tax treaties and developing countries

Part VI - Tax Treaties and Developing Countries

Tax Treaties with Developing Countries: A Plea for New Allocation Rules and a Combined Legal and Economic Approach

Author

Pasquale Pistone

1. Starting point and subject

Over the past few years globalization has considerably approximated the geographical boundaries of national tax

sovereignty around the world, as well as the rules for exercising such sovereignty in cross-border situations. This

is possibly not just the outcome of de facto coordination through market forces, but rather a legal phenomenon

driven by the Organization for Economic Cooperation and Development (OECD).

The author acknowledges hereby the important and constructive role of the OECD Model Tax Convention

(hereinafter also: OECD MTC) and its Commentaries in levelling out the differences across the tax treaties of

OECD Member States, but also notes a de facto influence on tax treaty relations with and between non-OECD

Member States. Various technical factors have enhanced the growing importance of the OECD MTC, including in

particular the high degree of stability offered by its provisions and the dialogue opened with non-member

countries some years ago. The OECD MTC´s provisions have in fact become a settled body of – soft – law,

especially because the evolution of the MTC is now primarily through more frequent changes to the OECD

Commentaries than changes to the Model itself.

This has turned the OECD MTC into the expression of the internationally accepted tax treaty practice and the

main source of soft tax treaty law around the world, expanding to an extent that largely exceeds the geographical

boundaries of its mandate. This influence is much stronger with regard to the wording of the provisions than the

setting of tax rates.

The opposite trend may be recorded in respect of the UN Model Tax Convention (hereinafter: UN MTC).

Conceived to reflect the tax policy needs of developing countries, the UN MTC has gradually lost its importance

for and influence on bilateral tax treaties over the past decades and is now, possibly also as a consequence of

the stronger negotiating powers of OECD member countries, rarely used as a pattern for bilateral tax treaties

around the world. Accordingly, despite the advantages of a common platform with standard tax treaty clauses for

exercising tax jurisdiction in cross-border situations, the strong influence exercised by the OECD and its member

countries on such standards currently offers developing countries weak protection of their international tax policy

needs.

This scenario creates a very uneven pattern for the tax treaty relations between OECD member states and

developing countries.

OECD member countries usually have strong tax treaty negotiating powers, due to their own international

prestige, economic power, or proximity to the average needs of a powerful block of countries with similar

international tax policy goals, and this power usually allows them to impose their tax treaty provisions in their tax

treaties. Even if the specific tax treaty policy of certain OECD member countries may to some extent vary (a

clear example of this is the United States), their overall needs are fairly homogeneous and are generally

reflected in the OECD MTC. Furthermore, whenever problems in the interpretation and application of tax treaties

arise, they may have their say in the OECD working parties and thus possibly affect or lead to corresponding

amendments in the OECD official tax treaty policy.

Developing countries try to be consistent with their international tax policy goals, but have to face internationally

accepted tax treaty standards that generally do not take such goals into account. Of course, such countries are

still free to include in their tax treaties only provisions that are consistent with their own tax policy, but in practice

this only happens when their negotiating powers are strong enough to impose them, which is not frequently the

case. This problem is shared more generally by all countries that have weak negotiating powers, for instance due

to their limited geographical size. Furthermore, like all non-OECD countries, they can express their positions on

the Model, but may not otherwise contribute to shaping the MTC, whose provisions they will often then have to

accept in their tax treaties with OECD countries. Since such countries do sign and ratify the actual bilateral tax

treaties, the author excludes a problem of democratic deficit in this situation, but wishes to underline the formal

exercise of sovereignty, which may give rise to structural problems of inconsistency with their international tax

policy.

This paper focuses on a selection of tax treaty problems arising in relations with developing countries. Although it

does not define this category, [1] the paper considers it to include capital-importing and net capital-exporting

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countries (such as the “BRIC” countries, i.e. Brazil, Russia, India and China, but also additional countries that

share similar economic features), both as opposed to the category of (fully) developed countries.

The position of the two subcategories is significantly different from a tax treaty perspective, including negotiation,

interpretation and application.

In particular, capital-importing countries are generally poorer than their counterparts and may therefore be

keener in granting tax concessions to the other contracting state, in order to obtain other non-tax advantages in

return, such as, for instance, financial grants. Possibly, such countries perceive tax treaties as the components of

a sound policy to attract international investment, whereas investors can rely on formally agreed limits to tax

sovereignty at the international level.

By contrast, net capital-exporting countries have in most cases fast-growing economies and a likewise growing

negotiating power, which in most cases affects their tax treaties with both developed and capital-importing

countries, sometimes, as in the case of China, giving rise to a different tax treaty policy with developed and

capital-importing countries.

Such differences show that elements such as poverty, negotiating power, rate of economic growth and

development affect the tax treaty policy of developing country, leading to a different combination of relevant

policy goals to be pursued and making the traditional category of developing countries a fairly complex

phenomenon to be addressed. Nevertheless, since none of these countries are OECD member countries, the

author feels that the analysis of their tax treaty problems could positively influence critical thinking as to whether

the current internationally accepted standards, mainly inspired by international tax policy goals of OECD

countries, are in fact suitable to being applied worldwide.

This paper will therefore focus on whether a new framework should be set up for tax treaties involving such

countries and, if the answer is in the affirmative, whether and how the rules and principles of such treaties should

evolve as a separate domain within international taxation. It is, in fact, a legal research paper with a function that

is instrumental to updating the analysis of policy and economic issues in the era of global law.

2. Economic theories and the legal dimension: the need for a combined approach

Economic research has provided theoretical support to the current allocation of taxing powers in the international

scene in relations with developing countries and has shown that no economic development is possible without

developing countries disposing of financial resources that are sufficient to upgrade their infrastructure and carry

out productive government expenditure. [2]

Income tax treaties following the current international standards generally allocate taxing rights by giving shared

or exclusive taxing powers to the state of residence. Especially when such a country relieves double taxation by

the credit method, it may interfere with tax policy decisions of the other contracting state, [3] turning lower taxes of

the other state into a lower entitlement to credit and thus preventing investors from cashing in possible

advantages arising from preferential tax treatment granted by the latter state.

Economists argue that such an allocation in fact protects the fiscal capacity of developing countries, based on

the assumption that capital export neutrality pursued by the state of residence would prevent MNEs from

negotiating tax holidays in the state of source, [4] making the system efficient and giving each contracting state a

fair share of tax.

