On 3 April 2019 a number of papers were released by the UN in advance of the meeting of the UN Committee of Experts on International Cooperation in Tax Matters planned for 23 to 26 April 2019. These papers included suggested amendments to the UN Model Taxation Convention between Developed and Developing Countries.

The subcommittee looking at possible updates to the UN Model is requesting input from the Committee on proposed updates to the commentary to Article 5 of the UN Model in relation to the definition of a permanent establishment. These updates would reflect changes made by the OECD to the commentary to the OECD Model as a result of the work on base erosion and profit shifting (BEPS).

The proposed update to the UN Model would also involve renumbering the cross-references to the OECD commentary to tie in with the updated commentary to the OECD Model.

Beneficial ownership

The subcommittee released a paper considering the issue of beneficial ownership as it relates to the UN Model. The subcommittee notes that the OECD has clarified this concept in its 2014 update to the OECD model and discusses the possibility of an update to the UN Model along similar lines.

The reference to beneficial ownership in the UN Model is intended to prevent the granting of treaty benefits such as reduced tax rates on payments where the recipient of the payment is a nominee or agent with a legal right to the income but no beneficial ownership. This concept is included in relation to the reduction of source country tax (e.g. withholding tax) on payments of passive income such as dividends, interest and royalties and aims to prevent the use of agents or nominees to obtain the treaty benefits in relation to the income.

However as the concept of beneficial ownership is not defined in the UN Model there can be questions as to its precise meaning. Cases in domestic Courts have led to inconsistent conclusions especially in relation to the question of whether the interpretation of the concept should be governed by domestic or international law. Many countries also do not have a clear definition of beneficial ownership in their domestic law.

The 2017 update of the UN Model incorporated a limitation on benefits (LOB) article (“Entitlement to Benefits”) and a principle purposes test (PPT) to deal with tax treaty shopping in a broad sense, as well as a preamble to the treaty stating that tax treaties are not intended to provide opportunities for treaty shopping. These broad anti-abuse provisions can now be relied upon by countries to prevent treaty shopping generally rather than having to rely on the concept of beneficial ownership.

This would therefore be a suitable time for the UN to clarify the meaning of beneficial ownership for the purposes of the UN Model, thereby preventing the litigation that has often arisen from the unclear meaning of the term. Developing countries will then be able to save resources previously devoted to such litigation and instead concentrate resources on using the new tools in the treaty such as the LOB provision to prevent treaty abuse more generally.

Next steps

The subcommittee has already received some comments from the Committee in relation to its suggested updates and the matter will be further considered at the meeting of the UN Committee on 23 to 26 April 2019.

UN: Proposed updates to UN Model Tax Convention