The Potential of Multilateral Tax Treaties

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Part IV - Source versus Residence The Potential of Multilateral Tax Treaties

Author
Kim Brooks

1. The rich literature supporting multilateralism

It is time for renewed multilateralism a multilateralism that delivers for real people in real time. UN SecretaryGeneral Ban Ki-moon November 5, 2009 [1] For the past half-century international tax scholars and policy makers have been actively debating whether nation states need to change their approach to international tax policy in the face of an increasingly integrated world. A relatively small number of big questions have motivated much of their work: Will investment be made in countries where it can reap the most productive returns or will economic efficiency be eroded because differences in tax rates and bases cause investors to invest in jurisdictions where their real economic returns are sub-optimal? How can countries, acting largely unilaterally, ensure that tax revenues are fairly allocated between two (or more) jurisdictions, each of which has a justifiable claim to tax the associated income, and how can they ensure that the responsibility to pay tax is fairly allocated among types of income (i.e. employment versus capital returns) and among types of investors (i.e. higher- and lower-income individuals)? Will differential approaches to international tax policy, and in particular the presence of tax havens and preferential tax regimes for some forms of investment, result in the explosion of tax evasion and avoidance opportunities, particularly for passive investments, to the detriment of government revenue collection? How can tax administrators ensure that tax is collected in at least one jurisdiction? Scholars have debated these broad questions as well as the finer empirical and normative propositions that underlie them. At the root of these questions, however, is a debate about whether and how countries ought to design their tax systems given the increasing internationalization of trade and mobility. The collection of chapters in this book provides a snapshot of the scholarship grappling with these questions, rooted in the context of the tax treaties that provide some of the fundamental architecture of international tax systems. Over the same period, the literature on multilateralism more generally has proliferated. [2] Scholars in many disciplines have devoted energies to making sense of the concept and tracking the tendencies towards or away from multilateralism in a wide range of contexts. [3] Broadly put, this diverse and extensive body of scholarship is preoccupied with discerning the parameters of and through which states in groups of three or more coordinate their national policies through ad hoc or more institutional arrangements. Given that international tax law has not seen the trend towards formal legal multilateralism witnessed in other areas of legal regulation, [4] in section 2. this paper canvasses briefly some alternative possible approaches that governments could adopt if they were serious about better coordinating and possibly harmonizing international tax regimes. In section 3., the paper turns to explore in some detail the potential advantages to using tax treaties as a form of multilateral solution. In section 4., the paper evaluates the CARICOM multilateral double taxation treaty to see if in practice that treaty delivers on the predicted benefits of multilateralism including: whether it offers the potential to ensure that tax is collected in at least one state; whether some of the mechanisms to implement multilateralism would better integrate tax regimes; and whether multilateralism can promote tax fairness. The paper concludes by urging governments to pursue multilateral and collective solutions to international tax law design, alongside unilateral solutions to some of the policy dilemmas that arise in an integrated world, and to explore creative ways of designing collaborative tax instruments and agreements to ensure international tax laws remain robust.

2. Possible approaches to improving tax coordination: The road to multilateralism

There are a number of steps countries can take unilaterally to ensure that they collect an appropriate amount of tax from businesses operating in their jurisdictions. These unilaterally designed rules can be quite technical; however, the purpose of this part of the paper is simply to highlight a few of the kinds of rules that might be adopted, using Canadas rules as illustrative. After a review of some of these unilateral design possibilities, this section of the paper turns to a discussion of the possible multilateral solutions. First, under the present law, corporations are deemed to be resident in Canada, and are taxed on their worldwide income, if they are incorporated in Canada or if their central management and control is in Canada. [5] These tests make it very simple for a corporation to become resident outside Canada. It would be relatively simple to substantially strengthen this test of corporate residency by making it a multi-factor test. A corporation might be held to be resident in Canada if it has a substantial economic nexus with Canada based upon a consideration of a number of connecting factors in addition to the two previously mentioned factors such as: whether the executive or day-to-day control is exercised in Canada; whether the majority of shareholders are resident in Canada; whether the controlling shareholders are resident in Canada; and whether the corporation has substantial business operations in Canada. [6] Corporations should not be able to avoid domestic taxation through the manipulation of formal, legal procedures. Second, a substantial part of international trade takes place between affiliated corporations. In determining how much profit a Canadian subsidiary has earned in Canada, the present tax rules require it to compute its profits as if it were dealing with its affiliated overseas corporations at arms length. Of course it is notoriously difficult to determine what the value of a transfer between related companies should be particularly for unique and

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intangible goods and services and it is widely understood that billions of dollars of corporate profits are in effect removed from the jurisdiction of the Canadian government through the manipulation of these so-called transfer prices. Numerous commentators have suggested that the Canadian government should use a formula based upon, for example, what percentage of the multinationals worldwide sales are in Canada or what percentage of its worldwide payroll is in Canada, and simply assume that that percentage of its worldwide profits were earned in Canada. [7] Such an approach would be much more difficult to manipulate and would provide a more appropriate calculation of profits attributable to Canada. Third, and finally, Canada has tax treaties with a number of countries that have very favourable tax regimes for international businesses, such as Barbados. Under Canadas domestic tax law any business income earned in corporations resident in these jurisdictions can be repatriated to Canada tax-free. The Auditor-General has suggested on numerous occasions that the Canadian government should close this loophole, [8] which remains available for Canadian multinationals. [9] In fact, this loophole has been extended in the last 2 years as the government has moved to allow investors into countries with whom Canada enters into a tax information exchange agreement to receive the beneficial tax treatment for business profits afforded previously only to countries with which Canada had a comprehensive income tax treaty. [10] Canada entered into its first tax information exchange agreement with the Netherlands Antilles [11] in August 2009 and has announced that it is negotiating agreements with a long list of low-tax jurisdictions. [12] These exchange agreements may prove to be useful tools for obtaining information about recalcitrant taxpayers, but the trade off on taxing business profits earned in the jurisdiction is perhaps not worth the benefits. The list of possible measures that Canada (or any country) could take to strengthen the taxation of multinational businesses operating in Canada is long. The point in highlighting a few unilateral measures is simply to underscore that even if states have to act unilaterally, they are not entirely impotent to preserve their corporate or business tax bases in the face of the forces of globalization. Nevertheless, presumably many of the perceived pressures of globalization are related to any given countrys sense that other countries are offering more competitive or attractive tax environments for international business. This sentiment leads countries to conclude that they, too, need to refine their tax systems (by reducing rates and limiting their tax base) in order to attract foreign investment and keep domestic investment at home. Therefore, it seems that protecting a countrys national sovereignty might be better accomplished through multilateral or cooperative agreements. There are at least four obvious advantages to tax cooperation. [13] The first two advantages are derived primarily because they result in reduced barriers to investment and assist in ensuring that investment is made in the jurisdiction where the best economic returns can be earned. First, if nations coordinate in setting their tax policies, barriers to business investment may be reduced. For example, in the absence of coordination, two countries might impose tax on the same income leading to disincentives for cross-border investment. Second, cooperation may reduce fiscal externalities. When nations set their tax policies based only on their own best interest, neutrality at an international level suffers. For example, it is appealing for a nation to tax foreign investors on the value of their income earned in the host country to fund domestic spending programs. This strategy permits the cost of those domestic programmes to be exported to non-resident investors. However, this practice inevitably affects the tax revenue that can be raised in the foreign jurisdiction. While this externality (tax exportation) makes the other jurisdiction worse off, a second fiscal externality, tax base flight may make that jurisdiction better off. In this case, the host nation raises its business tax rate to a sufficiently high level that business relocates to another nation. The result is increased revenues for the new host nation. Other efforts at tax coordination seek to ensure that an appropriate amount of tax is collected. So, a third advantage to coordination among nations is that abusive tax arrangements might be reduced. For example, companies with the ability to locate in a variety of jurisdictions may be able to: 1) take advantage of the opportunity to deduct some expenses (double dip) in more than one jurisdiction; 2) price goods and services sold between related companies (transfer pricing) in a way that ensures that most of the profits are realized in low-tax jurisdictions; 3) funnel profits through multiple countries to achieve reduced withholding tax rates; or 4), conceal profits altogether by leaving profits in jurisdictions with bank secrecy laws or inadequate exchange of information obligations. Fourth, and finally, compliance and administration costs might be reduced if tax systems were more harmonized. Every jurisdiction has different rules for calculating income, and different tax rates. If more of these calculation rules were the same, the time and expense of determining taxes owing would decrease. Governments, policy makers and scholars have explored a variety of collaborative, coordinated and harmonized approaches to taxation in an effort to capture some or all of the above reviewed advantages. [14] For example, the formation of the European Union has resulted in a number of recent attempts to coordinate corporate tax regimes in Europe. These initiatives are driven in part by a desire to facilitate greater trade among EU countries, but also in part by concerns about preserving the corporate tax. [15] Similarly, the Organisation for Economic Cooperation and Development (OECD) has attempted to combat what they have termed harmful tax competition, releasing a significant report in 1998, with subsequent follow-up reports and releases. [16] OECD member country concerns about tax evasion and fraud have manifested in a concerted effort to promote tax information exchange among countries, an effort that has received a good deal of political attention over the last couple of years. [17] Scholars and policy makers have explored the possibilities presented by an international tax organization that could propose and/or implement international tax policy, [18] the adoption of a consolidated tax base, [19] the application of consistent withholding tax rates, enhanced exchange of information, formulary apportionment [20] and a model tax code, [21] among other ideas aimed at promoting some form of coordination of harmonization.