The real world looks, however, fairly different from this assumption. MNEs are no longer just from developed

countries and they invest large economic resources in international tax planning schemes, in order to obtain tax

advantages that allow them to survive on the global market. They generally succeed in repatriating lower-taxed

income by planning their activities in such a way that return from investment is routed through chains of

companies involving exemption countries and/or tax havens. There is no need to give specific evidence of this

well-known situation to those who are aware of the volumes of foreign direct investment in and out some

countries traditionally defined as tax havens. [5]

This situation is fairly emblematic of the lack of dialogue between economic and legal experts on international

taxation. Economists regard the interpretation and application of their theories as a mere administrative problem,

somehow devoting limited attention to the differences existing in tax treaties across the world and generally

ignoring the remarkable scope for tax arbitrage, [6] while their legal counterparts (especially in Europe) not

always keep in mind the goals and functions of such rules when tax treaties are concluded, interpreted or

applied. [7] Accordingly, theoretically correct results from an economic and policy perspective could be negated

by their implementation and interpretation, also taking into account allocation and relief rules in domestic and

treaty provisions, which at present mostly reflect the economic policies and goals of developed countries.

This shows how important it is for economic and legal experts of taxation to join their forces and analyse the

issues that arise at the intersection between the two research domains, namely the implementation of economic

policies in an international scenario and their interaction through legal rules.



There is, however, a more general problem, which has so far been overshadowed by the economic theories on

the international allocation of taxing rights and the attempts to avoid non-neutral flows of capital in the

international scene. Taxation also pursues non-fiscal goals, such as for instance fostering investment in certain

areas of its territory and/or some specific types of activities. Regardless of whether and how effective this may

be, each system, in compliance with its sovereignty over its domestic law, sets such priorities and how they

should be achieved.

In the international scene, the current rules on allocation of taxing powers and on the relief contained in tax

treaties, in fact make such a state no longer sovereign over its own tax policy decisions, leaving it up to the

international tax policy goals pursued by the other contracting state to determine whether or not such measures

keep their effects. Accordingly, for instance, if a state fosters environmental protection through tax cuts, this

incentive will offer an advantage for investors resident in a country relieving international double taxation through

the exemption method, but investors from another country which apply the credit method will lose that

advantage.

One should therefore in general ask whether the allocation of taxing powers may allow one country to interfere

with the international tax policy decisions of another country. It is a dilemma that affects the very foundations of

capital export neutrality and the compensatory effects of lower tax rates that it pursues.

The author believes that a different position should be taken, according to whether the allocation of taxing

powers is at standard or preferential rates.

The issue of the state of residence protecting the fiscal capacity of the state of source can be formulated slightly

differently. Can one country claim that, since it fears that another country will give up its taxing rights, it is

therefore allowed to keep exercising its own tax sovereignty in order to offset the tax advantages that an investor

could receive by the other country? The answer to such a question under the current tax treaties is affirmative,

also in relations with developing countries, but the reality is that its effects cut short any impact of tax policy

decisions of the state of investment and amount to interference in the latter´s country sovereignty. Tax treaties at

present are the legal instruments through which capital-exporting countries want to preserve the highest possible

share of their taxing rights.

Certainly, this keeps taxation within the boundaries of international neutrality from the perspective of the

residence country of investors, but the price to be paid is that such a country in fact dominates those that may

want to use taxation to attract investment in consistency with the rules of their own tax systems. The paradox is

that international capital in fact does not flow to poorer countries, because tax advantages are unable to

compensate for all other disadvantages (lack of infrastructure, etc.) related to the investment in such countries.

The outcome is that poorer countries still end up in having a limited fiscal capacity, which prevents them from

disposing over revenue to fund their infrastructure and policies for economic development. Alternatively, such

countries are obliged to search for revenue by taxing non-mobile persons, who often are striving to survive and

have little or no ability to pay.

Taking into account that the assumptions of economic theories can now be questioned in the light of international

tax planning, the author believes that attention is needed as to whether allocation and relief rules in tax treaties

should be reconsidered, in order to keep the country of source master of its own decisions without any external

interference. This is a particularly important point on the agenda of developing countries, in order for them to

support new policies of sustainable development, which promote good tax governance – an indispensable tool in

the era of global fiscal transparency – based on sufficient financial resources that each country collects from

taxes levied on legitimately attracted international capital without interference from developed countries.

However, it is a point that could be more generally put on the agendas of several countries in respect of tax

treaty policy.

The selection of issues involving tax treaties with developing countries will now be structured in three parts. After

some remarks on the evolution of the rules on the geographical boundaries of tax jurisdiction and the reduction in

the traditional differences between developing and developed countries due to the expansion of the OECD MTC,

the focus will be shifted to the core part of this paper, which will provide some details as to a system for

rethinking the allocation of taxing powers in relations with developing countries, including their application in the

Latin American Model Tax Convention, which the author has recently drafted with a group of legal tax experts for

the Latin American Institute for Tax Law. Some conclusions are then added.

3. Looking backwards: a few selected remarks on tax jurisdiction from past to present

Although problems concerning the geographical boundaries of tax jurisdiction were also common to developing

countries, they were probably never as crucial as they are now. Economic theories supporting capital export

neutrality, combined with personal links leading to worldwide tax liability, found their legal dimension and brought

extraterritorial economic events within the territory of more tax jurisdictions than that within which income was

sourced or produced. It was not a truly new phenomenon, but the OECD MTC aggregated this position around a



uniform pattern, whereas developing countries have long tried to defend their territorial tax jurisdiction through

the UN MTC.

The strong clash between these two tax philosophies, respectively supporting territorial and worldwide taxation,

also involving a different allocation of tax jurisdiction, went on for quite a few decades, but is now gradually

fading out. This seems fairly clear if one compares the strong defence of fiscal territoriality against worldwide

taxation in the 1950s [8] with the recent developments on global fiscal transparency, where some territorial

systems, traditionally not needing tax treaties and therefore lacking an adequate treaty network, were urged to

make up for that and conclude several tax treaties fairly quickly, in order not to be included in the list of non-

cooperative countries. [9]

This evolutionary process took place in two phases. First, developed countries brought the OECD MTC not only

into their tax treaties with other OECD member countries, but also into the ones with developing countries, in

order to enhance consistency with their own international tax policy goals and reduce loopholes (or the scope for

arbitrage) in their tax treaty networks. The negotiating power of developed countries, perhaps supplemented by

financial counterbalancing measures in favour of developing countries within the package deal marking the

conclusion of bilateral tax treaties, may have enhanced this process even further. Second, in a relatively more

recent past, the OECD MTC itself also turned into the main point of reference for treaties concluded by net

capital-exporting countries, which adapted the OECD pattern in order to make it fit their own policy.

This is, for instance, the case of India, which has considerably elaborated sourcing rules and their interpretation,

in order to avoid being deprived of taxing rights on income that in its view was sourced in its national territory,

such as for instance in the case of royalties. [10] However, this position was also shared by other net capital-

exporting countries, like Brazil, which has also acted at the level of relief. For several decades Brazil pursued a

policy of fostering economic development, including notional credit in its treaties in order to avoid the outcome of

its international tax policy being offset by compensatory measures taken by developed countries. The same

pattern was in substance followed by China. Although the author is not aware of quantitative and qualitative

empirical studies on the overall approaches taken by such countries in their tax treaties, an overview of their

provisions may possibly show signs of inconsistency when tax treaties signed by net capital-exporting countries

are compared with the more developed and least developed countries.

