- QUESTION POSTED BY: Student
- PROGRAMME: Postgraduate Diploma in International Taxation
- TOPIC: Double Tax/ Foreign Tax Relief (WEEKS 25 & 26)
- LECTURER: Renier van Rensburg
FULL QUESTION
Can you please give examples where treaty interpretation differs in cases of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... and double non-taxation?
ADDITIONAL WRITTEN ANSWER
Treaty interpretation can yield different results in cases of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... and double non-taxation, particularly in how countries apply provisions to prevent both. Here are a few examples that highlight these differences:
1. Double TaxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... Cases
- OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... vs. UN Model Interpretations on Source vs. Residence
- In a double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... scenario, both countries involved in a treaty claim taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... over the same income, often resolved by applying either residence-based or source-based taxation. For instance, the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... Model Tax Convention favors residence-based taxation, granting the resident country primary taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... with relief measures, like credits or exemptions, to avoid double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double.... Conversely, the UN Model often provides more taxing rightsFiscal Sovereignty is the inherent authority of a state to independently manage its financial and economic policies, especially the power to levy and collect taxes within its jurisdiction. Central to national autonomy, fiscal sovereignty enables governments to shape economic policies that reflect their priorities, ranging from welfare programs to defence and infrastructure investment. It also underpins each country’s approach to... to the source country, as it better aligns with the needs of developing countries. This difference can affect tax burdens significantly, as seen in cases like the Indian satellite communications case, where India’s reliance on source-country rights led to double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... that might not have occurred under the OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... Model.
- Interpretation of Business Profits and Permanent Establishment (PE)
- The treatment of a Permanent Establishment can also lead to different double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... results. In the Morgan Stanley case (India), India argued that the activities of Morgan Stanley constituted a PE under its domestic law, subjecting it to Indian tax. However, through treaty interpretation under the India-U.S. tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and..., Morgan Stanley successfully argued that no further profit could be attributed to the PE, as the profits were already taxed in the U.S. Thus, the treaty’s application allowed for the relief of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... that might otherwise have occurred.
2. Double Non-Taxation Cases
- Hybrid Entities and Mismatches
- Hybrid entities and mismatches in the classification of income sources can result in double non-taxation, as each country may interpret the entity or income differently under its domestic law and the treaty. For example, in the French Bank case with a U.S. client, the bank exploited differences in the classification of debt and equity under the France-U.S. treaty. France saw the payments as interest (non-taxable in France), while the U.S. did not tax them either, resulting in double non-taxation.
- Use of the Principal Purpose Test (PPT) in Anti-Avoidance MeasuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due...
- Anti-avoidance measuresAnti-abuse provisions are legislative measures implemented by tax authorities to prevent taxpayers from exploiting legal loopholes or engaging in artificial arrangements solely to reduce their tax liabilities. These provisions are essential tools for revenue authorities to maintain fairness in the tax system, ensuring that the intent of tax laws is respected and that tax bases are protected against erosion due... under BEPSBEPS stands for "Base Erosion and Profit Shifting". BEPS refers to tax avoidance strategies used by multinational enterprises (MNEs) to exploit gaps and mismatches in the international tax system. By shifting profits from high-tax jurisdictions to low- or no-tax locations, MNEs reduce their overall tax burden, even if little to no economic activity occurs in the low-tax jurisdictions. These practices erode... Action 6 led to the inclusion of the Principal Purpose Test (PPT) in many treaties, aiming to prevent treaty shopping and double non-taxation. The Danish beneficial ownership cases highlight this application: Denmark sought to prevent multinational corporations from routing funds through low-tax jurisdictions to avoid tax entirely. The interpretation of the PPT allowed Denmark to deny treaty benefits where the primary purpose was tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities..., targeting double non-taxation cases effectively.
3. Interpretational Differences in Dual-Resident Companies
- Place of Effective Management Test
- When a company is dual-resident (resident in two countries under domestic laws), treaties often apply a “place of effective management” test to establish a single jurisdiction for tax purposes, preventing double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double.... However, variations in interpretation can lead to double non-taxation or double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... if neither country considers itself the principal taxing jurisdiction, especially where both have differing standards for management and control.
4. Beneficial Ownership Concept and Its Interpretation
- Dividend, Interest, and Royalty Payments
- The concept of beneficial ownership in treaties, especially for dividends, interest, and royalty payments, varies in interpretation between countries. In the Prevost Car Inc. v. Canada case, Canada attempted to deny treaty benefits by arguing that the Canadian subsidiary’s Dutch parent was not the beneficial owner, potentially creating double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double.... However, the court upheld treaty benefits based on a narrow interpretation of beneficial ownership under the Canada-Netherlands treaty, thus preventing double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double....
These examples underscore how nuanced treaty interpretations can create outcomes of double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double... or double non-taxation, highlighting the importance of precise, context-sensitive application of treaty terms.