise, acceptance of “deemed PE” for GloBE rules should be extended to Amount A as well. By doing so, a tax nexus would be provided in source jurisdictions, which will allow profits attributable to Multinational Enterprises (MNEs) in a digitalized economy (without physical presence) getting taxed under domestic rules of these source (market) jurisdictions. This would have been a much simpler solution and would have eliminated the complexity of Amount A rules to a large extent, as we see today.
COVID-19 impacted humanity in many ways and one such impact is wide acceptance of the concept of Work From Home (WFH) by the corporate sector. Previously, WFH did exist in some countries, perhaps at a much smaller scale, but compulsions of COVID-19 have made WFH a new normal. This new normal also creates new tax challenges for the Multinational Enterprises (MNEs). Does the employee create a taxable presence in the countries where they are working remotely through a ”permanent establishment” and if yes what are the profits attributable to such permanent establishment?
The existing treaty provisions are likely to result in widespread litigation on these issues. It is desirable that a new provision is introduced in the tax treaties to tackle these issues. The suggested remote worker permanent establishment provision adopts a very simple measurable threshold for determination of permanent establishment and also attempts to balance taxing rights of the country of source as well as residence. A simple standardised approach could be adopted for determining the profits attributable to such permanent establishment.
Mejora la regla del nexo para una distribución justa de derechos fiscales a países en vías de desarrollo
Por Radhakishan Rawal
Uno de los problemas abiertos para Pilar Uno en el debate de la tributación de la economía digital es el umbral del Nexo, que determinaría qué Empresas multinacionales (MNE) tienen una presencia tributable. Las economías muy desarrolladas o las economías más pequeñas en vías de desarrollo pueden verse privadas de derechos fiscales como resultado de umbrales de nexo como son descritos en la propuesta de Pilar Uno. Asimismo, inclusive cuando se adoptan umbrales más pequeños, a algunos países aún se les puede denegar derechos fiscales. El umbral financiero nunca fue un parámetro de distribución de derechos fiscales entre los países. Un ligero ajuste del proceso de certeza impositiva podría abordar el problema.
Este artículo recomienda otorgar el derecho fiscal por Monto A de Pilar Uno, que abarca la porción principal de ganancias tributables de la economía digital, a todas las jurisdicciones del mercado, pero otorgar derechos relacionados con las jurisdicciones impositivas afectadas solo a aquellos países que cumplen con los umbrales de Nexo. Este enfoque resultará en una distribución justa de derechos fiscales y también garantizará que no haya una carga adicional en el proceso de certeza impositiva, que será más sencillo para países en vías de desarrollo.
Artículo 12B: una solución del tratado tributario del Comité sobre Cooperación Internacional en Cuestiones de Tributación de la ONU para la tributación de ingresos digitales
Por Rajat Bansal
La tributación sobre los ingresos de las empresas multinacionales dedicadas a actividades digitales por las jurisdicciones de origen y las de mercado es actualmente el desafío más importante para la comunidad tributaria internacional. El actual conjunto de miembros del Comité en cuestiones de tributación de las Naciones Unidas finalizó, en abril de 2021, una medida de tratados tributarios para abordar este desafío. Este informe explica la justificación para la solución particular de agregar un nuevo artículo a la Convención Modelo de las Naciones Unidas, sus méritos y cómo esto puede ser beneficioso para todos los países, especialmente los en desarrollo.
Article 12B – Une solution de convention fiscale par le Comité fiscal des NU pour taxer les revenus numériques
Par Rajat Bansal
L’imposition sur les revenus des entreprises multinationales dans des activités numériques par les juridictions de la source ou de marché est actuellement le défi le plus important pour la communauté fiscale internationale. La composition actuelle du Comité fiscal des Nations Unies a finalisé, en avril 2021, un accord de convention fiscale pour relever ce défi. Ce rapport explique la raison d’être d’une solution particulière consistant à insérer un nouvel article dans le Modèle de convention des Nations Unies, ses mérites et comment il peut être bénéfique pour tous les pays, en particulier les pays en développement.