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In addition to these alternatives, countries could use tax treaties as a means of better coordinating or harmonizing their tax regimes. Canada has close to 100 bilateral tax treaties with foreign countries. As usually articulated, the fundamental purpose of these bilateral tax treaties is to facilitate cross-border trade, investment and other activities by removing the possibility of double taxation for multinationals operating in both countries. However, an equally important purpose should be to ensure that international income is taxed at least once and to prevent tax evasion. Canadas tax treaties could be strengthened in several ways to achieve these objectives by providing for more information exchanges, facilitating the simultaneous audits of multinational corporations and so on. While changes to bilateral tax treaties may help to facilitate trade and prevent avoidance and evasion, the remainder of this paper pursues the possibilities presented by a move from bilateral to multilateral tax treaties, exploring the argument that the potential advantages of coordination and harmonization are better captured if more countries are at the treaty-negotiating table.

3. The advantages of multilateral tax treaties

The beginnings of modern efforts to coordinate tax regimes between multiple nations using multilateral tax treaties can be traced to the work of the League of Nations around the time of the First World War. [22] Motivated by concerns expressed by the International Chamber of Commerce, the focus of the League of Nations work in the early 1920s was on the eradication or reduction of double taxation that might arise as a consequence of the application of two or more national tax systems to a particular stream of income. The League commissioned a well-known report authored by four economists to explore alternative approaches to resolve international double taxation. [23] The result of that report, and the subsequent pressures from different member states, was that the League embraced double taxation treaties, rather than multilateral tax treaties, which were also on their agenda for consideration. Tax scholars who have written about multilateral tax treaties are often talking about different things. Some scholars have written about a worldwide multilateral treaty that would replace the current system of bilateral agreements; [24] others have advocated a multilateral treaty or agreement that would address one or two very specific aspects of international taxation that could be signed onto by governments with an interest in becoming part of that treaty; [25] still others have debated the merits of multilateral tax treaties that could be signed by regional or trading blocks. [26] This paper focuses on the possibilities presented by this last kind of multilateral tax treaty. A number of tax scholars have either considered the advantages of multilateral tax treaties or noted the disadvantages of bilateral treaties (that might be ameliorated with multilateral agreement). [27] Those advantages are reviewed in this part of the paper. A number of the advantages identified in the literature are based on the ability of multilateral treaties to better facilitate trade; other advantages focus on the potential for greater enforcement; and a final category of advantages are based on gains to administration. While facilitating trade, and more especially enabling better enforcement, are laudable goals in the face of increased globalization, with the potential for tax competition to erode business tax revenues significantly, this part of the paper ends by exploring whether multilateral tax treaties could serve a useful role in protecting tax bases and rates.

3.1. Advantages in facilitating trade

Addressing triangular cases: Bilateral tax treaties are quite effective where activities are carried on in only two jurisdictions. They become less effective where a multinational carries on activities in more than those two states. For example, it is a challenge for tax administrations to determine how to best tax a company that has income from a source in one state, earned by a permanent establishment in a second state, and where the business has its head office (or residence) in a third state. [28] Triangular cases also arise for individual actors. For example, an individual may be resident in one country, engaged in a work project in a second country, and sent to a third country on a short-term basis. Similarly, multilateral treaties are more effective at dealing with cases where, for example, an individual or company might be found to be resident in more than two jurisdictions, or income may be held to have multiple sources. Multilateral treaties can resolve these kinds of triangular fact situations in equitable ways. Expanding treaty networks: Many middle- and low-income countries (1) have underfinanced tax administrations and have therefore been unable to develop significant tax treaty networks; (2) have faced discrimination by highincome country negotiators and therefore have been unable to negotiate extensive tax treaty networks; or (3) have realized the capital-exporting bias of the OECD and to a lesser extent United Nations (UN) model double taxation treaties and have opted not to enter into tax treaties based on those models. These countries are arguably insufficiently covered by tax treaties and would potentially benefit from multilateral treaties onto which they could sign.