The combined outcome of such phenomena has notably contributed to the diffusion of the OECD MTC much

beyond its original geographical sphere of influence, perhaps even to the point that one should ask whether the

UN MTC nowadays is an effective or a mere nominal source of soft law for tax treaties of developing countries. [11]

However, the fact that the OECD currently is the main (at least soft) source of tax treaty rules should make legal

and economic tax experts question whether it is in fact fair and legitimate that tax treaty provisions shaped by a

limited number of countries, sharing the same level of economic development and, to a large extent, reflecting

similar international tax policy goals, regulate the exercise of taxing sovereignty in relations with developing

countries as well. Of course, each country is only bound by the treaties that it actually signs and the exercise of

its taxing sovereignty remains a matter primarily governed by its own domestic law. However, insofar as

consensus reached within a group of countries on the core of soft law is now gradually spreading throughout the

world, what can the remaining (including developing) countries do other than accept adapting their own tax

systems to the new scenario? This is a traditional problem of soft law, even though formal consensus may be

required in order to implement it into hard law, but its silent diffusion spreads its content in substance also

beyond it. [12] The author believes that a third view could perhaps be held for our specific purposes, namely that

when tax treaty provisions drafted by means of soft law are transposed to a different geographical scenario, such

as that of treaties with developing countries, their interpretation and application requires some adaptation in

order to fit to the needs of this context.

Tax treaties are package deals. However, tax treaties with non-OECD countries patterned along the OECD MTC

do not automatically imply that the deal should also include an obligation for the non-OECD country to follow the

tax treaty policy goals of the OECD and its member countries.

The value of OECD Commentaries as vehicles of soft international tax law is fairly different across the world. The

author believes it is appropriate to differentiate the situation of OECD member countries from that of the

remaining ones, considering that only for the former ones should soft law perform its technical function of

securing a correct interpretation of a tax treaty to the extent that its wording, object and purpose correspond in a

specific situation to the one that is contained in the OECD MTC. Nevertheless, the analysis carried out in an IFA

Seminar some time ago, [13] indicates that the importance of the OECD Commentaries is extremely diversified in

OECD member countries and it is by contrast quite important in some non-OECD countries, [14] such as, for

instance, India. [15]

However, the most interesting issues at the interpretative level arise in respect of terms that are fully or partly

defined by the tax treaty, since in all other cases opening the door to obtaining their interpretation on the basis of

domestic law would strongly reduce the possible influence of the OECD by means of its Commentaries as well.



In principle, this paper supports the view that the solution of all interpretative problems raised by tax treaties with

non-OECD countries should not necessarily follow that which would be most logical or correct from the OECD

perspective, even if nothing hinders a non-OECD member country from voluntarily accepting to do so.

Whenever a term is defined by the wording of a provision contained in the OECD MTC that is also included in a

bilateral tax treaty with a non-OECD country, we should find out whether or not the range of such definition is

exhaustive. If the answer is in the negative, the value of the OECD Commentaries in clarifying the definition

should be limited in tax treaties with non-OECD countries, because such clarification could fall under the general

rule of interpretation provided for by Art. 31 of the Vienna Convention on the Law of Treaties only insofar it would

reflect the understanding among the OECD countries. In the absence of evidence indicating that this view is also

shared by the non-OECD contracting state, such country would not be bound by this interpretation, even if a

different conclusion could be reached in respect of the OECD contracting state. [16]

4. Rethinking the allocation of taxing powers in tax treaties with developing countries

An additional, albeit related, problem arises from a perspective that goes well beyond the mere interpretation and

application of tax law and treaties.

In particular, for the capital-importing countries that are eligible for economic aid, one should wonder whether it

makes sense, on the one hand, to give financial subsidies and aid to foster the economic development of a

country, while, on the other hand, allowing developed countries to levy their taxes on income that is generated

outside their own territory.

Regardless of the fact that tax incentives are complex to handle and their impact is more difficult to assess than

that of financial subsidies, the issue here is whether the current allocation of taxing powers in relations with such

developing countries is consistent with the international tax policy needs of those countries, and also with the

one of adequately fostering their good governance and economic development. An affirmative answer to the first

part of such a question is in principle fairly obvious. However, fairness in international taxation also requires an

answer to the second and third part of the question, in order to avoid sacrificing the position of developing

countries on the altar of their predominantly developed counterparts in a tax treaty.

A few more remarks are needed to circumscribe the boundaries of good international tax governance, before

focusing on the broad lines of a possible international tax policy to foster economic development. Since the

Ecofin Council of 14 May 2008, the EU Commission has included the commitment to comply with good tax

governance as a requirement for providing additional subsidies in the framework of its external policy for

development cooperation. Among other things, principles of good governance require an effective exchange of

information between/among tax authorities in cross-border situations and rules (including the ones on State aids)

that allow free competition according to similar standards to the ones applicable within the EU internal market.

[17] Likewise, good tax governance is spreading through the Global Forum on Transparency along the paths of

the international tax standards for exchanging tax information developed by the OECD in co-operation with non-

OECD countries, which were first endorsed by the G20 Finance Ministers at the 2004 Berlin Meeting, and then

by the UN Committee of Experts in 2008 and are now shared by over 80 jurisdictions.

More recently, at a joint conference of the European Parliament and the European Commission, following the

ideals expressed in the Doha Declaration 2008, the point was made that the need to fight poverty could be better

addressed by modernizing the tax administrations of developing countries and making them able to collect more

revenue. [18] From the perspective of developed countries good tax governance is certainly fostered through the

measures described until now. However, the author submits that, seen from the perspective of a developing

country, good tax governance is just a component to be included within a possible new tax approach to the

international relations between developing and developed countries. The new approach should also consist of

measures that make it possible for the developing country to be consistent with its own tax policy in respect of

cross-border situations as well. A combination of the two elements will make it possible to upgrade tax standards

in the developing country towards the ones that are common within developed countries and to enhance the

revenue that legitimately proceeds from genuine investments carried out in the territory subject to its tax

jurisdiction.

This paper will now focus on whether a different allocation of taxing powers can increase the potential tax

revenue of developing countries and enhance the changes that some of them have adopted in the framework of

international good tax governance.

Worldwide taxation and the personal liability to tax (usually supported by high tax jurisdictions) create

international double taxation, but its foundations in economic theory [19] are now deeply rooted in internationally

accepted tax practice. European law has further contributed to strengthening them, by taking the position that

insofar as a country levies its taxes on a personal basis, it should also take into account any circumstances

affecting the ability to pay of the taxpayer and his/her family. Although one may argue that developed countries,



when acting as countries of residence of the taxpayer, also give relief for the international double taxation that

they create, the solution at this level often interferes with the economic policy goals of their counterpart.

