source versus residence. the potential of multilateral tax treaties

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 Secretary-

General 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 Canada´s 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 arm´s 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 multinational´s 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 Canada´s 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 country´s

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 country´s 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.



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. Canada´s 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 high-

income 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 taxpayer´s domestic activities since usually

domestic law enables administrators to compel evidence from third parties and the taxpayer him or herself. In

contrast, where a taxpayer´s 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 taxpayer´s 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



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 tax-

advantaged 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

“arm´s-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 arm´s-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 B´s law, the vehicle may be classified as a

corporation, entitled to be treated as a separate taxpayer. For the purposes of Country A´s 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

Canada´s 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



treaty. This cooperation may result in more consistent interpretation of the treaty´s 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



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 world´s

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

A´s 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 state´s 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 CARICOM´s 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



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 source-

only 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.



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 treaty´s 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 Canada–US 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 treaty´s 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.

“Working together, nations can tackle today´s 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.

1.

2.

3.



599-632; Bouchard, C. and J. Peterson, Conceptualising Multilateralism, Mercury Working Paper

(Edinburgh: University of Edinburgh, 2009), available at http://typo3-8447.rrz.uni-

koeln.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.

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.oag-

bvg.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 Canada´s 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., “Canada´s Two-Faced TIEAs –

Netherland Antilles Trumps Bermuda”, 55 Tax Notes Int´l 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/treaties-

conventions/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. 1151-

1289.

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 Commission´s

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 OECD´s 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 OECD´s 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. Int´l

L. 4 (2000-2001), p. 1683; Cockfield, A., “The Rise of the OECD as Informal ´World Tax Organization´

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

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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 Int´l 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.

See e.g. Weiner, J., “Approaching an EU Common Consolidated Tax Base”, 46 Tax Notes Int´l 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 Int´l (1993), p. 260;

Krever, R., “Drafting Tax Legislation: Some Lessons from the Basic World Tax Code”, 12 Tax Notes Int´l

(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. Int´l 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 Europe´s 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. Int´l 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. Int´l 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. Int´l 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.

25.

26.

27.

28.

29.

30.

31.

32.

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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).

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 treaties…has

become ossified…” (Thuronyi, 26 Brook. J. Int´l 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 Thuronyi´s 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 can´t force the country to

impose a tax and that is the issue which tax competition raises.” Ault, 26 Brook. J. Int´l 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. 94-

96.

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

Int´l 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. 409-

412; 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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42.

43.

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).

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 Canada–US Tax Treaty, Art. XXVIA.

See Decision 578.

Sardella, J., “Commentary on the Canada-U.S. Tax Treaty´s 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).

© Copyright 2010 Kim Brooks All rights reserved

© Copyright 2013 IBFD All rights reserved

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47.

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source versus residence. the potential of multilateral tax treaties

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