3.2. Advantages in preventing or reducing evasion and avoidance

Facilitating exchange of information: One of the most difficult challenges in administering tax systems is obtaining information about the international transactions and investments of domestic taxpayers. It is relatively straightforward for tax administrators to get information about a taxpayers domestic activities since usually domestic law enables administrators to compel evidence from third parties and the taxpayer him or herself. In contrast, where a taxpayers investments are held in secret in another jurisdiction, the tax administration has no real mechanism to compel the other jurisdiction to provide it with information about the taxpayers investments. As a consequence, information exchange has become one of the hot topics of international taxation. Bilateral tax treaties generally include a provision that enables the states, which are parties to the treaty, to exchange information for tax purposes under certain conditions. For states with many bilateral tax treaties (or tax

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information exchange agreements) the major challenges of information exchange may be limited to tax havens that refuse to enter into information exchanges or tax administration resource constraints. However, many middle- and low-income countries, for example, have been unable to command a vast network of tax treaties and may find their ability to obtain taxpayer information is quite limited. Multilateral tax treaties could ameliorate some of the limits on information exchange. For example, a multilateral treaty could require multiple governments to work together in an audit of a group of companies that carry on activities in several of those jurisdictions. In addition, they might enable countries to share tax information, which they have received from other countries outside the multilateral treaty network. Reducing treaty shopping: Taxpayers commonly use treaty networks in an effort to secure the most taxadvantaged routes for their investment. For example, if a taxpayer in Country A wants to invest in Country B, but Country B imposes a 10% withholding tax rate, the taxpayer in Country A may invest in Country B through a vehicle in Country C if the rate of withholding in the tax treaty between Countries B and C is less than 10%. It is almost impossible to police this kind of treaty shopping; however, if Countries A, B, and C were all members of a multilateral tax treaty with the same rates of withholding, then there would be no incentive for the investor to divert investment through a third country. Advancing fair approaches to tax issues that cannot be adequately resolved by only one or two states: A range of technical international tax design issues are difficult for one state to adequately address on its own. Transfer pricing and interest deductibility are two illustrative areas where adequate international tax design is difficult if not impossible for one state alone to manage. [29] Disputes about transfer pricing have become a major preoccupation of tax scholars and administrators. Under the model bilateral tax treaties and the domestic tax legislation of most high-income countries, multinational companies are charged with determining an arms-length price for goods and services exchanged within the corporate group. Tax administrators have a notoriously difficult time determining what goods and services are in fact being transferred between related companies, settling on an arms-length price and enforcing an audit on a company that does business in multiple jurisdictions. In addition, transfer pricing audits are hugely expensive for both tax administrators and multinationals. As noted above, many scholars have endorsed some form of formulary apportionment whereby the profits of a multinational are allocated among the jurisdictions where that corporation has activities based on some objective factors. Although two treaty partners could agree to a form of formulary apportionment as part of their negotiation of a bilateral tax treaty, none have done so. It is possible that countries entering into a multilateral tax agreement might feel less constrained by the model tax treaties and dominant bilateral practices and might consider whether some form of formulary apportionment might be acceptable for multinationals doing business in the countries who are party to the agreement. [30] Interest deductibility poses similar challenges. A parent company located in Country A may carry on business through a vehicle located in Country B. For the purposes of Country Bs law, the vehicle may be classified as a corporation, entitled to be treated as a separate taxpayer. For the purposes of Country As law, the vehicle may be classified as a flow-through entity, therefore not distinct from the parent in Country A. If the entity in Country B borrows some funds and makes deductible interest payments, that entity may receive a deduction in Country B as well as in Country A for the same interest payments. This kind of arrangement, expressed in its simplest form here, is referred to as a double dip because two interest deductions have been claimed for one interest payment. While the two countries could conceivably come to some agreement between them about the allocation of the interest deduction, no pair of countries has done so. Instead, countries often cite the ability of businesses in other jurisdictions to enter into similar arrangements as a justification for failing to take action. If, however, several countries were at the negotiating table, it is possible that they could find some mutually agreeable solution to the allocation of interest (and other) expenses.

3.3. Administrative advantages

Reducing interpretive inconsistencies: One of the challenges of a network of bilateral treaties can be that different jurisdictions take different interpretive positions on similar or identical clauses. As a result, some commentators have criticized bilateral treaties as leading to excessive time spent on interpretive issues that may result in a lack of common understanding about similar or identical text. [31] One proposed solution to this problem is the adoption of a multilateral treaty with an international body charged with its interpretation. [32] But consultation and discussion among signatories to a multilateral treaty might provide similar (although more limited) benefits. Reducing amendment difficulties: Bilateral tax treaty networks are difficult to amend and amendment is costly and slow. Canada, for example, has almost 100 tax treaties signed and to renegotiate each of those treaties would take a tremendous amount of time. As a consequence, some tax treaties become quite dated before Canadas treaty negotiators are able to negotiate protocols or otherwise update the treaties. Tax treaties are therefore far from responsive to rapidly developing tax planning strategies. [33] It is possible that multilateral tax treaties would be easier to amend and when amended would affect more international transactions. [34] The counter-argument, of course, is that with more treaty partners at the table it may take just as long to have everyone come to agreement on the revised provision(s). [35] Reducing administrative costs: Taxpayers that engage in activities across multiple jurisdictions are required to comply with the domestic tax rules of each jurisdiction, including the effect of bilateral tax treaties on the application of those rules. A multilateral tax treaty would at least minimize the time spent learning and complying with multiple, often only marginally different, tax treaty consequences of investing in multiple countries. Improving tax administration cooperation: One presumes that a multilateral treaty necessarily requires tax administrators from multiple countries to work closely together in the interpretation and application of the tax

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treaty. This cooperation may result in more consistent interpretation of the treatys provisions, easier resolution of disputes (because the parties have built a longer-standing, more committed relationship), possibly a reduced number of inter-country disputes since the stance of the parties to the treaty will be better articulated and more consistent, and increased information exchange.

3.4. Potential for preventing tax competition

The traditional arguments in favour of multilateral treaties above may, on their own, be sufficient to justify their serious consideration by tax treaty negotiators and policy makers around the world. As reviewed, those advantages are focused primarily on the uses of a multilateral treaty in reducing barriers to trade and investment, reducing avoidance and evasion, and in improving administration. Multilateral treaties may also present an opportunity for countries to stem, in a significant way, the erosion of business tax bases and rates. To make significant progress in resisting tax competition, multilateral treaties would need to take a direction different from that historically taken: they would need to include agreements by their parties not to erode particular aspects of their tax bases and rates. [36] Scholars and policy makers appear not to have explored the possibilities for multilateral treaties to serve as an instrument for tax coordination when entered into between countries in regional trading blocks. [37] There may be several reasons for their failure to do so. First, there is no reason why an agreement not to engage in tax competition between states should be reflected in a tax treaty as opposed to some other treaty instrument or agreement. Second, the OECD model tax treaty is sticky and it may be that treaty negotiators are reluctant to deviate in any significant way from that standard form in their tax treaties. Third, states may be too preoccupied with the perceived short-term benefits of tax competition with their trading neighbours to take seriously any proposal that would require governments to sacrifice current investment possibilities with the aim of ensuring greater tax revenue returns in the longer run. Multilateral treaties in their current form do have at least some potential to reduce competitive distortions. For example, if a tax treaty between Country A and Country B offers an interest withholding tax rate of 5%, and a treaty between Country A and Country C offers a rate of 10%, one imagines that if the Country A investor is indifferent between borrowing from a lender in Country B or Country C it would choose Country B. If these three countries were all part of a multilateral treaty, assuming that an interest withholding tax were actually imposed by both countries B and C in their domestic legislation, then presumably the interest withholding rate would be the same for payments between the three countries. More challenging, however, is the idea that multilateral tax treaties among members of common trading blocs might provide a vehicle for a serious discussion among the signatories about the baselines for taxation. The negotiation of tax treaties could provide states with the opportunities to set some minimum taxation thresholds. For example, countries could agree to withholding taxes within a particular minimum and maximum range (instead of just setting a maximum). Or countries could agree to impose some minimum level of business or corporate tax with reference to both a rate and appropriate base. [38]

3.5. Potential disadvantages

Scholars have identified a range of possible disadvantages associated with multilateral tax treaties. [39] First, the parties may simply be unable to reach an agreement. Multilateral treaties are difficult to negotiate: instead of having only two countries at the negotiating table, there are three or more countries, each with concerns about their position relative to each other. Treaty negotiations could commence, then take an enormous amount of time, and then the parties may subsequently fail to reach a satisfactory set of compromises. Second, differences between the tax systems and the economic, political and social location of the countries may be so wide that bilateral treaties provide more effective instruments for compensating for those differences. Third, bilateral treaties can be quite responsive to the particular circumstances of the treaty parties. Multilateral treaties might lose some of that local responsiveness or become quite unwieldy in length and detail in order to accommodate those circumstances. Fourth, even if countries could come to an agreement, it is possible that it would be harder to change the agreement than it would be to change the standard bilateral agreement. Finally, it is possible that the more powerful countries or special interests that have a stake in the negotiations will capture the discussions and policy decisions required by treaty negotiations and will end up dominating the form the treaty takes.