Améliorer des règles du nexus pour une répartition équitable des droits d’imposition pour les pays en développement
Par Radhakishan Rawal
L’une des questions posées dans le Premier Pilier sur les discussions sur l’imposition de l’économie numérique est le seuil du nexus, c’est-à-dire le lien de rattachement au pays, qui déterminerait quelles entreprises multinationales (EMN) ont une présence imposable. Les grandes économies développées ainsi que les petites économies en développement peuvent être privées de droits d’imposition en raison des seuils des nexus tels que décrits actuellement dans la proposition du Premier Pilier. De plus, même si des seuils plus petits sont adoptés, certains pays peuvent encore se voir refuser des droits d’imposition. Un seuil financier n’a jamais été un paramètre de répartition des droits d’imposition entre les pays. Un ajustement mineur dans le processus de certitude fiscale pourrait résoudre le problème.
Cet article préconise d’accorder le droit d’imposition sur le montant A du Premier Pilier, qui couvre la portion principale des bénéfices imposables de l’économie numérique, à toutes les juridictions du marché, mais d’accorder les droits destinés aux juridictions fiscales concernées uniquement aux pays atteignant les seuils du nexus. Cette approche se traduira par une répartition équitable des droits d’imposition et garantira également qu’il n’y ait pas de charge supplémentaire dans le processus de la certitude fiscale, ce qui sera plus facile pour les pays en développement.
Article 12B – A tax treaty solution by the UN Tax Committee for taxing digital incomes
By Rajat Bansal
Taxation of income of multinational enterprises engaged in digitalised businesses by source or market jurisdictions is currently the most important challenge before the international tax community. The current membership of the United Nations Tax Committee in April 2021 finalised a tax treaty solution to address this challenge. This brief explains the rationale for coming up with a particular solution of inserting a new Article in the United Nations Model Tax Convention, its merits and how it can be beneficial for all countries, especially the developing ones.
Improve nexus rule for fair distribution of taxing rights to developing countries
By Radhakishan Rawal
One of the open issues for Pillar One in the discussion on the taxation of the digital economy is the nexus threshold, which would determine which Multinational Enterprises (MNEs) have a taxable presence. Big developed economies or smaller developing economies both may be deprived of taxing rights as a result of nexus thresholds as presently described in the Pillar One proposal. Further, even where smaller thresholds are adopted, some countries may still be denied taxing rights. Financial threshold was never a parameter of distributing taxing rights between the countries. A minor tweaking of the tax certainty process could address the issue.
This article recommends giving the taxing right over Amount A of Pillar One, which covers the main portion of taxable profits from the digital economy to all the market jurisdictions, but to give rights related to affected tax jurisdictions only to those countries meeting the nexus thresholds. This approach will result in a fair distribution of taxing rights and will also ensure that there is no additional burden on the tax certainty process, which will be easier for developing countries.
The Tax Sovereignty Principle and Its Peaceful Coexistence with Article 12B of the UN Model Tax Convention
By Kuldeep Sharma, ADIT (CIOT, UK)
Article 12B of the United Nations (UN) Model Tax Convention (MTC) provides developing countries with a practical and easy way to administer policy solutions for taxing the digital economy, in particular income from Automated Digital Services. It merges seamlessly with the existing provisions of the UN MTC and it is completely aligned and coexistent with the Tax Sovereignty Principle.
Opportunities and Challenges: Tax Cooperation and Governance for Asia-Pacific Countries
By Sakshi Rai
An informal technical meeting was organised on April 8th 2021 by the Secretariat of the High Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel) for tax officials from the Asia-Pacific, to discuss the relevance of the Panel’s recommendations in the context of the region as well as to familiarise tax officials with its final report.
Mesures nationales sur l’imposition de l’économie numérique
ParVeronica Grondona, Abdul Muheet Chowdhary, Daniel Uribe
Le Cadre inclusif sur le BEPS de l’Organisation de coopération et de développement économiques (OCDE) envisage une approche fondée sur deux piliers en matière de taxation de l’économie numérique. Les premières estimations concernant l’impact de ses recommandations montrent une modeste augmentation de la collecte de l’impôt sur les sociétés, dont les bénéfices devraient revenir principalement aux pays développés. Dans le même temps, les mesures nationales de taxation de l’économie numérique se multiplient, en conséquence de la pandémie de COVID-19. Le droit international reconnaît pleinement ce droit aux pays, bien que cette approche soit considérée comme une forme d’unilatéralisme. Ce document de recherche met en lumière les mesures de fiscalité directe prises par différents pays et présente les trois approches clés retenues pour taxer l’économie numérique : (1) l’imposition de taxes sur les services numériques ; (2) l’élaboration de règles permettant d’établir un lien fiscal pour les entreprises numériques qui opère par l’intermédiaire d’une présence numérique significative ; (3) des retenues à la source sur les transactions numériques.
