On 13 February 2024 UNCTAD released a guide with the title Double taxation treaties: What investment policymakers need to know. The guide deals with the aspects of double tax treaties that are important for investment policymakers to understand, and the design options available.

The risk of double taxation can discourage international investment; and double taxation treaties are designed to reduce this risk. Investment policymakers therefore need to understand the important aspects of tax treaties and take part in discussions on the design options for tax treaties.

The guide emphasises the importance of interaction between investment and tax policymakers. They share common objectives to promote investment, raise revenue and mobilise resources. International taxation and investment are regulated by different networks of treaties with different emphases and the tax and investment communities both need to be familiar with the basic principles behind both types of agreement. UNCTAD previously published a guide on what tax policymakers need to know about investment agreements; and the latest publication is a further attempt to bridge the gap between the investment and tax communities.

Some provisions of tax treaties need to be particularly noted by investment policymakers:

Personal scope

An individual or legal person who is a resident in one or both contracting States may have access to tax treaty benefits. These conditions leave room for opportunities of jurisdiction shopping and distortions in allocation. Various types of anti-avoidance rule may be applied to combat tax treaty abuse. The more complex rules provide greater certainty for investors, but are more difficult to administer; and the introduction of complex provisions should take into account the capacity of the tax administration to manage the rules.

Taxes covered

Double tax treaties normally cover direct taxes on income and capital but do not cover indirect taxes or other levies such as social security contributions. Some taxes may be designed in a way that is outside the scope of double tax treaties. In particular, value added tax (VAT) is not covered by tax treaties and international aspects may be regulated by other international guidelines or by directives from regional economic organizations. Investment policymakers need to note the scope of tax treaties.

Attribution of taxing rights over business income

Generally, the attribution of taxing rights over active business income depends on a physical presence test (permanent establishment). This means that in the absence of other provisions an online business could do significant business in a country without becoming liable to corporate income tax in the country. The scope of the criteria giving rise to a permanent establishment are therefore important to investment policymakers. The broader the criteria, the more foreign investors may be affected, which may raise more tax revenue but could discourage investment. Investment and tax policymakers may therefore need to collaborate on finding the optimal way forward.

Non-discrimination

Double tax treaties normally contain an article providing for non-discriminatory treatment in certain specific situations. It is important for investment policymakers to understand the differences between the non-discrimination article in tax treaties and the concept of discrimination in international trade and investment agreements. An important difference is that the non-discrimination provision in a tax treaty applies on the basis of residence whereas in investment and trade agreements non-discrimination provisions are generally based on nationality. Policymakers need to be aware of the possible pitfalls, such as the use of the non-discrimination provisions in an investment treaty to challenge tax decisions.

Dispute resolution

Double tax treaties include provisions for dispute settlement that differ from the investor–State dispute settlement provisions contained in investment treaties. Double tax treaties rely on the mutual agreement procedure (MAP) to resolve tax disputes between competent authorities. The procedure requires significant administrative capacity to enable the competent authorities to endeavour to reach agreement, and this is difficult for countries with limited resources. The guide notes that developing countries should be able to give greater input into the design of dispute settlement provisions and there should be more capacity-building. Also, taxpayers may benefit from the differences in the dispute resolution procedures in a way that was not foreseen by policymakers. To avoid problems the approach to investment and tax treaty dispute resolution needs to be coordinated.