4. Potential of the CARICOM multilateral double taxation agreement

Although there has not been a widespread movement towards the negotiation and ratification of multilateral tax treaties, a few comprehensive multilateral tax treaties are currently in force. The Andean countries (Bolivia, Chile, Columbia, Ecuador and Peru) originally signed a multilateral convention in 1971, [40] which has been updated several times, but most recently in 2004 (among Bolivia, Colombia, Ecuador, Peru and Venezuela); [41] the Nordic countries signed a multilateral treaty in 1983, which has been updated several times, including most recently in 2008 (among Denmark, Faroe Islands, Finland, Iceland, Norway and Sweden); [42] and in 1973 some of the Caribbean Community (CARICOM) countries signed a multilateral treaty, which was updated most recently in 1994 (among Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, Saint Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago). [43] Other jurisdictions have been negotiating comprehensive double taxation agreements, but those negotiations have not yet been concluded. [44] These three treaties stand out as remarkable in a world where countries have agreed to over 2,500 comprehensive bilateral tax treaties. This part of the paper reviews the CARICOM treaty in an effort to see whether in practice multilateral tax treaties give rise to the advantages and disadvantages identified in the academic literature. The CARICOM treaty has been chosen for three reasons. First, it is a long-standing treaty still in operation. Second, it reflects a quite different approach to the resolution of double taxation issues than that taken in the models promulgated by the

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Organization for Economic Cooperation and Development and the United Nations. [45] Third, unlike the Nordic treaty, the CARICOM treaty has not been the subject of extensive academic commentary. [46]

4.1. Brief review of the history and design of the CARICOM treaty
The CARICOM multilateral tax treaty, originally signed in 1973, built on the economic integration of some of the countries of the Caribbean. Four countries, Barbados, Jamaica, Guyana, and Trinidad and Tobago were the first countries to sign the Treaty of Chaguaramas in 1973. The goal of that treaty was to establish free trade in goods and services and free movement of capital within the CARICOM community. As is the case of the story of the origins of many modern tax treaties, the CARICOM double tax agreement followed the trade agreement in short order. The 1973 multilateral tax treaty divided its signatories into two groups: more developed (Barbados, Guyana, Jamaica, and Trinidad and Tobago) and less developed (Antigua, Belize, Dominica, Grenada, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia and St. Vincent) countries. The treaty applied for transactions between a more developed country and a less developed country, or between less developed countries, but did not apply between more developed countries. While the treaty was similar in many respects to the UN and OECD models, it had a unique feature in addition to its multilateralism: it allocated greater taxing rights to the less developed nations. Just to illustrate, the treaty provided for the possibility of non-reciprocal withholding tax rates: the more developed countries agreed to limits on their withholding tax rates (to 10% for interest and 5% for royalties), while the less developed countries were granted the right to tax those payments at their domestic withholding tax rates. The treaty fell out of use, however, and in 1992 the CARICOM Secretariat circulated a draft replacement treaty for comment. This treaty was signed by many of the current signatories in July 1994. The treaty derives much of its language from a combination of the OECD and UN model treaties; however, it also derives some of its fundamental inspiration from the Andean model. [47] The most unusual feature of the 1994 treaty, borrowed from the Andean model (again, aside from its multilateral nature), is its allocation of the taxing jurisdiction almost exclusively to the source country. [48] Most of the worlds treaties, including the Nordic multilateral treaty, are based on the allocation of tax jurisdiction between the source and the residence state. For example, in the taxation of interest income, most treaties allow the source country (usually the country where the payer is resident) to impose a withholding tax on the gross cross-border interest payment and set a maximum possible rate for that withholding tax, say, 10%. The residence state is also allowed to tax the receipt of the interest payment by its resident, but generally must take into account the tax imposed at source. The tax credit mechanism enables countries to share tax jurisdiction without resulting in double tax. To illustrate, imagine a payer in Country A makes a USD 100 interest payment to a recipient in Country B. If Country As withholding tax rate in its domestic tax legislation is 15%, that country would normally require the payer to remit USD 15 to the tax authority on behalf of the tax liability of the taxpayer resident in Country B. The tax treaty between Country A and Country B may reduce the withholding tax rate to 10%, so the payer need only remit USD 10. When the resident in Country B receives the amount he or she would report the USD 100 of income. Assume that the tax rate in Country B is 20%. Normally the resident in Country B would owe USD 20 to his government; however, because he has already paid USD 10 to Country A, the tax authority agrees it will credit the resident in Country B for the tax already paid. The result is that the resident pays only USD 10 to the government of Country B. The total tax is still USD 20, which is the tax that would have been paid if the interest had been earned in Country B. Unlike this standard scenario, the CARICOM treaty allocates all of the tax jurisdiction to Country A. So, in the illustration above, Country A would receive USD 10 of income and Country B would be precluded from imposing any tax. This change to adoption of a source-only approach to taxation of income between CARICOM signatory members presumably achieves three purposes. First, it makes the treaty administratively easy. Investors may need to learn only the laws in the jurisdiction of source. Tax administrations in the country of residence have infrequent need to audit the income of taxpayers with a source in the CARICOM but outside of the residence country. Second, it preserves the tax incentives offered by capital-importing countries. In a standard tax treaty where jurisdiction to tax is split between the residence and the source states, if the source state forgoes its right to tax, the residence state can simply tax all of the income associated with the source investment. The effect of the source states tax incentive will simply be a transfer of the tax revenue from the treasury of the source state to the treasury of the residence state. With source-only taxation, if the source state provides an incentive for a particular kind of investment by reducing or eliminating its tax on that kind of investment, the incentive effect of the low rate is preserved: the residence state has agreed not to tax the income at all. Third, it positions the CARICOMs approach to treaty design in direct opposition to its much earlier arrangements with the United Kingdom. In arrangements dating back to the 1940s with the United Kingdom, many of the countries involved in the current CARICOM treaty found themselves unable to tax income at source at all: in those early arrangements many types of income were taxable only in the country of residence. Naturally, this stripped all of the tax revenue associated with activities in the region from CARICOM governments (since revenue flows were almost entirely from the Caribbean to the United Kingdom), leaving it in the hands of the imperial power. One imagines that at least one explanation for the source-only approach in the 1994 treaty was a clear rejection of the legacy of tax colonialism in the CARICOM region. [49] In addition, one suspects that the decision to adopt a source-only approach was intended to assist less developed states in the spirit reflected in the 1973 treaty. Nevertheless, the approach is quite different. The 1973 treaty enabled the less developed states to tax the income at higher rates than the more developed states. One of the possible reasons that the treaty fell into disuse was because less developed states discovered that if their tax rates exceeded the rates in more developed countries, they would not be able to attract badly needed investment. Source-only taxation provided an alternative: however, it supports the less developed states by

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enabling them to provide generous tax holidays to attract investment rather than supporting them by enabling them to impose higher tax rates as a means of raising additional government revenues. With the above historical backdrop to the CARICOM Treaty, the next section turns to a review of the potential advantages of multilateral tax treaties to determine if any of those advantages are captured by the CARICOM treaty.

