Withholding Taxes
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.
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Una carga molesta para naciones en vías de desarrollo: Cláusula de NMF en tratados impositivos
Por Deepak Kapoor, IRS
La cláusula de la nación más favorecida (“NMF”) de los convenios para evitar la doble tributación encarna el principio básico de no discriminación y tiene por objeto aportar paridad a las oportunidades empresariales y de inversión entre los países y las jurisdicciones partes en los tratados. La incorporación de disposiciones como las cláusulas de la NMF y de no discriminación en los tratados de tributación pretende promover la equidad entre las partes en los tratados. En el contexto de los tratados de tributación entre países desarrollados y en desarrollo, las cláusulas de la NMF también actúan como herramienta de negociación para contemplar mejores tipos impositivos en los tratados.
Sin embargo, últimamente, estas cláusulas han empezado a manifestar unos efectos negativos en los países de origen, que en su mayor parte son países en desarrollo. Por lo general, no parece que las cláusulas de la NMF estén creando posibles riesgos si son operativas entre dos países con el mismo grado de desarrollo, pero, cuando la relación se establece entre un país desarrollado y otro en desarrollo, donde una parte recibe de la otra más inversiones de las que hace, ese tipo de riesgo es inevitable. Recientemente, se han producido problemas a raíz de diversas interpretaciones de las cláusulas de la NMF por parte de los tribunales que han obligado a los países de origen a ampliar los beneficios de los tipos reducidos y el ámbito de aplicación restringido a los países parte en el tratado con arreglo a las normas de la NMF. Esa clase de interpretaciones beneficiosas han ido más allá del objetivo y el propósito básicos de las cláusulas de la NMF.
A tenor de causas judiciales que han tenido lugar recientemente en Sudáfrica y la India, parece que las cláusulas de la NMF están creando oportunidades de “reducción de impuestos” y están dando lugar a una erosión involuntaria de la base imponible de los países de origen. El problema también radica en la redacción y las formulaciones ambiguas de las cláusulas de la NMF, que finalmente provocan resultados negativos inesperados para los países que están obligados por compromisos futuros. Por consiguiente, en estos momentos, las jurisdicciones de origen necesitan con urgencia un examen exhaustivo de las cláusulas de la NMF existentes en los tratados de tributación, sus relaciones cruzadas y sus posibles efectos secundarios negativos en otros tratados.
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Un albatros autour du cou des pays en développement – Clause NPF dans les conventions fiscales
Par Deepak Kapoor, IRS
L’inclusion dans les conventions en matière de double imposition d’une clause de la nation la plus favorisée (« NPF ») est une incarnation du principe fondamental de la non-discrimination et vise à permettre aux pays signataires de tirer également parti des perspectives en matière de commerce et d’investissement. L’objectif de dispositions telles que les clauses NPF et de non-discrimination dans les conventions fiscales est de favoriser l’équité entre les différents pays signataires. Dans les conventions fiscales conclues entre pays développés et pays en développement, les clauses NPF servent également d’outils de négociation pour obtenir de meilleurs taux d’imposition.
Cependant ces clauses ont aujourd’hui des effets négatifs pour les pays de source des revenus, qui sont pour la plupart des pays en développement. Lorsqu’elles sont appliquées entre deux pays également développés, les clauses NPF ne constituent pas, généralement, une source de danger potentielle, mais lorsque la convention est conclue entre un pays développé et un pays en développement, où l’un des pays reçoit plus d’investissements de l’autre qu’il n’en réalise, le danger est réel. De fait, des difficultés sont apparues récemment en raison d’interprétations divergentes de ces clauses par les tribunaux, qui ont contraint les pays source à appliquer, sur la base des termes contenus dans la clause NPF, un taux d’imposition plus avantageux que celui prévu dans la convention fiscale et à modifier son champ d’application, remettant en cause l’objectif et l’utilité même des clauses NPF.
Il ressort des procédures judiciaires intentées en Afrique du Sud et en Inde que les clauses NPF peuvent aboutir à une réduction de la fiscalité et entrainer une érosion involontaire de la base d’imposition des pays de source des revenus. Le problème réside également dans la rédaction et la formulation ambiguë des clauses NPF, qui entrainent des répercussions négatives inattendues pour les pays ayant pris des engagements dans le cadre de ces conventions. Il est aujourd’hui urgent pour les pays source de procéder à un examen approfondi des clauses NPF figurant dans les conventions fiscales existantes, de la manière dont elles s’articulent entre elles et des retombées négatives qu’elles pourraient avoir sur d’autres conventions.
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An Albatross Around the Neck of Developing Nations – MFN Clause in Tax Treaties
By Deepak Kapoor, IRS
The Most Favoured Nation (“MFN”) clause in double taxation avoidance conventions epitomises the basic principle of non-discrimination and intends to bring parity in business and investment opportunities among treaty partner countries and jurisdictions. Inclusion of provisions like MFN and non-discrimination clauses in tax treaties are intended to promote equity among treaty partners. In the context of tax treaties between developed and developing countries, the MFN clauses also act as negotiating tools to bargain for better treaty tax rates.