Insofar as taxing powers are shared and the residence state relieves double taxation by means of the credit

method, the structural compensatory effects of such a method remove the beneficial effects of lower taxes that

may be levied by the state of source, including the ones that were lowered by that country for the purposes of

fostering investment into its territory. From such a perspective, any tax sacrifice by the developing country (for

instance taxes levied at lower rates than the standard ones in order to foster investment in such country) turns

into a tax gift not to its intended addressee, but rather to its developed-country counterpart, except in the

presence of mechanisms for giving relief by credit on a notional basis (tax sparing [20] and matching credit [21]), or

by exemption. [22]

This paper will not truly enter into the debate concerning the different effects and desirability from a tax policy

perspective of the different methods for relieving international double taxation, but rather only focus on whether

preventing double taxation through an exclusive allocation of taxing powers to the state with the closest

connection may positively affect the relations with developing countries. This shift from a general use of shared

allocation of taxing powers towards a general use of exclusive allocation of taxing powers on most types of

income (i.e. whenever that is technically possible on the basis of reasonable grounds) could mark a new

philosophy, which in fact departs from worldwide taxation in tax treaties with developing countries, in order to

make them sovereign over their own tax policy decisions in the international scene. Although it would be a very

important exception, the author believes it is not the only one to the worldwide taxation principle. For instance,

the exemption method as such achieves results that are fairly similar to territorial taxation, at least when it comes

to taxation of income. [23] Additional examples could be given from a broader perspective, such as by taking into

account the schedular features that income taxation is gradually evidencing, especially in cross-border situations,

[24] and that shift income taxation away from the idea of a comprehensive income tax that was regarded by the

economic theory some time ago as an indispensable feature of a fair tax system.

The view could be held that developing countries are generally too weak, and not just when negotiating a tax

treaty with a developing country, but also when deciding whether to grant a tax holiday or preferential tax

treatment to a multinational enterprise. This is fairly evident if one considers that such an MNE could bring

employment to one of these countries or allow it go elsewhere. Accordingly, insofar as the state of residence of

an MNE gives relief through compensatory measures, or applies other equivalent measures (such as, for

instance, CFC legislation, etc.), it could somehow prevent or discourage the pressure put by MNEs on the

developing country for lowering the effective tax.

However, several arguments can be invoked to show that such a view is not entirely adequate to seize the

problem at stake.

In general terms, the weak powers of negotiation of a developing country should be no reason for the other

contracting state to adopt countermeasures that in fact interfere with the policy goals of the developing country,

or otherwise indirectly alter an inter-nation fair allocation of taxing powers. In particular, arguments based on the

need to pursue capital export neutrality in the high tax jurisdiction may be questioned in the light of good

international tax governance, taking into account the goal of supporting free competition on the market, whereas

the compensatory effects that are inherent to foreign tax credit may make it structurally incompatible with such

goal. Nor may one invoke the need to comply with the overall ability-to-pay principle, which could be preserved

by applying notional credit mechanisms on the basis of the same arguments that reconcile with the principle of

equality any more favourable treatment used to foster economic development in purely domestic cases to the

state of residence of the taxpayer.

Furthermore, the current international arena shows that even when developed countries pursue capital export

neutrality through measures at the taxing or relieving level, MNEs in fact still manage to channel their

investments in and out the developing country without losing the more favourable tax treatment, for instance by

international tax planning schemes involving companies that have a genuine function in and operate from

countries that give relief by exemption. This could lead to thinking that apparent theoretical beliefs have in fact

ended up fostering international tax planning superstructures: in other words, money flows to pursue goals that

are unproductive and merely generate advantages out of the flaws in the current international tax setting

Perhaps, the idea of transplanting a good tax governance culture to developing countries, combined with a shift

of taxing powers towards their exclusive allocation (or, when that is not possible, to give relief by replacing

foreign tax credits with other methods) could be a fair mix to achieve more significant results from various

perspectives. In particular, tax treaties would prevent double taxation, rather than giving relief for it and would

refrain from interfering with national tax policies of the contracting states.

One could, however, ask (i) why countries should then find it convenient to sign tax treaties in a context that

mainly achieves exclusive allocation of taxing powers and (ii) whether and (iii) how such an exclusive allocation

of taxing powers should be realized. These issues will now be analysed in this paper.

4.1. Why still conclude a tax treaty?



Before analysing the first issue, one should consider that the system would keep worldwide liability to tax and

create an ad hoc exception for countries that are given the status of developing countries for tax purposes.

Accordingly, tax treaties would be the instrument to introduce a limitation in the exercise of taxing powers that

prevents the developed countries from maintaining the otherwise traditional scope of their sovereignty.

In the author´s view, the need for tax treaties (i.e. the first question raised above) would in principle be perceived

from the perspective of both contracting states, yet in different ways.

Developed countries are at present strongly engaged in a major campaign to establish global fiscal transparency,

which combats all practices that may undermine their tax sovereignty in the international arena. This is not just a

problem arising in situations that involve shared taxing powers and the correct exercise of their fiscal sovereignty

over income produced abroad, but also in the ones concerning domestic-source income, especially when it

comes to determining whether taxes are correctly levied on it and in order to exclude the possible negative

impact of abusive practices carried out at the international level. Accordingly, a case of transfer pricing with

foreign related parties could also affect the exercise of sovereignty on domestic-source income of an enterprise.

For such reasons one could well argue that even in (the unlikely) case of exclusive allocation of taxing powers on

all income to the state of source, the state of residence, which is normally the OECD contracting state, would still

find it important to conclude a tax treaty, since this legal instrument would make it possible to obtain all relevant

information that is needed in order to achieve a correct levy of taxes.

From the opposite perspective, i.e. of the non-OECD contracting state (which is likely to be the developing state),

the interest is of course much greater, because the tax treaty represents an instrument for securing, in a possibly

wide number of cases, an exclusive allocation of taxing powers, thus freezing the liability to tax in the other

contracting state. Especially if framed in the context of the plea for good international tax governance, we believe

this could be the right moment to make such a major conceptual shift towards a system that changes the balance

of inter-nation tax equity towards developing countries, simplifies the exercise of taxing powers and achieves an

effective protection of an interest in collecting revenue through tax treaties.

4.2. For a new balance in the allocation of taxing powers

Moving away from the traditional schemes for allocating taxing powers towards a new balance mainly based on

exclusive allocation to one contracting state may in fact be harder than it seems. Various reasons can be given

for such statement, including a certain tacit unwillingness of the world soft legal order to move away from a well-

established and functioning body of law that has developed around the OECD MTC. This psychological

reluctance should, however, be framed within technical arguments that will be addressed later in this paper. An

additional important factor that instead requires urgent attention should be mentioned, namely: how much longer

can we truly accept that tax treaties allocate taxing powers mainly on the pattern developed by an organization

that reflects the policy goals of developed countries only?