4.2. Advantages in facilitating trade

It seems likely that the treaty has resulted in the facilitation of trade among the CARICOM signatory members. Triangular cases among the CARICOM member states are relatively easy to resolve. The main conflict occurs where there might be multiple states that claim that income has a source within their jurisdiction. No article expressly addresses how to deal with a source conflict; however, a taxpayer is able under the consultation article to present her case to the competent authority in the member state where she is resident. That member state can then address the conflict with the competent authorities of other jurisdictions if it cannot be resolved by the residence state alone. [50] Similarly, many of the signatories, particularly those who are members of the Organization of Eastern Caribbean States, are relatively small states. Many of those countries likely lack both the capacity to negotiate many bilateral treaties and may have lacked the clout to command treaties with the other CARICOM member states. For example, Barbados has signed 15 tax treaties, Trinidad and Tobago have signed 14, Jamaica has signed 12, Belize and Guyana have each signed two tax treaties, Grenada and St. Kitts and Nevis have signed one tax treaty, and Antigua and Barbuda, Dominica, Saint Lucia, and St. Vincent and the Grenadines have no other comprehensive income tax treaties.

4.3. Advantages in preventing or reducing evasion and avoidance

The effectiveness of the CARICOM treaty in preventing or reducing evasion and avoidance, relative to standard bilateral treaties, is mixed. On the one hand, the exchange of information provision enables countries to coordinate group audits of one taxpayer and to obtain information relatively easily from all of the member signatories. [51] This is not to suggest that information is actually exchanged: there may be limits on the capacities of tax administrations to use the tax information exchange clause. Nevertheless, the clause could facilitate a group of tax administrators to pool resources in order to audit a multinational engaged in business in the region in a way which other bilateral agreements do not. The exchange of information provision in the treaty could be even more effective. The article is drawn from the exchange of information article in the OECD model treaty current in 1994. The newer iterations of the model have changed some of the language in a way that might facilitate more effective exchange. The CARICOM model could be adjusted, for example, by changing the requirement to exchange information from when it is necessary to carry out the agreement to when it is reasonably foreseeable that it could be relevant. In addition, the CARICOM treaty members could (as an administrative matter) decide on a range of automatic information exchanges that would not turn on an individual in the tax office receiving a request. As an alternative to a protocol that would amend the exchange of information provision, members could consider the adoption of a much richer more detailed convention on mutual assistance. While, on the one hand, the multilateral nature of the agreement is helpful, on the other hand, the source-only approach makes tax avoidance and reduction easier. Taxpayers are able to use the provisions of the CARICOM treaty to their advantage. For example, accounting firms readily advocate that taxpayers invest in the Caribbean under the umbrella of the tax treaty. They point to the advantage of a taxpayer being able to reduce its tax liability for a subsidiary or branch in Country A (the source state) by paying management fees to Country B (the residence state). The subsidiary in Country A is able to deduct the management fee from its corporate income owing. If the rate of corporate tax is 30% and the management fee is USD 10,000, that presents a USD 3,000 saving. The subsidiary may need to pay the 15% withholding tax on the management fee payment, but the taxpayer is still USD 1,500 better off. [52] The management fee is not taxed in Country B because of the sourceonly orientation of the treaty. The source-only approach to taxation provides taxpayers with an incentive to shop for the jurisdiction with the lowest domestic tax rates. The possibilities for tax avoidance presented by the treaty are exacerbated in at least some countries by inadequate underlying domestic legislation. For example, some CARICOM member states lack strong transfer pricing rules (rules that enable the adjustment of prices charged between related parties); thin capitalization rules (rules that restrict the amount of debt capitalization between related companies and that therefore restrict the amount of interest that might be deducted at source); and mismatches between the language of the underlying domestic legislation (for example, which might provide that the geographic source of a payment is where the services are performed) and the treaty itself (which might provide that the geographic source is where the income arises). In terms of preventing evasion and avoidance, the treaty could include an assistance in collection provision that would enable one signatory country to assist another signatory country to collect the taxes actually owing under the treaty. Most bilateral tax treaties do not include such a provision, [53] although it is included in both the OECD and UN model treaty.

4.4. Administrative advantages

Scholars have identified a range of possible administrative advantages to multilateralism, including the development of common approaches to interpretation, a reduction in amendment difficulties, reduced administrative costs and improved cooperation between tax administrations. While the multilateral treaty provides a platform for achieving these objectives, generally speaking the tax treaty alone will not serve these purposes.

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In terms of the development of a common approach to treaty interpretation, in the absence of a common court, this benefit would require at least some coordination among the legal departments of the CARICOM members. If members were able, for example, to develop a repository for cases decided under the treaty, and tax administrators could exchange information about their legal interpretations of particular sections of the treaty when they audit taxpayers, that exchange of information might assist greatly in the development of a common body of law that would assist in the treatys interpretation. It might be noted that while the CARICOM treaty does not contain a clause detailing the interpretive stance to be adopted by its signatories, in their 2004 efforts to update their multilateral agreement the Andean countries included an interpretive clause that requires that decisions under the treaty must be made in a way that does not permit tax evasion. [54] The treaty does not seem to have been particularly difficult to amend, at least in 1994. As the history reveals, the CARICOM Secretariat circulated a draft for comment in 1992 and the treaty was signed in 1994. A 2-year time lag for a revised treaty is relatively quick, considering, for example, that it took treaty negotiators 10 years to renegotiate the most recent protocol to the CanadaUS treaty. [55] There are a number of ways that the administrative costs for the treaty might be reduced, largely by encouraging more cooperation among tax departments. First, treaty administrators could agree to share information on their treaty interpretations, thereby reducing the time a subsequent administration might need to spend on a particular issue. Second, regional expertise could be developed: for example, the expert on the application of Art. 8 (business activities) might reside within the Barbados tax administration, while the expert on the application of Art. 14 (management fees) might find her home in the tax department in St. Lucia. Third, tax administrations could work towards joint audits of large taxpayers. This approach might ensure that multiple tax administrations are not seeking the same information and trying to construct their audit positions at the same time or at cross purposes. One advantage is that the member states have an organization, the Caribbean Organization of Tax Administrators, which brings together tax administrators from all of the member states on a regular basis to discuss issues. This organization, or the CARICOM Secretariat itself, could serve as a forum for the discussion of some of these coordinated activities.