However, lately these clauses have started demonstrating disadvantageous effects for the source countries, which are mostly developing countries. The MFN clauses generally do not appear to be creating potential risks if they are operational between two equally developed countries but when the relationship is between a developed and developing country, where one partner receives more investments from the other than it makes, such risks are inevitable. Lately, problems have started arising due to various interpretations of the MFN clauses by the courts forcing the source countries to extend benefits of reduced rates and restricted scope to treaty partner countries under the MFN rules. Such beneficial interpretations have gone beyond the basic objective and purpose of the MFN clauses.
In light of recent court cases in South Africa and India, it appears that the MFN clauses are creating opportunities for “reduced taxation” and leading to unintended erosion of tax base of source countries. The problem also lies with the ambiguous drafting and formulations of the MFN clauses, which eventually leads to unexpected negative outcomes for countries who have bound themselves with the future commitments. Therefore, a comprehensive review of existing MFN clauses in tax treaties, their cross connections and possible negative spill over effects to other treaties is the urgent need of the hour for the source jurisdictions.
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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.
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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.
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Comments on Discussion Draft: Possible Changes to the United Nations Model Double Taxation Convention Between Developed and Developing Countries Concerning Inclusion of software payments in the definition of royalties
The South Centre Tax Initiative (SCTI) offers its comments on the discussion draft on inclusion of software payments in the definition of royalties. As is well known, this is an important issue that developing countries have been fighting for, for a while now. The SCTI supports the proposed change which seeks to insert the phrase “computer software” in article 12(3) of the United Nations Model Double Taxation Convention Between Developed and Developing Countries. The COVID-19 pandemic adds special urgency to resolving this long-pending issue as revenue from software payments made from developing countries continues to increase.
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Base Erosion and Profit Shifting in the Extractive Industries
By Danish and Daniel Uribe
Developing countries with significant natural resources have not fully utilised them for financing their development aspirations. Extractive industries and the revenue generated from their extractive activities need to constitute a larger share of domestic resource mobilisation. However, the sector remains beset with massive tax base erosion and profit shifting by large multinational companies. This policy brief therefore looks at the extractive industries, and the potential impact of their practices on the national policies and regulations in developing countries. It further also considers some current initiatives at the international level for enabling countries to obtain more revenue from natural resource extraction, and offers some observations on the policy options available to developing countries.
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Mesures nationales sur l’imposition de l’économie numérique
Par Veronica 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.
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Medidas Tributarias Nacionales sobre la Economia Digital
Por Veronica Grondona, Abdul Muheet Chowdhary, Daniel Uribe
El Marco Inclusivo de la Organización de Cooperación y Desarrollo Económicos (OCDE) está considerando un enfoque de dos pilares en relación con el cobro de impuestos sobre la economía digital. Las estimaciones preliminares acerca de la repercusión de sus recomendaciones indican un modesto incremento en la recaudación de impuestos sobre la renta de las sociedades, cuyos beneficios se prevén que se dirijan principalmente a los países desarrollados. Al mismo tiempo, están proliferando las medidas nacionales en materia de cobro de impuestos sobre la economía digital, un cambio estimulado por el comienzo de la pandemia de COVID-19. Los países también tienen plenos derechos a aplicarlas en virtud del derecho internacional, pese a las etiquetas de “unilateralismo”. En este documento de investigación se ponen de relieve las medidas en materia de impuestos directos que están adoptando diversos países y se exponen tres enfoques fundamentales con respecto al cobro de impuestos sobre la economía digital: 1) impuestos sobre los servicios digitales; 2) normas sobre un nexo en base a una presencia digital significativa; y 3) retenciones en origen sobre las transacciones digitales.
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National Measures on Taxing the Digital Economy
By Veronica Grondona, Abdul Muheet Chowdhary, Daniel Uribe
The Organisation for Economic Co-operation and Development (OECD)’s Inclusive Framework is considering a two-pillar approach on taxing the digital economy. Preliminary estimates about the impact of its recommendations show a modest increase in corporate income tax collection, the benefits of which are expected to go mostly to the developed countries. At the same time, there is a rise in national measures on taxing the digital economy, a move spurred by the onset of the COVID-19 pandemic. This is also fully within the rights of countries under international law, despite labels of ‘unilateralism’. This research paper highlights the direct tax measures being taken by various countries and finds three key approaches to tax the digital economy: (1) digital service taxes; (2) nexus rules based on significant economic presence ;(3) withholding tax on digital transactions.
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Taxing the Digital Economy to Fund the COVID-19 Response
By Abdul Muheet Chowdhary and Daniel Uribe Teran
The COVID-19 pandemic has weakened global economic growth, raising pressures on revenue authorities to fund the fiscal stimulus necessary to contain the spread of the virus and provide income support to affected households. Accordingly, countries are taking national measures to tax the digital economy as highly digitalized businesses are seeing a rise in sales, subscribers and profits owing to the work from home lockdown measures. The three main policy responses undertaken are digital service taxes, nexus rules based on significant economic presence and withholding taxes on digital transactions. These are briefly summarized here and elaborated in detail in a forthcoming research paper by the South Centre Tax Initiative (SCTI).
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