The author believes it will not be for long and supports a new branch of tax treaty law for relations with

developing countries so as to create its own special provisions on certain basic needs, in which simpler clauses

prevail over the most complex ones, successful practices prevail over the best ones, prevention of double

taxation through exclusive allocation of taxing powers takes precedence over its full or partial relief ex post,

especially by means of compensatory methods. The acceptance of such principles by developing countries could

be supported as part of a package deal that also includes a substantial upgrading in the direction of good tax

governance by enhancing the exchange of information, together with mechanisms for monitoring tax procedures

and a reasonable degree of compliance with standards of protection of free competition on the markets.

Shifting towards an exclusive nexus with one single tax jurisdiction may be a rather difficult way to go, since it

requires a comparative evaluation among the links existing with several tax jurisdictions that could possibly end

up with making the jurisdiction having the closest connection prevail over the remaining ones. For the reasons

that have been previously indicated in this paper, the closest connection should simply be with income, leaving

aside the link with the person that derives or produces it. Personal liability to tax was conceived at a time when

high tax jurisdictions supported the need to levy taxes on the overall ability to pay taxes of the taxpayer while

trying to bring within their tax jurisdiction facts that would otherwise fall foul of it for the absence of a link with

their territory. Even if personal liability to tax has turned into a generally accepted feature of tax jurisdiction, for

our purposes it should instead be regarded as having a weaker link than income-based liability. Besides the

reasons that have been previously indicated in this paper, it seems important to allow developing countries to

keep taxing powers on “their” income, i.e. income originating within their jurisdiction, since this will make it

possible for them to collect sufficient revenue and dispose of financial resources to cover their budgetary needs

without improperly seeking to attract international capital or overburdening non-mobile factors, such as for the

most part labour. The importance of supporting this change can be demonstrated by looking at the situation that

occurred in Uruguay after the turn of the century when that country reintroduced income taxation on the pattern

of a dual income tax. [25] Since this tax was levied at a higher rate on labour than on other (and more mobile)

types of income, such as, for instance, return from investment, it ended up in creating significant violations of the

principle of equality, but also of the fairness of taxation.



The closest connection of income to the taxing jurisdiction should not just be analysed by looking at the actual

geographical source of the income, but rather also by taking into account its origin and accordingly considering

what elements have been decisive for deriving such income. From this perspective, the idea of the source of

income developed by the Latin American legal theory of the 1950s [26] on the basis of concept of origin of income

put forward over one century ago by Italian scholars [27] – and unsuccessfully applied to preserve the taxing

rights of developing countries – would be closer to the arguments that are better known within the legal

international tax community as taxation in the state of origin. [28]

4.3. Some ideas for shifting to exclusive allocation of taxing powers in tax treaties according to the category of income

Due to such complexities, rather than seeking the closest connection with income determined on a general basis

for all categories of income, this paper will try to do so on a separate basis for each category of income. Attention

will be hereby focused in particular on business income and passive income, which are the most mobile factors

and therefore are likely to raise the more interesting and complex issues. Finally, some remarks will also be

made on income from employment.

This section of the paper will illustrate legal ideas that are based on previous interdisciplinary research [29] and

that have meanwhile been implemented in a model draft tax convention that the author has prepared for the

Latin American Institute of Tax Law in cooperation with other legal researchers. [30]

At first glance, shifting to exclusive allocation of taxing powers on business income would be relatively easy if

one considers that this type of income is the outcome of a combination of productive factors that can be detected

for several types of enterprises, such as industrial, but also commercial, activities. From this perspective the

point could be taken that the closest connection should be deemed to exist in the country where the productive

factors have been organized. Such a link should be found in the light of the attribution of profits to the assets that

have generated and the place where they are physically located.

The closest-connection principle would imply that profits generated by assets attributable to the enterprise should

be taxed in the country of residence, but also that such a country is deprived of its taxing powers on profits

generated by assets that are attributable to permanent establishments. After all, the authorized OECD approach

is steadily approximating permanent establishments to resident subsidiaries of the PE state. Accordingly, this

change would merely strengthen those rules, in order to make the taxation by the developing country become

final and prevent double taxation in most cases rather than giving relief for it. This shift would also align taxing

powers with the country where the productive establishment is situated and do away with theories, like the ones

supporting the force-of-attraction principle for the permanent establishment, that are incompatible with such idea

as well as with the current OECD approach.

The search for the closest connection for business income generated by other types of activities, such as for

instance the ones related to financial services, is by contrast a little bit more difficult. Such difficulties, however,

should not lead to the adoption of different criteria, which would only result in more complex allocation rules,

whereby a more precise determination of the functions and costs related to such activities, including their

attribution to permanent establishments, could contribute to determining from time to time which country should

get the exclusive taxing rights. In all such cases, therefore, developing countries would be able to carry out their

exclusive and final taxing powers on business income that is attributable to permanent establishment situated on

their territory. This may not seem at first a significant innovation, but it is such if only one considers that lower

taxes on business income attributable to a permanent establishment could be easily cashed in by non-residents,

thus stimulating MNEs to invest in such countries, whenever the organization of other productive factors suggest

that this is convenient. This consideration does not imply that business moves where it bears the lowest tax

burden, but rather that the tax factors remove a potential obstacle to let international capital flow where it is able

to produce the higher net of tax return. These considerations should also apply to CFC legislation, framing in the

context of developing countries the arguments that the European Court of Justice put forward in order to secure

free competition and exclude the levying of compensatory taxes in respect of genuine business practices within

the EU internal market. The author believes that economic theorists ought to support this standpoint.

Difficulties in ascertaining the closest connection increase further in respect of passive income (a category that,

for the purposes of this article, will be deemed to include dividends, interest, royalties and capital gains), which

is, on the one hand, generated by the use of capital and, on the other hand, also strictly related to its economic

exploitation in the territory of one or more given states. The importance of securing a balanced attribution of

powers could in principle suggest that the surrender of taxing powers by high-tax jurisdictions over business

income attributable to permanent establishments should be counterbalanced by a corresponding surrendering of

taxing powers by developing countries over passive income, especially considering that flows of income and

capital in such context are often unidirectional. [31]

However, one should not forget that business income not attributable to permanent establishments remains

exclusively taxable in the state of residence. Furthermore, among the reasons to plead for a separate analysis of

tax issues arising in relations with developing countries is the fact that the reality of such countries is in fact



structurally different from that of developed countries. Accordingly, the true connoisseurs of developing countries

will find it easy to recall the importance that withholding taxes play in such a context, while unsophisticated tax

authorities traditionally face lower standards of tax compliance. This argument could be combined with the

traditional importance of withholding taxes in the tax systems of developing countries, where they play an

important role in controlling the effective compliance and securing a reasonably straightforward collection of

taxes. This situation cannot change all of a sudden due to a commitment to complying with good tax governance

standards.