4.5. Potential for preventing tax competition

Where a source state gives up its right to tax a particular source of income, no tax is collected. There may be justifications for providing generous tax holidays, but the empirical evidence suggests that tax holidays rarely have the desired incentive effect. As a consequence, the CARICOM treaty does nothing to assist in preventing tax competition. Instead, in many ways the reverse is true: countries have an incentive to lower their source taxes to attract badly needed investment. It is not surprising, therefore, that there have been formal tax harmonization initiatives running parallel to the work on the CARICOM treaty. In the early 2000s, for example, the CARICOM countries began pursuing some domestic tax harmonization initiatives. At this stage, that initiative has stalled; however, countries have at least some ongoing conversations about its reinvigoration. There have also been informal tax harmonization efforts, resulting largely from the implementation of some of the technical advice received by organizations like the IMF in the region.

5. The importance of some form of multilateralism

The above review presents a mixed picture of the possibilities of multilateralism to assist with tax administration, tax collection and the reduction of tax competition. Most notably, multilateral treaties may enable greater cooperation among states in information exchange and taxpayer audit. They could also be useful in facilitating a common interpretation of the treatys provisions and an assistance in collection provision could relatively easily be inserted. But it is also clear that multilateral treaties will not provide a panacea for the challenges of modern day international tax planning. The underlying domestic tax systems and tax administrations still need to be robust. Even with expansive, effective domestic legislation, a robust tax administration and good tax information exchange and collection provisions, meeting the challenges for tax systems worldwide requires more than a multilateral tax treaty. As the CARICOM story reveals, unless there is some agreement about the minimum tax level, or some kind of tax harmonization, the likelihood in the long run of shoring up tax systems in the face of increased mobility of capital seems remote. By way of conclusion, something optimistic might be said about the CARICOM treaty. It demonstrates that eleven countries can get together and come to some agreement on some aspects of international tax system design. If those countries are able to take that conversation further, and to pursue the possibility of at least some harmonization, it might encourage other nations to consider whether they can put aside some of their short-term interests in order to explore the potential for a collaborative approach to common international tax problems. You have to start somewhere. 1. Working together, nations can tackle todays major challenges Ban, United Nations News Center (5 November 2009), available at http://huwu.org/apps/news/story.asp? NewsID=32856&Cr=multilateralism&Cr1=#. For a discussion of the debates between and among universalists and multilateralists in international law see Blum, G., Bilateralism, Multilateralism, and the Architecture of International Law, 49 Harvard International Law Journal 2 (2008), pp. 323-379. See e.g. Bhagwati, J., Regionalism and Multilateralism: An Overview, Discussion Paper No. 693 (Columbia: Columbia University Department of Economics, 1992); Caporaso, J., International Relations Theory and Multilateralism: The Search for Foundations, 46 International Organization 3 (1992), pp.

2.

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599-632; Bouchard, C. and J. Peterson, Conceptualising Multilateralism, Mercury Working Paper (Edinburgh: University of Edinburgh, 2009), available at http://typo3-8447.rrz.unikoeln.de/fileadmin/user_upload/Bouchard_Peterson_Conceptualising_Multilateralism.pdf; Ruggie, J.G., Multilateralism: The Anatomy of an Institution, 46 International Organization 3 (1992), p. 561; Keohane, R., Multilateralism: An Agenda for Research, 45 International Journal 4 (1990), p. 731. 4. See Rixen, T., and I. Rohlfing, The Political Economy of Bilateralism and Multilateralism: Institutional Choice in International Trade and Taxation, TranState Working Papers No. 31 (Bremen: University of Bremen, 2005). For a fuller discussion of the Canadian corporate residence rules see Brooks, K., Canada, in Maisto (ed.) Residence of Companies Under Tax Treaties and EC Law, EC and International Law Tax Series, Vol. 5 (Amsterdam: IBFD Publications, 2009). See the suggestions made by Arnold, B., A Tax Policy Perspective on Corporate Residence, 51 Canadian Tax Journal 4 (2003), pp. 1559-66, at 1562; and McIntyre, M., Determining the Residence of Members of a Corporate Group, 51 Canadian Tax Journal 3 (2003), pp. 1567-1572. The literature on the difficulties of transfer pricing and the advantages of a formulary approach, including concrete efforts to set out what factors should be considered, is voluminous. For a recent illustration, see Avi-Yonah, R., K. Clausing and M. Durst, Allocating Business Profits for Tax Purposes: A Proposal to Adopt a Formulary Profit Split, University of Michigan Public Law Working Paper No. 138 (Michigan: University of Michigan, 2008), available at SSRN: http://papers.ssrn.com/sol3/papers.cfm? abstract_id=1317327. See e.g. Report of the Auditor General of Canada, 1992, Chapter 2 - Other Audit Observations, Tax arrangements for foreign affiliates are costing Canada hundreds of millions of dollars in lost tax revenues, Para. 2.28, available at http://www.oagbvg.gc.ca/internet/English/parl_oag_199212_02_e_8055.html#0.2.L39QK2.V0OCQD.CS3YFE.F1; Report of the Auditor General of Canada, December 2002, Chapter 4 - Canada Customs and Revenue Agency - Taxing International Transactions of Canadian Residents, Para. 4.9, available at http://www.oag-bvg.gc.ca/internet/English/parl_oag_200212_11_e_12405.html#ch11hd3e. See also the recommendations in Arnold, B.J., Reforming Canadas International Tax System: Toward Coherence and Simplicity (Toronto: Canadian Tax Foundation, 2009), Chapter 4. A comprehensive treaty is a treaty that covers all kinds of income taxes, not just taxes on shipping profits, for example. See http://www.fin.gc.ca/treaties-conventions/antilles-agree-eng.asp. For a review of the significance of this first treaty and the proposed subsequent ones see Boidman, N., Canadas Two-Faced TIEAs Netherland Antilles Trumps Bermuda, 55 Tax Notes Intl 12 (2009), p. 1023. These include Anguilla, Aruba, Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Gibraltar, Guernsey, Isle of Man, Jersey, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, San Marino, Turks and Caicos Islands. See http://www.fin.gc.ca/treatiesconventions/tieaaerf-nego-eng.asp. Mintz, J. identifies three in Globalization of the Corporate Income Tax, 56 FinanzArchiv: Public Finance Analysis 3/4 (1999), pp. 393-398. Interest in increased cooperation between national governments in the tax area is far from new. See e.g. Tinbergen, J., A.J. Dolman and J. van Ettinger, Reshaping the International Order: A Report to the Club of Rome (New York: Dutton, 1976); Steinberg, E.B. and J.A. Yager, New Means of Financing International Needs (Washington: The Brookings Institution, 1978); Surr, J.V., Intertax: Intergovernmental Cooperation in Taxation, 7 Harvard International Law Journal 2 (1966), p. 179; and Kingston, C.I., The Coherence of International Taxation, 81 Columbia Law Review 6 (1981), pp. 11511289. For EU initiatives, see for example discussions of the potential of a Common Consolidated Corporate Tax Base: European Commission (EC), CCCTB: Possible Elements of a Technical Outline, Working Document CCCTB\WP\057\doc, 26 July 2007, available at http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/common_tax_base/CCCTBWP057_en.pdf; Avi-Yonah, R. and K. Clausing, More Open Issues Regarding the Consolidated Corporate Tax Base in the European Union, 62 Tax Law Review 1 (2008), p. 119; Fuest, C., The European Commissions proposal for a common consolidated tax base, 24 Oxford Review of Economic Policy 4 (2008), p. 720; Mintz, J. and J. Weiner, Some Open Negotiation Issues Involving a Common Consolidated Corporate Tax Base in the European Union, 62 Tax Law Review 81 (2008), p. 81. See OECD, Harmful Tax Competition: An Emerging Global Issues (Paris: OECD, 1998); OECD, Towards a Global Tax Co-operation: Progress in Identifying and Eliminating Harmful Tax Practices (Paris: OECD, 2000). See also the OECDs website tracking their activities on this issue: http://www.oecd.org/department/0,3355,en_2649_33745_1_1_1_1_1,00.html. See e.g. OECD, Finance Ministers Issue Statement on International Tax Fraud and Evasion (23 June 2009) Doc. 2009-14279 Tax Analysts; OECD, Overview of the OECDs Work on Countering International Tax Evasion: A Background Brief, (18 September 2009) Doc. 2009-20883 Tax Analysts. See e.g. Avi-Yonah, R., Commentary: Treating Tax Issues Through Trade Regimes, 26 Brook. J. Intl L. 4 (2000-2001), p. 1683; Cockfield, A., The Rise of the OECD as Informal World Tax Organization

