The Platform for Collaboration on Tax (PCT) has issued a draft toolkit on tax treaty negotiations. The period for feedback from interested parties is 29 June 2020 to 10 September 2020.

The PCT was set up by the OECD, IMF, World Bank and UN to increase cooperation and facilitate consultations on the design and implementation of international tax standards.

Costs and Benefits of a Tax Treaty

A country must consider the costs and benefits of concluding a particular tax treaty and must assess existing tax treaties to see if they are still worthwhile. Some treaties may cause revenue losses in return for very little increase in inward investment. In this case the treaties could be renegotiated or modified using the multilateral instrument to implement BEPS measures into tax treaties.

The toolkit notes that the part of a tax treaty containing substantive provisions on taxation, referred as distributive rules, is likely to reduce the tax that the source country can charge on non-residents based on its domestic tax law. Balanced against this reduction in tax collection are increases in tax revenue based on behavioural changes resulting from the treaty and from increased international cooperation (although the latter may involve administrative compliance costs).

Alternatives to a Tax Treaty

Countries should consider the possibility that their objectives could be achieved by alternative measures, for example an agreement for the exchange of tax information; joining the Multilateral Convention on Mutual Administrative Assistance in Tax Matters; or concluding an air transport or shipping agreement.

Another potential alternative to negotiating a tax treaty could be the introduction of unilateral measures on tax and investment in domestic laws.

Tax Treaty Policy

A country should establish the main outcomes it aims to achieve in its tax treaty policy, and identify the countries that are priority treaty partners. The treaty policy could take into account the provisions of the OECD and UN Model Treaties; commitments to any regional organisation to which the country belongs; main features of the country’s economy and tax law; and the ability of its tax administration to implement treaty measures.

The country should work out its policy position on withholding tax rates for different categories of income; a tiebreaker rule for dual resident entities; a definition of permanent establishment; a definition of royalties; inclusion of an article on technical services fees; taxation of indirect transfers of immovable property; a limitation on benefits provision; and BEPS treaty related measures. A model tax treaty should be drawn up to reflect these policies.

Preparing for Negotiations

When preparing to negotiate a tax treaty the country should consult business and relevant government ministries so the negotiators have relevant information on economic sectors or on important issues. A draft model should be prepared for use on a particular negotiation, based on the country’s model treaty but modified where necessary for particular issues in relation to the potential treaty partner country. Some provisions may be considered non-negotiable and these could be communicated to the negotiating partner beforehand to save time in the negotiations.

A written description of the domestic tax system and of the model tax treaty could be given to the negotiation partner. Also the key features of the other country’s tax system should be researched in advance. The negotiating team should understand the interaction of the domestic legislation and the provisions of the treaty they are negotiating.

Negotiating the Treaty

The draft toolkit also contains guidance on the conduct of the negotiations. Agreed minutes of meetings should be produced. An accurate record should be kept of what has been agreed and any outstanding issues.