All these elements, if combined, seem to suggest that the closest connection with the jurisdiction of one single

country is unlikely to lead to absolute levels of fairness when developing countries are involved. This conclusion

could lead to further research if a different outcome is possible for each of the types of passive income, though

the main element concerning the connection with income does not seem to change.

Furthermore, one should not forget the complexity of the OECD MTC for drawing an exact dividing line between

some types of passive income, like interest and dividends, or the considerable scope for planning and arbitrage

that arises from exclusive taxation of certain types of capital gains in the state of residence and shared allocation

of taxing powers on dividends. Taking into account as well the importance of simplifying the allocation rules in

relations with countries that have unsophisticated tax authorities, [32] one could thus perhaps consider to keep

the shared allocation of taxing powers on passive income in relations with developing countries, but on a basis

that enhances neutrality among them. A possible path to follow would be to recognize their aspirations for an

effective exercise of their tax jurisdiction over the economic exploitation in their territory with respect to all types

and to do so in a way that also enhances neutrality in the allocation of taxing powers.

An additional issue arises as to what should be the appropriate level of withholding taxes. OECD countries

generally support full liberalization policies and in several cases, especially with countries pursuing capital import

neutrality and allowing for the full exchange of information on cross-border income, have succeeded in bringing

down to zero withholding taxes by means of tax treaties, such as (more often) for royalties and interest, but also

(less frequently) for (intercompany) dividends (paid to beneficial owners). Is this also appropriate for relations

with developing countries? A negative answer seems appropriate for various reasons, at least insofar as one

could think of an automatic application of the same policy. Perhaps the most important one is that developing

countries believe they should retain taxing powers over income from the economic exploitation of their territory.

Accordingly, the levying of withholding taxes should not necessarily make their minimization an absolute priority,

but rather steer them towards rates that are sustainable for funding a collection of tax that is sufficient to secure

their autonomy of revenue and avoid other and less mobile factors of production being overtaxed. However, from

the opposite perspective one could argue that the reason for applying withholding taxes, especially on cross-

border dividends, and for allowing lower rates on intercompany distributions to beneficial owners is that the

OECD MTC presupposes a classical tax system. [33] Such a type of corporate shareholder taxation used to be

the rule when the MTC was designed, including some deviations especially in parent-subsidiary distributions, but

is now gradually turning into the exception. For such reasons countries are generally bringing down their

withholding tax rates on dividends, though usually by means of negotiation over the grant of concessions.

Despite the latter argument in principle being sufficient to offset the former one and its rationale, the author

believes that the right for developing countries to levy withholding taxes on outbound payments of passive

income is a cornerstone of the tax systems of these countries that no global tax reform could and should wash

out. The commitment to pursue good tax governance cannot by itself give efficiency to the activities of tax

authorities, which in most cases are at lower levels of sophistication from the ones that are common within the

OECD countries. Furthermore, withholding taxes can give an important boost to ensure the financial autonomy of

the public budget of developing countries, while securing an effective bastion for tax auditing.

All such reasons strengthen the author´s position in which he believes that an exclusive allocation of taxing

powers on passive income in relations with developing countries is a rather impossible goal to achieve, on a

general basis. For one other reason the alternative of shared taxing powers is perhaps unavoidable. One could

in theory plead for a system of revenue sharing, where the state of establishment of the paying agent would

collect the tax and then turn the revenue to the other contracting state after deducting a fee, which would include

its services and a percentage of tax that appropriately reflects its sovereignty over the cross-border income. This

type of revenue currently applies to cross-border interest flows paid by paying agents of Switzerland, Austria,

Luxembourg and a few other countries (including Belgium until last year) to beneficial owners who are

individuals, resident in EU Member States. However, its functioning is far from being ideal in tax systems like the

ones of developing countries that are already slow in making refunds to non-residents and that would therefore

be overburdened by the need to handle such a complex mechanism.

Despite the acceptance of shared taxing powers, the author submits that relief for double taxation should be

aligned with the goals of an approach to taxation in relations with developing countries that does not interfere

with their international tax policy goals. For this reason, the author suggests that the foreign tax credit

mechanism should be replaced by notional credit mechanisms (either matching credit or tax sparing) or

exemption. [34]



By contrast, exclusive allocation does not seem an impossible goal to achieve in respect of taxation of income

from employment, where the exercise of the activity by the employee plays a central role in establishing the

closest connection with the place of production of income, largely exceeding the relevance of other factors, such

as the place of establishment of the employer. Insofar as such an activity is usually exercised in one country, this

country should therefore be allowed to keep full and exclusive taxing powers, regardless of whether (as is,

however, normally the case) it is also the country of residence of the employee. This implies that short-duration

work would not be covered by this type of allocation rule, which would instead also structurally prevent

international hiring-out of labour, while preserving the tax sovereignty of the state of activity.

Exclusive allocation, this time in the country of residence, is also difficult to rule out in respect of pensions,

especially for international mobile workers. However, the author also finds it important to preserve the symmetry

in the exercise of taxing powers on income from employment and pensions. In particular, insofar as the country

of employment grants deduction of contribution to pension payments, it may then seek to recapture the

previously granted deduction. When this is the case, the additional taxation of pensions in the country of

residence would expose the taxpayer to a form of double taxation that the current treaties do not normally take

into account. For this reason, whenever the contributions paid to a pension scheme have either not been

deducted, or have reclaimed by the state of employment, the Latin American Model Tax Convention restricts the

right of the state of residence to tax the pension, showing that the protection of the taxing powers of the latter

state is in fact secondary to that of the state that has taxing rights on the employment, but also to that of the

taxpayer, preventing a possible case of double taxation from occurring.

5. Conclusions

This paper has provided various arguments for supporting a new approach to taxation in relations with

developing countries, which should spread around the world on a track of soft law that is separate from the one

that is currently approximating tax systems based on the international tax policy goals of developed countries

only.

Global law is swiftly conveying its rules along the invisible waves of soft law, which formally requires a global

consensus, but often ends up in applying the law of the strong players. Everything and everyone around the

world are adapting at present to such pattern, including MNEs, which divert large economic resources from

productive goals and use them to set up complex international tax planning structures, which will allow their

survival on the global market. And developing countries as well are accepting this pattern.

The OECD MTC is the soft and silent carrier of the rules of global tax law, but its application to developing

countries seems to be a major source of unfairness in taxation. Developing countries are the weak players in the

global law game: far too weak to react and unite to support the application of different rules to the exercise of tax

sovereignty in cross-border situations.

This paper submits that the era of global law should protect the weak players by replacing endless financial

grants with the enhancement of their capacity to collect a sustainable revenue from the collection of their own

taxes on their own territory, or on events that are closely related to it on the basis of a personal or objective link.