5.

6.

7.

8.

9. 10. 11.

12.

13. 14.

15.

16.

17.

18.

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through National Responses to E-Commerce Tax Challenges, 8 Yale J. L. & Tech. 59 (2006), p. 136; Horner, F., Do We Need an International Tax Organization?, 24 Tax Notes Intl 2 (2001), p. 179; McLure, C., Globalization, Tax Rules and National Sovereignty, 55 Bulletin for International Fiscal Documentation 8 (2001), pp. 328-341; Pinto, D., A Proposal to Create a World Tax Organisation, 9 New Zealand Journal of Taxation Law and Policy (2003), pp. 145-160; Spencer, D., The UN a forum for global tax issues? (Part 2), 17 Journal of International Taxation 3 (2006), pp. 30-44; Tanzi, V., Is there a Need for World Tax Organization?, in Razin/Sadka (eds.) The Economics of Globalization (New York: Cambridge University Press, 1999), p. 173; Vann, R., A Model Tax Treaty for the Asian-Pacific Region? (Part II), 45 Bulletin for International Fiscal Documentation 4 (1991), pp. 151-163 at 160-161. See Brauner, Y., An International Tax Regime in Crystallization, 56 Tax Law Review 2 (2003), pp. 259-328 for an argument in favour of an incrementally harmonized world tax regime. See also the proposal in United Nations, Report of the High Level Panel on Financing for Development, available at http://www.un.org/reports/financing/full_report.pdf. 19. 20. See e.g. Weiner, J., Approaching an EU Common Consolidated Tax Base, 46 Tax Notes Intl 6 (2007), p. 647. See e.g. Bird, R., The Interjurisdictional Allocation of Income and the Unitary Taxation Debate, 3 Australian Tax Forum (1986), p. 333; Musgrave, P., Tax Base Shares: the Unitary versus Separate Entity Approaches, 21 Canadian Tax Foundation (1979), p. 445. See e.g. Hussey, W. and D. Lubick, Basic World Tax Code and Commentary: a project sponsored by the Harvard University International Tax Program (Arlington, Virginia: Tax Analysts, 1996); Arnold, B., International Aspects of the Basic world Tax Code and Commentary, 7 Tax Notes Intl (1993), p. 260; Krever, R., Drafting Tax Legislation: Some Lessons from the Basic World Tax Code, 12 Tax Notes Intl (1996), p. 915. See Lang, M. and J. Schuch, Europe on its way to a Multilateral Tax Treaty, 9 EC Tax Review 1 (2000), pp. 39-43 at 39; Loukota, H., Multilateral Tax Treaty Versus Bilateral Treaty Network, in Lang et al. (eds.) Multilateral Tax Treaties: New Developments in International Tax Law (London: Kluwer Law International, 1998), Chapter 5, pp. 86-87. Bruins, W., L. Einaudi, E. Seligman and Sir J. Stamp, Report on Double Taxation Submitted to the Financial Committee, League of Nations Doc. No. E.F.S. 73/F. 19 (Geneva: League of Nations, 1923). See e.g. Loukota, in Lang et al. (eds.) Multilateral Tax Treaties: New Developments in International Tax Law (1998), Chapter 5, pp. 86-87. Thuronyi, V., International Tax Cooperation and a Multilateral Treaty, 26 Brook. J. Intl L. 4 (2000-2001), p. 1641. See e.g. Dunlop, J., Taxing the International Athlete: Working Toward Free Trade in the Americas Through a Multilateral Tax Treaty, 27 Northwestern Journal of International Law & Business 1 (2006), pp. 227-253; Graetz, M., A Multilateral Solution for the Income Tax Treatment of Interest Expenses, Yale Law & Economics Research Paper No. 371 (New Haven: Yale Law School, 2008), available at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259847; Oliver, D., Tax Treaties and the Market State, 56 Tax Law Review 4 (2003), pp. 587-608; McIntyre, M., Options for Greater International Coordination and Cooperation in the Tax Treaty Area, in 56 Bulletin for International Fiscal Documentation 6 (2002), pp. 250-253; Arnold, B., J. Sasseville and E. Zolt, Summary of the Proceedings of an Invitational Seminar on Tax Treaties in the 21st Century, 50 Canadian Tax Journal 1 (2002), pp. 65-144 at 99; Reinhold, R., Some Things that Multilateral Tax Treaties Might Usefully Do, 57 Tax Lawyer 3 (2003-2004), p. 661. As a concrete illustration of this kind of treaty see the OECD and Council of Europes Multinational Convention on Mutual Administrative Assistance on Tax Matters, CETS No.: 127 (Strasbourg: Council of Europe, 1998), available at http://conventions.coe.int/Treaty/EN/Treaties/Html/127.htm. See e.g. Lang and Schuch, EC Tax Review (2000), pp. 39-43; Mattsson, N., Multilateral Tax Treaties: A Model for The Future?, 28 Intertax 8/9 (2000), pp. 301-308; Vann, 45 Bulletin for International Fiscal Documentation 4 (1991), pp. 151-163 at 160-161. See e.g. Taylor, C.J., Twilight of the Neanderthals or are Bi-lateral Double Tax Treaty Networks Sustainable? (Paper presented at the Australasian Tax Teachers Association Conference in Christchurch, New Zealand, January 2009); Thuronyi, 26 Brook. J. Intl L. (2000-2001), p. 1641. Not everyone thinks that multilateral treaties are the appropriate focus for harmonization efforts. See e.g. Ault, H., The Importance of International Cooperation in Forging Tax Policy, 26 Brook. J. Intl L. 4 (2000-2001), p. 1693. See OECD, Triangular Cases, in OECD (ed.) Model Tax Convention: Four Related Studies (Paris: OECD, 1992), p. 28. Other difficult issues include conflicting depreciation practices and the treatment of cross-border mergers and acquisitions. See, for example, the proposal made by McDaniel, P., Formulary Taxation in the North American Free Trade Zone, 49 Tax Law Review 4 (1995), p. 691. See e.g. Thuronyi, 26 Brook. J. Intl L. (2000-2001), p. 1641. See e.g. id., and van Raad, K., International Coordination of Tax Treaty Interpretation and Application, 29 Intertax 6/7 (2001), p. 212.

