The Platform for Collaboration on Tax (PCT) was set up by the IMF, OECD, UN and World Bank Group. The PCT has been developing a series of toolkits to guide developing countries in the implementing policy options.

The PCT’s Toolkit on Tax Treaty Negotiations builds on existing guidance, for example the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries. In addition to the guidance the toolkit includes links to useful publicly available resources to assist treaty negotiators.

Potential costs and benefits

The substantive provisions on taxation in a treaty include distribution rules that will generally operate to limit the amount of tax that can be charged by the source country on the income of non-residents, for example by imposing a maximum limit on source country taxation of dividends, interest, royalties. When a treaty is finalised the provisions may require additional administrative functions within the tax administration with resulting additional costs.

However, the possibilities for information exchange and assistance in tax collection by the treaty partner can lead to improved tax compliance and higher tax revenue. Developing countries must weigh up the costs and benefits of negotiating a new treaty and must monitor existing treaties for cost effectiveness.

Tax treaty policy and model treaty

The policy outcomes targeted by a country in treaty negotiations should be established, and the amount of flexibility given to negotiators and the minimum policy outcomes should be clear. A country should take account of the provisions of the UN and OECD Models, and regional models such as the African Tax Administration Forum (ATAF) model, and consider them in the light of the country’s economy, its most important revenue sources and the areas where foreign investment is required. The domestic tax law and its interaction with treaties should be considered.

A country should decide on the countries with which a treaty is required and the reasons why a treaty is needed with each country, taking into account the volume of cross border trade and investment and the potential revenue effect of a treaty.

Preparing for treaty negotiation

The toolkit considers the preparations required including defining the roles of the members of the negotiating team; consultation with business, government departments and other stakeholders; preparation of a draft model for a particular treaty negotiation; alternative provisions for use where a targeted provision is controversial; and identification of non-negotiable provisions representing strongly held policy positions that must be included in the treaty. The interaction between domestic and treaty positions must be clear. A brief explanation of the domestic tax system and treaty model should be provided to the negotiating partner country and a comparison of the treaty models of the two countries could be prepared.

Conduct of the negotiations and post-negotiation activities

The toolkit deals with the negotiating style, gaining the trust of the other negotiating team and building a relationship. An accurate record should be kept of what has been agreed. The countries must agree on the official texts of the treaty and which versions of the treaty are authentic and authoritative.