Economic theory has in the past provided important elements to support the current international allocation of

taxing powers in relations with developing countries.

However, this paper supports the view that action could be taken through tax treaties between developed and

developing countries in order to replace the shared allocation of taxing powers with exclusive allocation to the

largest extent possible, thus preventing double taxation in relations with developing countries rather than giving

relief for it. Whenever such an approach proves impossible, however, action at the level of relief should move

clearly away from compensatory measures (like foreign tax credit) currently used by developing countries, since

they usually interfere with the international tax policy of the developing country and neutralize the possible effects

of incentives under the official flag of pursuing a stronger worldwide efficiency.

This new scenario would in fact enhance the attractiveness for MNEs – whether from developed or developing

countries – of investing in such countries whenever the tax burden, combined with all other relevant conditions

for such investment, is regarded as acceptable. International tax planning would play a minor role in this new

context, since high-tax jurisdictions would no longer be in a position to interfere with how the developing

countries exercise their tax sovereignty. Whether developing countries will in fact dispose of sufficient financial

resources to fund their budgetary needs is of course a matter that needs actual evidence. However, the

allocation of taxing powers envisaged in this paper would certainly make any incentives given to business

income assets attributable to a permanent establishment located in the developing country become final.

Likewise, whenever the developing country thinks that it ought to maintain its withholding taxes on passive

income as well, its evaluation policy would not be subject to interference by the developed country at the level of

relief.

Taxation is perhaps not the most important factor influencing foreign direct investment in developing countries.

[35] However, cashing in a double tax advantage would turn taxation into an element to divert the investment from

Página 10 de 13Tax Treaties with Developing Countries: A Plea for New Allocation Rules and a ...


its efficient allocation and make it depart from neutrality. Neutrality is a concept whose meaning is determined

according to the perspective within which it is framed. The tax literature itself has put forward different concepts

of neutrality [36] over time and one may wonder whether the current worldwide tax scenario is neutral from any

perspective at all, other than its consistency with the international tax policy goals of OECD countries that

determine the framework within which the rules of global law develop.

This author believes, however, that, from a fairness and from a sociological perspective, developed countries

should switch from funding developing countries through financial aid to turning them into the lords of their own

financial destinies over economic resources that are at least partly situated on their territory: perhaps a new

international tax model for sustainable growth in the global era.

See on this Pistone, P. and Goodspeed, T., Rethinking tax jurisdictions and relief from international

double taxation with regard to developing countries: Legal and economic perspectives from Europe and

North America, in Zagler (ed.) International Tax Coordination: Virtues and Pitfalls (New York: Routledge,

2010), pp. 13-36.

This is the issue of interdisciplinary research being carried out within the SFB on international tax

coordination. See further on this, Zagler, M., Capital Taxation and Economic Performance, SFB

International Tax Coordination Discussion Paper, No. 24 (Vienna: Vienna University of Economics and

Business, 2007) and the literature quoted therein.

An exception to these rules exists in the case of shared allocation of taxing powers with notional credits

(matching credit and tax sparing), as well as exemption, although the latter normally has a different

impact on the tax treatment of cross-border losses.

Surrey, S., “International Tax Conventions: How They Operate and What They Accomplish”, 23 Journal

of Taxation (1965), pp. 366 et seq.

A good example of this kind is Western Samoa, which is a very poor country and recipient of Australian

aid, but also the largest investor into Australia. Further relevant examples could be given by looking at

the investment in and out the British Virgin Islands and the Cayman Islands.

The author understands that economists need to streamline data in order to analyse them and obtain

relevant information for their analysis. However, tax treaties are no longer a single and homogeneous

block of international agreements. They are no longer concluded for the purpose of countering

international double taxation, which in various respects and in several cases is already being done

unilaterally by domestic law, but also to allocate taxing rights. More recently, one reason for concluding a

tax treaty may even be the need to secure an effective exchange of information. For this reason the

author suggests that economists should reconsider their analysis of whether and to what extent tax

treaties affect investment. Such an analysis should no longer be done on a general basis, but rather by

looking at the impact of a DTC on the specific type of income and whether the OECD country would be

able to exercise its taxing powers under the treaty. Furthermore, when doing so, one should also be able

to read behind the data and search for possible reasons affecting a specific investment from a country to

another country. An example of this kind is the Hong Kong routing for investment into China, which did

not need tax treaty, since representations offices in China could belong to Hong Kong companies.

Likewise, the treaties concluded by Belgium over the past decade with countries/territories having little or

no income tax (such as, for instance, Bahrain, Hong Kong, Macao, Mauritius, San Marino, United Arab

Emirates) were mainly justified in order to attract investment flows from sovereign funds, which for tax

treaty purposes are regarded as residents of the other contracting state.

This is particularly evident among legal experts from Europe, who are mostly concerned with the

interpretation and application of tax provisions, leaving tax policy issues to a meta-juridical dimension

that is only relevant for economists, whereas their North American counterparts consider tax policy a

decisive element for understanding the true function of tax rules.

Ramón Valdés Costa is perhaps the most authoritative Latin American legal tax expert who contributed

to the development of this theory, formulated in 1956 at the 1st conference of the Latin American Institute

of Tax Law (ILADT) in Montevideo. The theory was then transposed in the tax regimes applicable within

the Andean Pact, acknowledged by the Latin American Free Trade Association (ALALC), as well as by

several Latin American countries (most of which have meanwhile repealed it, including Uruguay, which

has announced the introduction of worldwide taxation as of 1.1.2011). See further on this in Valdés

Costa, R., Estudios de derecho tributario internacional (Montevideo: Fernández, A.M., 1978), pp. 193 et

seq; as well as id., “Territorialidad de la imposición. El Modelo latinoamericano en teoría y práctica”, XI

Revista tributaria 58 (1984), pp. 39 et seq. For a overview of this theory also see Mazz, A., Rasgos

fundamentales de la doctrina latinoamericana sobre el derecho tributario internacional y los

requerimientos actuales de éste, in Mazz/Pistone (eds.) Reflexiones en torno a un modelo

latinoamericano de convenio de doble imposición (Montevideo: Fundación de Cultura Universitaria,

2010), pp. 38 et seq.

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This kind of pressure is being put by the Global Forum on Fiscal Transparency. Information on the

progress towards compliance with the standards set by the OECD can be found at

http://www.oecd.org/dataoecd/50/0/43606256.pdf.

Rohatgi, R., Basic International Taxation, 2nd ed. (New Delhi/Richmond: Taxmann, 2007).

Recently, Figueroa, A.H., La historia de los convenios de doble imposición, in Mazz/Pistone (eds.)

Reflexiones en torno a un Modelo Latinoamericano de Convenio de doble imposición (2010), p. 26, has

suggested that the UN is a mere executor of policy decisions taken elsewhere, i.e. at the OECD.