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23. 24.

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28. 29. 30. 31. 32. 33.

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As noted by Richard Vann, the current bilateral treaties do not adequately address issues like thin capitalization, foreign currency conversions or finance leasing. See Vann, 45 Bulletin for International Fiscal Documentation 4 (1991), p. 152-154. See also Rigby, M., A Critique of Double Tax Treaties as a Jurisdictional Coordination Mechanism, 8 Australian Law Forum (1991), p. 301 (who draws attention to the inadequacies of tax treaties in addressing controlled foreign corporations, thin capitalization, and transfer pricing). 34. Avery Jones, J. and P. Baker, The Multiple Amendment of Bilateral Double Taxation Conventions, 60 Bulletin for International Fiscal Documentation 1 (2006), p. 19. (One of the most pressing problems in international tax practice at the present time is how to devise a simple system consistent with the bilateral nature of existing DTCs and the constitutional traditions of the many countries concerned for amending the wording of large numbers of bilateral DTCs in a short period of time.) Tax scholars disagree about whether bilateral or multilateral treaties would be more likely to lead to ossification. Contrast, Victor Thuronyi who claims that the existing network of bilateral treatieshas become ossified (Thuronyi, 26 Brook. J. Intl L. (2000-2001), p. 1644.) and McIntyre, M., 56 Bulletin for International Fiscal Documentation 6 (2002), pp. 250-253, at 253, who notes that A multilateral treaty, in practice, may become difficult to amend. If a multilateral treaty ossifies, it is likely to do more harm than good. In offering commentary on Victor Thuronyis proposal for a multilateral treaty, Hugh Ault comments: I think the focus should be the problem of a country which wishes to tax inbound portfolio investment but is reluctant to do so because taxing non-residents may drive the capital to other jurisdictions. This, of course, is a classic problem of tax competition, but not one about which a multilateral treaty, along the lines of any of the existing treaties, really can do anything. If the treaty allows a positive rate of tax on interest, that does not mean that all countries will in fact impose the tax, as witnessed, for example, by the U.S. portfolio interest exemption. The treaty can limit taxing rights, but it cant force the country to impose a tax and that is the issue which tax competition raises. Ault, 26 Brook. J. Intl L. (2000-2001), pp. 1693 at 1695. Although some of the difficulties of adopting a different treaty policy with a trading block multilateral treaty from the treaty policy adopted bilaterally with third countries have been explored. See, for example, Vann, 45 Bulletin for International Fiscal Documentation 4 (1991), pp. 154-156. Including provisions that might establish a base is not as far from current treaty practice as it might first appear. At least some treaties set, for example, restrictions on the deductibility of certain kinds of expenses. These provisions do set some limits on the domestic determinations of what is included in the calculation of profit. See e.g. McIntyre, 56 Bulletin for International Fiscal Documentation 6 (2002), pp. 250-253; Loukota, in Lang et al. (eds.) Multilateral Tax Treaties: New Developments in International Tax Law (1998), pp. 9496. Decision No. 40, Aprobacion del convenio para evitar la doble tributacion entre los paises miembros y del convenio tipo para la celebracion de acuerdos sobre doble tributacion entre los paises miembros y otros estados ajenos a la subregion (Official Gazette No. 1620 of 1 November 1973). For more on the treaty see Atchabahian, A., The Andean Subregion and its Approach to Avoidance of Alleviation of International Double Taxation, XXVIII Bulletin for International Fiscal Documentation 8 (1974), p. 308; Hausman, J.S., The Andean Model Convention as Viewed by the Capital Exporting Nations, XXIX Bulletin for International Fiscal Documentation 3 (1975), p. 99; Piedrabuena, E., The Model Convention to Avoid Double Income Taxation in the Andean Pact, XXIX Bulletin for International FiscalDocumentation 2 (1975), p. 51; Costa, V., The Treatment of Investment Income Under the Andean Pact Model Convention The Andean View, XXIX Bulletin for International Fiscal Documentation 3 (1975), p. 91. See Decision No. 578 published in Official Gazette No. 1063 of 5 May 2004. See also, Evans, R., Andean Pact Community Establishes New System to Prevent Double Taxation, Evasion, 34 Tax Notes Intl 13 (28 June 2004), p. 1397. Convention between the Nordic Countries for the Avoidance of Double Taxation with respect to Taxes on Income and Capital. See also Mattsson, N., Multilateral Tax Treaties: A Model for the Future?, in Lindencrona/Lodin/Wiman (eds.) International Studies in Taxation: Law and Economics (Boston: Kluwer Law International, 1999), pp. 243-258; Hengsle, O., The Nordic Multilateral Tax Treaties for the Avoidance of Double Taxation and on Mutual Assistance, 56 Bulletin for International Fiscal Documentation 8 (2002), pp. 371-376; Mattsson, N., Multilateral Tax Treaties: A Model for The Future?, 28 Intertax 8-9 (2000), pp. 301-308. Agreement Among the Governments of the Member States of the Caribbean Community for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, Profits or Gains and Capital Gains and for the Encouragement of Regional Trade and Investment (1994); See also Perera, C.G., Double Tax Treaties in the Eastern Caribbean, British Tax Review (1993), pp. 395-400; Zagaris, B., The 1994 CARICOM Double Taxation Agreement: A New Model for Regional Integration and Fiscal Cooperation, 50 Bulletin for International Fiscal Documentation 9 (1996), pp. 409412; and Zagaris, B., Double Taxation Agreements of CARICOM: A Review of Existing Practice and Prospective Policy Options, 47 Bulletin for International Fiscal Documentation 3 (1993), p. 129. See e.g. the draft agreement between Burundi, Kenya, Rwanda, Tanzania and Uganda.

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44. 45.

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OECD Model Tax Convention on Income and on Capital (2005) and United Nations Model Double Taxation Convention Between Developed and Developing Countries (2001); United Nations Model Double Taxation Convention between Developed and Developing Countries (1980). 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. But see note 43. For example, the tax jurisdiction article (Art. 5) is drawn directly from the Andean model. As a general matter, residence taxation is limited to shipping and air transport profits (Art. 9) and some employment income (Art. 15). See the story told in Perera, C.G., British Tax Review (1993), pp. 395-396. CARICOM, Art. 23. Id., Art. 24. See, for example, KPMG, Tax Newsletter: Trinidad and Tobago (August 2007), available at http://www.kpmg.co.tt/uploads/tt/TaxNewsletterIssue1.pdf. But see the CanadaUS Tax Treaty, Art. XXVIA. See Decision 578. Sardella, J., Commentary on the Canada-U.S. Tax Treatys Fifth Protocol, 39 The Tax Adviser 3 (2008), p. 150.

Citation: F. Barthel et al., Tax Treaties: Building Bridges between Law and Economics (M. Lang et al. eds., IBFD 2010), Online Books IBFD (accessed 2 Aug. 2013).

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