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An Introduction to Tax Treaties

The basics about international treaties designed to prevent fiscal evasion, avoid double taxation and more recently to demonstrate compliance with global standards on transparency and the exchange of confidential taxpayer information. Commonly referred to as 'double taxation agreements' there are over 2,000 of this bilateral agreements in existence. www.franhendy.com ; @franhendy; www.facebook.com/franhendy

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An Introduction to Tax Treaties

  1. 1. An Introduction to Tax TreatiesFrançoise L.M HendyInternational Treaty Negotiator(Tax, Investment, Trade)Attorney-at-Law
  2. 2. What is a TREATY ?o A ‘Proof’ and ‘Product’ of Diplomacyo A Contractconcluded between Sovereign Statesin written formgoverned by Public International Lawwhether in one or more documentsregardless of its description
  3. 3. Legal Effect of aTREATY ?oContracting State PartiesDualismMonismoThird States (Non-Contracting State Parties)oTerritorial ApplicationoSuccession
  4. 4. What is a TAXTREATY ?An agreement in writing between sovereign statesgoverned by public international law which sets out therights and responsibilities of the contracting states inrespect of matters of international taxation including theexchange of tax information and the prevention of fiscalevasion.
  5. 5. InternationalTaxation: A Fiction!Under International law there does not exist an overarchingbody of ‘international tax law’ through which internationalprescriptive and enforcement powers in relation to theimposition of tax has been recognized or accepted by thecommunity of states.The right to impose tax and the administration of ataxation system along with the authority to impose sanctionfor breach of the obligation is a function of domestic law.International Taxation therefore merely refers to the‘foreign’ elements of a country’s domestic tax system whichexpose latent or patent conflicts with another country’s taxsystem; warrants a joint and sustained response by thecountries whose national interests are affected; and whereunilateral remedies may not adequately or definitelyresolve the problems in the application of the domestic taxlaw.
  6. 6. Goals ofInternationalTaxation Rules (1)oAvoidance of Double TaxationThe juridical meaning of ‘doubletaxation’ describes the conceptwhere taxation occurs in two or morejurisdictions in respect of the sameobject of tax and exercised withrespect to the same tax subject forthe same taxable periodoTypes of double taxation Source-Source Residence-Source Source-Residence
  7. 7. Goals ofInternationalTaxation Rules: (2)Fairnesso Inter-state justice (Protection of tax-base)TransparencyExchange of Tax InformationPrevention of Fiscal Evasiono Taxpayer TreatmentNon-discriminatory treatment of taxpayer liabilitywithout reference to the source of the incomeTax liability should be contingent on tax payersability to pay.
  8. 8. Goals ofInternationalTaxation Rules: (3)Competivenesso Nationalo Industryo Firmo Individual
  9. 9. Goals ofInternationalTaxation: (4)Neutralityo A fundamental tax policy principle.It requires that economic processes should notbe affected by external influences such astaxation. In this way it is arguedproductivity will be highest when income producingfactors are distributed by the market preference withoutpublic interference. Neutral equates to efficiency and taxlaws that do not interfere with factor distribution bymarket forces are regarded as neutral.o Capital Import vs. Export Neutrality
  10. 10. The Rules ofInternationalTaxation:OverviewThe purpose of tax treaties can be said to be thecodification of rules that will be applied to resolvethe conflicts that arise as a result of juridicaldouble taxation.In this respect they are three types of thesedistributive rules: source, assignment and relief.
  11. 11. The Rules ofInternationalTaxation (1)SourceCustomary international law provides that a country hasthe primary right to tax income that has its source in thatcountry.Under the rules of source the tax objects over which theState has the principal though not exclusive right to taxincludeimmoveable property; industrial or business profits andprofessional services; shipping and air transport;dividend, interest payments and directors’ fees;employment services; artistes, entertainers andsportspersons; and government salaries and pensions
  12. 12. The Rules ofInternationalTaxation (2)AssignmentAssignment rules allocate either an exclusive or limitedtaxing right to countries using one or more of thefollowing distributive principles on different incomesources: the exclusive right to tax is conferred on the stateof source of the tax object; the source country can reservethe right to limit or share its taxation right of the object;the source country may tax fully even in the absence ofan exclusive tax right; and the exclusive right to taxationis with the country where the tax subject resides.
  13. 13. The Rules ofInternationalTaxation (3)ReliefThe content of these rules also provide for mechanisms toeliminate or mitigate juridical double taxation when it arisesby: the exemption method whereby full exemption orexemption with progression is provided in respect of the taxessuffered in the other jurisdiction; full or ordinary credit for thetax paid is provided at the marginal or average tax rate; oflimited modern-day use is the tax sparing method where atax sparing credit is granted by the residence country forforeign taxes that for some reason were not actually paidunder the country’s normal tax rules.
  14. 14. Key Elements of aTax Treaty: (1)Scope and Coverageo Persons CoveredIndividualCompanyOther body of persono Taxes CoveredIncome ( Corporate , premium,petroleum winnings)Capital Gains
  15. 15. Key Elements of aTax Treaty: (2)ResidencyoNot citizenshipoNot nationalityo‘Liable to tax’ ResidenceIncorporationCentral Management and Control DomicileIntention + Stay + Notification Place of managementPermanent Establishment Any other similar criteriono
  16. 16. Key Elements of aTax Treaty: (3)Apportionment of Taxing Rightso Business Incomeo Shipping and International Transporto Associated enterpriseso Professionalso Investment IncomeDividendsInterestRoyaltieso Capital gainso Income from immoveable propertyo Income from employmento Pensions and other remunerationo Professors and teacherso Students and traineeso Treatment of Entertainers and sportspersonso Other income
  17. 17. Key Elements of aTax Treaty: (4)Methods of Avoiding Double Taxationo Tax Sparingo Credit Methodo Exemption
  18. 18. Key Elements of aTax Treaty: (5)Prevention of Fiscal EvasionAvoidance and evasion distinguishedDenial of treaty benefitsApplication of domestic GAARLimitation of BenefitsprovisionsAdministrative co-operationCompetent AuthorityProcedureExchange of tax informationNon-discrimination
  19. 19. franhendy’s OFFSHORE blogE-Learningwww.franhendy.comfh@francoisehendy.com