See further on this in Pistone, P., Soft tax coordination: a suitable path for the OECD and the EU to

address the challenges of international double (non-)taxation in VAT/GST systems, in

Lang/Melz/Kristoffersson (eds.) Value Added Tax and Direct Taxation – Similarities and Differences

(Amsterdam: IBFD, 2009), pp. 1161 et seq; Pistone, P., Soft tax law: steering legal pluralism towards

international tax coordination, in Weber, D. (ed.) Traditional and alternative routes to European tax

integration, LANG Seminar Series, No. 4 (Amsterdam: IBFD, 2010), pp. 97 et seq.

IFA Seminar, “The Use of Foreign Court Decisions in the Interpretation of Tax Treaties”, 2008 Brussels

Congress, unpublished, but with slides available at http://www.ifa.nl.

This ranges from the persuasive importance or authority held respectively by Netherlands and UK courts,

the high persuasive value of Canadian courts (Crown Forest Industries), the high importance and usual

point of reference of Australian courts, to the usual relevance for Austrian and German courts and the

mere technical guidance of French courts, or the limited relevance for Italian courts.

As reported at the IFA Seminar, Indian courts generally rely on the OECD Commentaries, unless they

are in conflict with the UN MTC, whose provisions are reflected in the specific provision of the Indian

bilateral tax treaty.

The author addresses this argument more extensively in Pistone, in Weber (ed.) Traditional and

alternative routes to European tax integration (2010), pp. 101 et seq.

COM (2009) 201 final of 28 April 2009.

See Kermode, P., Tax and Development to Fight against Poverty, Conference held at the European

Parliament on 9 December 2009.

This paper briefly mentioned them at the beginning of section 3.

Under a tax sparing credit provision, the amount of credit given by the state of residence is not reduced

by the tax advantages granted by the source state.

Under a matching credit provision, the state of residence increases the tax amount by a given

percentage, regardless of what tax is actually paid in the state of source.

Different views have been held in the tax literature on the methods for relieving double taxation and their

effects on cross-border taxation. Their analysis is, however, not the immediate object of this paper. The

author has addressed it in Pistone, Goodspeed, in Zagler (ed.) International Tax Coordination: Virtues

and Pitfalls (2010), pp. 13-36.

This is the outcome of what is known as the symmetry approach, whereas exemption implies the non-

exercise of tax jurisdiction on profits and therefore correspondingly also the non-obligation to take losses

into account.

Corporate-shareholder taxation in cross-border situations in the European Union is a very good example

of this phenomenon, especially since the European Court of Justice (ECJ 7 September 2004, C-319/02,

Manninen [2004] ECR I-7477) held that there is an obligation to provide a non-discriminatory relief from

international economic double taxation in the case of integration by imputation credit, after excluding the

same in cases of schedular credit (ECJ 15 July 2004, C-315/02, Anneliese Lenz [2004] ECR I-7063).

Various tax systems have applied a dual income tax system and accordingly taxed more mobile factors

at rates than were lower than the ordinary ones, sometimes applying them to a broader tax basis and

thus preventing a possible problem with the principle of equality among taxpayers. Furthermore, having

been developed in a context where taxes (also on labour) are used to finance the welfare system of

workers, its application in developing countries (as in the case of Uruguay) turned out to be quite unfair in

the absence of a corresponding benefit from a welfare system.

See on this Valdés Costa, R., Estudios de derecho tributario internacional (1978), pp. 193 et seq, and,

more recently, Mazz, in Mazz/Pistone (eds.) Reflexiones en torno a un modelo latinoamericano de

convenio de doble imposición (2010), pp. 38 et seq cit.

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In particular, Quarta, O., Commento alla legge sull´imposta di ricchezza mobile, Vol. I-III (Milan: S.E.L.,

1902-1905).

See on this Kemmeren, E., The Principle of Origin in Tax Conventions: A Rethinking of Models

(Pijnenburg: Dongen, 2001).

See Pistone, Goodspeed, in Zagler (ed.) International Tax Coordination: Virtues and Pitfalls (2010).

The text of the Draft Latin American Model Tax Convention (Malherbe, J., Pistone, P., Taveira Tôrres, H.

and Figueroa, A.H., Modelo ILADT de Convenio para Evitar la Doble Imposición en América Latina

(Bogotá: ICDT-ILADT, 2010), was presented at the XXV Jornadas Latinoamericanas de Derecho

Tributario on 15 February 2010 in Cartagena (Colombia) and is based on preliminary studies that have

been published in Mazz/Pistone (eds.) Reflexiones en torno a un modelo latinoamericano de convenio

(2010).

In this sense see Avi Yonah, R., “The Structure of International Taxation: A Proposal for Simplification”,

74 Texas Law Review 6 (1996), p. 1305.

Simplification is not as such the sole recipe for a fair and balanced approach to problems of taxation.

However, if one considers that, perhaps due to the absence of an international tax court, the current tax

rules on cross-border situations have become extremely complicated, one could perhaps thus evaluate

the importance of streamlining them. The research project on the Multilateral Latin American Tax

Convention has duly taken into account these needs, by dramatically reducing the number of tax treaty

provisions, in particular of the ones concerning the allocation of taxing powers. This result could be

achieved through different paths. First, the general shift from shared to mainly exclusive allocations of

taxing powers has facilitated such a process by reducing the complexity of the single allocation rules.

Second, for the purpose of enhancing the neutrality between similar types of income, the Latin American

Model has put together several tax treaty provisions, such as for instance the ones concerning different

types of passive income.

See Ault, H.J., “Corporate Integration, Tax Treaties and the Division of the International Tax Base”, 47

Tax Law Review (1992), p. 565.

The same view is also shared in the literature by Barker, W.B., “An International Tax System for

Emerging Economies, Tax Sparing and Development: It Is All About Source!”, 29 University of

Pennsylvania Journal of International Law 2 (2007), p. 365 and Hines, J.R. Jr., Tax Sparing and Direct

Investment in Developing Countries 3-4, Working Paper No. 6728 (Cambridge: National Bureau of

Economic Research, 1998), available at http://www.nber.org/papers/w6728.

Goodspeed, T.J., J. Martinez-Vazquez and L. Zhang, Public Policies and FDI Location: Differences

between Developing and Developed Countries, Working Paper (New York: Hunter College Economics

Department, 2009).

See on this Desai, M.A. and Hines, J.R. Jr., “Old Rules and New Realities: Corporate Tax Policy in

Global Setting”, 57 National Tax Journal 4 (2004), pp. 937 et seq. The neutrality arguments have been

recently reviewed by Schön, W., “International Tax Coordination for a Second-Best World”, 1 World Tax

Journal 1 (2010), pp. 65 et seq, in particular 70 et seq.

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 Pasquale Pistone All rights reserved

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