The current system of bi-lateral tax double tax treaties
is complex and presents no impetus for international harmonisation
of tax systems. The way forward for dealing with the problem
of double taxation is for the countries of the OECD to enter
into a single multilateral double taxation treaty.
The process of double taxation is a scenario where cross-border
investment are taxed twice by the country of investment and
by the country of the source of investment .The cross border
investments would be seriously impeded if there was a danger
that the returns on such investment were taxed twice. The
Model Tax Convention of OECD model convention ( Created in
1963 and re- created in 1992 and the worldwide network of
tax treaties based upon it ( by the two countries involved
in the double taxation process) help to avoid that danger
by providing clear consensual rules for taxing income and
capital. The Work on Model Double Taxation Conventions began
about 80 years ago under the auspices of the League of Nations.
The baton then passed to the Organisation for European Economic
Co-operation in the late 1950s. Its successor body, the OECD,
carried on this work and published its first Model in 1963.In
1992 the OECD decided to work continuously on the Model, with
the result that changes have come relatively thick and fast.
To a large extent this reflects the increased globalisation
of the world economy and the ever-increasing international
mobility of goods, capital and people. All these developments
give rise to new problems and issues if double taxation is
to be avoided. So the OECD Model and its Commentary have to
be ever more responsive.
The models under the OECD , guides the countries concerned
on the process of double Taxation .The double taxation treaties
at present are bilateral treaties and there are non existence
of double taxation treaties between the two countries. The
new issues arising out of globalization like :
" Trade between countries without any treaties
" Cross border income tax issues arising from the Employee
stock options
" Taxation on Internet Transaction
In this era of globalization, the global economy are more
integrated through trade treaties and through the process
of economic globalization. This is leading to a question for
creating a single multilateral treaty in place of bilateral
treaties. in the present Deklaration , OECD is trying to improve
the international investment climate and boost the uniformity
of the Tax regulations across the different countries to promote
the harmonization of the tax regimes regarding the Double
taxation bilateral treaties . The more competitive environment
of the last decades has had many positive effects on tax systems
and put us in front of the question of usefulness of the bilateral
tax agreements between the countries and the creation of the
Single Multilateral tax Agreement to avoid double taxation
. The OECD provides a framework in which countries can work
to eliminate such harmful tax practices.
Bilateral Trade Agreements on Double Taxation
Looking at the present situation , where the bilateral issues
are trade relations dominate the international trade , the
tax treaties play a very important role in exploring the new
markets and the transfer of benefits in terms of production
and technology .For example we can look at the different tax
treaties between different countries and how they are different.
Canada :
Under Canada's tax treaties, which are generally based on
the OECD model, Canada taxes the Canadian-source income of
non-residents only if the business has enough presence to
have a Permanent Establishment (PE) in Canada. A PE is a fixed
place of business or management or a permanent representative
with the authority to enter into contracts. Facilities that
are solely for advertising, storage or certain other purposes
are generally excluded. However , the treaty does not consider
the online trading , which constitute a major part in global
business nowadays[1]
.
The United Kingdom :
The country has different tax treaty with different countries
with more benefits towards the countries from European Union
and most favoured nation status to some Commonwealth nations
and north America . The special treaties with countries like
Argentina regarding the exemptions for all the incomes from
business of sea and air transport . With Australia , the dividend
payments from Australia is taxed at 15% , but the dividends
payment to Australia is tax free .Same policy is followed
with USA .With Switzerland, the dividend is taxed at 5% for
UK companies otherwise the tax rates are 15% .[2]
The United States :
the country has huge trade imbalance with a lot of countries
and have different trade and tax treaties with different countries
.It has offered Most favoured Nation status to the trading
partners in Europe and Asia as well as it does not have any
trade treaties with countries like Thailand , where the bilateral
trade figures are continuously improving [3].
The above examples indicate the discrepancies across
the bilateral tax treaties existing between the countries
, creating unfair advantages and disadvantages for the global
trade .
The Role of OECD in Changes : The Single Multilateral Tax
Regime
The present inadequacy of the bilateral tax treaties in meeting
the new challenges posed by the problem of double taxation
is evident from the project launched by the OECD to improve
the conditions to reduce the cross border tax disputes . As
global trade and investment increases, the possibility of
cross-border tax disputes necessarily increases as well and
in this present situation when the integration of the economy
is at the highest rate the disputes need to be resolved faster
these disputes can result in double taxation and a corresponding
impediment to the free flow of goods and services in a global
economy. Both governments and business need effective procedures
to keep such disputes to a minimum and to resolve them satisfactorily
when they arise.[4]
The OECD's Centre for Tax Policy and Administration (CTPA)
has been actively involved in developing procedures to deal
with these issues. Looking to resolve tax disputes before
they start, the OECD has helped establish internationally
accepted procedures for so-called "Advance Pricing Agreements
(APAs)" in which governments and taxpayers can agree
in advance the appropriate approach to determine the "arm's
length" price to be charged in transactions between related
entities. Bilateral APAs (i.e. APAs involving the competent
authorities of the tax administrations affected by the transactions)
create an assurance in advance for taxpayers that a consistent approach will be taken by the
governments involved in a cross border transaction, thus avoiding
the possibility of costly later disputes.
