When a person or entity from one jurisdiction invests in another jurisdiction and earns income there, the question then arises as to which jurisdiction gets to tax which bits of the income. Countries sign Double Tax Treaties or Double Tax Agreements (DTAs) with each other that sort out these and other questions, and to prevent 'double taxation'. Three main questions stand out from a tax justice perspective. First, does the prevention of double taxation turn into double non-taxation? Second is the extent to which the jurisdiction that is the source of that income (i.e. the one that hosts the investment) gets to tax the income, as opposed to the jurisdiction where the investor is resident. A TJN briefing paper on source-based and residence-based taxation is here.) A third is the extent to which treaties permit information exchange or transparency.
Apart from DTAs, there is another class of tax treaties that countries sign too: Tax Information Exchange Agreements (TIEAs). These are far narrower in scope and concern only the provision of information. Generally, countries prefer to sign TIEAs instead of DTAs with tax havens, for fear of fiscal leakage (see here for a briefing paper exploring the differences.) While our TJN information exchange page focuses most closely on TIEAs, this page focuses most closely on DTAs.
Double Tax Agreements tend to be based on two models: a dominant OECD model, on the one hand, and a model put forwards by the United Nations, on the other. In general, the OECD model gives greater emphasis to residence-based taxation - which is favourable to OECD countries, where many of the multinationals are residence. The UN model gives greater taxing rights to source jurisdictions, which are typically developing countries receiving inward investment. For a detailed technical comparison of the two, see Michael Lennard's Jan/Feb 2009 paper in the Asia-Pacific Tax Bulletin, The UN Model Tax Convention as Compared with the OECD Model Tax Convention – Current Points of Difference and Recent Developments, cited with the kind permission of IBFD. (For a less detailed assessment, see TJN's briefing paper on source- and residence-based taxation, linked above.) This 2008 paper The Purpose and Current Status of the United Nations Tax Work also by Lennard (and also with permission of IBFD) provides a shorter assessment of the differences between the OECD and UN models, along with some history.
Non-governmental organisations including TJN have raised concerns about the global tax treaty system and individual treaties. Questions have been raised as to whether DTAs may be constraining the policy space available to developing countries (and others) to implement pro-poor and progressive fiscal policies. Furthermore, in very many cases, DTAs do not provide an adequate basis for a fair and meaningful exchange of tax information between developing and developed countries, and in particular with secrecy jurisdictions. Furthermore, some argue that DTAs could be seen as a pretext: although they are supposed to prevent 'double taxation,' too often the result is double non-taxation - that is, the multinational can use treaties to escape, or largely escape, the tax net altogether. Literature and professional tax databases indicate that most governments home to multinational businesses do already provide for unilateral measures to avoid double taxation.
These points are up for debate, and we plan to contribute to, and shape, the debate, as we build on the list of articles and documents below.
March 28, 2012 - David Spencer: Guest blog on rifts between the OECD and United Nations on international tax
Aug 4, 2011 - Swiss-German tax treaty on Aug 10 will undermine automatic information exchange
Mar 7, 2011 - US, UK, OECD oppose developing countries having stronger voice on international tax
Feb 22, 2011 - The U.S. –Chile Income Tax Treaty: A Guide for other Developing Countries
Feb 22, 2011 - Austria's and Luxembourg's Anglo-German fig leaf on how Switzerland is playing divide and rule within the European Union, to the benefit of Austrian and Luxembourgois secrecy.
Jan 20, 2011 - US emerges as Swedish Tax Haven Sweden hasn't received any information from the U.S. since 2005, despite a treaty oblighing information-sharing.
Dec 20, 2010 - How corporate tax evasion can be tackled worldwide - an interesting letter in the FT looking at multilateral treaty approaches towards formula apportionment
Nov 23, 2010 - India: don't sign with Liechtenstein on why countries should sign TIEAs, but not DTAs, with tax havens.
Oct 2010 - Tax Justice Focus - Swiss Double Tax Agreements: the Development Perspective. Mark Herkenrath explores how Switzerland is forcing developing countries into tax concessions in exchange for inadequate information exchange provisions.
2009 - Norwegian government commission on capital flight from developing countries, recommendations, explaining assymetries in power between developed and developing countries when treaties are negotiated.