The Independent Commission for the Reform of International Corporate Taxation (ICRICT) released a report analysing the OECD and UN versions of the Subject to Tax Rule (STTR). Both versions enable source states to impose a minimum tax on payments subject to low or no taxation in the payee’s state. The report advises developing countries to adopt the UN STTR in their tax treaties.

The past few decades have seen a rapid increase in the amount of double tax treaties signed between countries, from a global number of around 500 to more than 3,000. Initially proposed to prevent double taxation in different jurisdictions, today these treaties have become instruments for reinforcing global inequality, by reducing the ability of developing countries to raise revenues.

The resulting network of bilateral tax treaties is skewed towards the needs of resident countries (home to multinational companies, and their intermediaries). This occurs through rules that reduce withholding tax rates on intra-group payments (e.g. interests, dividends, royalties) that flow from countries where the economic activity occurs (source countries) to the home countries of multinationals or to offshore intermediaries, which can be located in low-tax jurisdictions.

The ability of multinationals to structure their intra-group payments to take advantage of low-tax jurisdictions often results in low or double non-taxation and a loss of revenues for the source country.

In order to ensure a minimum level of taxation of intra-group payments, the G20/OECD Inclusive Framework (G20/OECD IF) and the United Nations Committee of Experts on International Tax Cooperation (UNTC) have separately developed a Subject to Tax Rule (STTR). This is a minimum tax that applies on a transactional basis to payments from source States that are subject to low nominal tax rates in the State of the payee.

The STTR is based on an understanding that where, under a tax treaty, a source State has ceded taxing rights on certain outbound payments, it should be able to recover some of those rights when the income in question is taxed (if at all) in the State of the payee (i.e. the residence State) below a certain rate.

Including a STTR in all treaties would allow source countries to tax income if the other country does not tax it at an agreed-upon minimum rate, enabling (mostly developing) countries to tax income that is currently avoiding taxation.

However, the STTR developed by the UNTC (UN STTR) and that developed by the G20/OECD IF (OECD STTR) are different in significant ways. Countries, especially developing countries, must carefully consider these before adoption and implementation.

Members of the G20/OECD IF have been invited to sign the Multilateral Instrument to give effect to the STTR on 19 September 2024.

The ICRICT believes that the UN STTR is much more beneficial for countries than the OECD STTR, particularly for developing countries, both in terms of administration and potential additional revenue collection. Therefore, it recommends that developing countries introduce the UN STTR in their tax treaties.