The work on avoiding
disputes culminated in the publication of the Annex to the
OECD Transfer Pricing Guidelines on conducting APAs under
the Mutual Agreement Procedure of Article 25 of the OECD Model
Tax Convention . But the publication is not complete in discussing
the existing discrepancies and the challenges in terms of
the online trade and the employee stock options .[5]
Looking at the present global scenario , the OECD studies
of October 2002 has found that Tax burdens as measured by
the ratio of tax to GDP fell in fifteen of all the countries
covered under the OECD between 2000 and 2001, suggesting a
break in a trend of continuous increases in the OECD average
tax-to-GDP ratio during the previous five years. However ,
the Provisional figures in the 2002 of the OECD's Revenue
Statistics show that the average tax-to-GDP ratio for the
25 OECD countries for which 2001 figures are available fell
by one tenth of a percentage point last year. Between 1995
and 2000, the average tax-to-GDP ratio for all 30 OECD countries
rose from 36.1% to 37.4 .[6]
This is quite in line with the failure of the OECD bi lateral
trade agreements dominated double taxation treaties. The continuous
declining tax regimes across the countries in terms of bilateral
trades should have reduced the figures considerably rather
than the increase. .This also calls for the uniformity in
the model to guide the double taxation process. There are
new countries joining in the global economy t a faster rate
than at any pint of time and the non-existence of the bi-lateral
trade agreements between the countries under the present OECD
model for double taxation is appearing to be quite ineffective
in this case .
The OECD is taking steps towards this direction to counter
the present problems .The meeting of OECD scheduled for November
2003 is a step towards that direction .Entitled "Encouraging
Modern Governance and Transparency for Investment: Why and
How", the conference will be the third annual meeting
of the OECD Global Forum on International Investment (GFII).
The GFII is an open forum for policy dialogue among OECD members, non-members and other
stakeholders world-wide. It provides them with a platform
for exchanging their expertise and experience in meeting the
challenges and opportunities created by international investment.
The central idea of this forum is to look into the barriers
that exist in the system of taxation and how to improve the
present condition.
Tax harmonisation versus tax competition
Looking into the present situation in terms of the double
taxation and the bilateral tax agreement , we can say that
, there is a lack of direction in tax management . The basic
idea of tax harmonization between different countries have
been lost and replaced by the process of tax competition and
creating better trade situation between the two countries
in the bilateral trade agreements to get more advantages for
each other in comparison with other countries , rather than
enjoying the same benefits as other countries in terms of
tax benefits through proper utilization of double taxation
agreements .The existence of features like "most favoured
nations" , are quite against the basic idea of OECD to
create the equivalent tax regimes for all the partner countries
. The present Model tax treaties do not require tax rate coordination,
but do call for either credits or exemptions when calculating
a multinational's domestic taxes. This contradicts recent
models with a single capital exporter where deductions are
most efficient and these are the models that can create the
base for the single multilateral tax treaty applicable to
all member states of the OECD. The study conducted by Ronald
B Davies of the University of Oregon has found that , many
nations import and export capital. With symmetric countries,
credits by both is the only treaty equilibrium, resulting
in Pareto optimal effective tax rates which weakly dominate
the non-treaty equilibrium rates. With asymmetric countries,
the treaty need not offer improvements without tax harmonization.
With harmonization, it is always possible to reach efficient
capital allocations while increasing both countries' welfares
only if neither uses deductions. [7]
In the question of the harmonisation , the views are again
supported in the speech by Gabriel Makhlouf , Chair, Committee
on Fiscal Affairs .OECD, to the Ciot European Branch Conference
7th March 2003. The OECD Model Convention - reflections and
developments .The speaker strongly suggested the need for
the harmonization of the global double taxation scenario by
the introduction of the uniform tax situations for all the
countries to avoid the double taxation .A high degree of harmonisation
is certainly necessary in the field of indirect taxes, as
such taxes can create an immediate obstacle to the free movement
of goods and the free supply of services within the Internal
Market. Indeed, a significant degree of harmonisation of indirect
taxes has already taken place.
Conclusion :
The OECD model for the double taxation was created for a time
where there was no economic globalization as we are observing
today and the model has served perfectly for that period .But
in today's context where the economies are getting integrated
and the online trading is integrating the world trade at a
faster pace , the new model is the need of the hour and the
OECD is taking the right directions by moving towards a single
multilateral tax treaty for all the members for the harmonization
of the taxes and to eliminate the problems of double taxation
.
- Canadian Tax Letter : KPMG .June
2000.[Return]
- United Kingdom : Double Tax Treaties
:John Newman [Return]
- United Kingdom Double Tax Treaties
:John Newman[Return]
- OECD, Centre for Tax Policies
and Administration.[Return]
- Model Double Taxation convention
OECD[Return]
- OECD : Centre for Tax Policies
and Administration[Return]
- The OECD Model Tax Treaty: Tax
Competition and Two-Way Capital . Ronald B. Davies (University
of Oregon Economics Department)[Return]
- BIBLIOGRAPHY:
- Canadian Tax Letter : KPMG .June 2000.The OECD considers
the Tax Treaty for the Digital Age .
- United Kingdom : Double Tax Treaties :John Newman
- OECD, Centre for Tax Policies and Administration.
- Model Double Taxation convention OECD
- OECD : Centre for Tax Policies and Administration 2003
- The OECD Model Tax Treaty: Tax Competition and Two-Way
Capital . Ronald B. Davies (University of Oregon Economics
Department)
- the Ciot European Branch Conference 7th March 2003.
The OECD Model Convention
|
