The question of the impact of Double Taxation Agreements on the social environment and human resources in CARICOM countries in general and of such treaties with countries outside the region in particular may be encountered from two different perspectives. The first would be the impact of tax treaties on the economy, the investment climate and the employment situation of countries. In this perspective the use and desirability of concluding tax treaties are the focus of the debate.

I will briefly summarise this debate and try to describe what seems to be the prevailing opinion in developing and developed countries. The second perspective is a more practical one and may be of more interest to this meeting of Caribbean Tax Administrators. In this perspective

I will discuss the actual process of negotiating and administering tax treaties and the requirements or recommendations for HR policy that follow therefrom.

I. Macro-economic and macro-policy effects of tax treaties

International double taxation has been identified as a main obstacle to the growth of cross border trade and investment since the 1920’s. The Committee of independent experts set up by the League of Nations and the later created Fiscal Committee of that organisation came up in 1928 with a set of Model Treaties for the avoidance of double taxation, which were presented as the best means of putting an end to the obstacle or at least provide a means for removing it.

After the second World War the Organisation for European Economic Cooperation (OEEC) built upon the work of the League of Nations by publishing its Model in turn in 1963. The OEEC was transformed into the Organisation for Economic Cooperation and Development (OECD) in 1969 and in the years between 1963 and today the OECD has succeeded in establishing its Model Convention as the state of the art standard for (bilateral) tax treaties. Even the UN, when it set out in the early seventies of last century to work out a Model Convention better suited for relations between developing and developed countries, could not avoid building further on the OECD Model.

The practice of countries since the publication of the UN Model and the Manual for the negotiation of tax treaties between developing and developed countries in 1980 has shown that although the UN Model differs from the OECD Model in material aspects, the OECD Model provides the basic structure for treaties concluded by and between member and non-member countries.

As is expressed in the title of the different Models and as is generally accepted, or should one say assumed, the primary object of tax treaties is to avoid international double taxation. There are, however, authors who think that avoidance of double taxation through (bilateral) tax treaties can be achieved at least as well and at less cost through unilateral domestic measures. We will come back to this question below. Right here it should be noted, however, that next to relief from double taxation tax treaties provide a mechanism to coordinate or synchronise the domestic tax systems of the treaty partners, which never can be done through unilateral domestic measures.

The OECD and most member countries claim that the phenomenal spread of tax treaties is one of the factors, together with the bringing about of the freedom of capital movement and the removal of obstacles to foreign investment, that have enabled the growth of international trade and cross border investment that we have witnessed over the last three or four decades. It will be clear that the freedom of capital movement and of foreign investment have played a greater role than tax treaties, but in the absence of such treaties the growth might have been slower and perhaps lower.

If we look uninhibitedly and unprejudiced at what it is that tax treaties do really, the effects of tax treaties could be described as limiting the right to tax for source countries in favour of the residence country of investors. Among OECD countries cross border flows of investment and income may be more or less balanced and consequently the gains and losses may be distributed more or less evenly. For developing countries, or more in particular for capital importing countries in general, the deal in tax treaties would seem to be (much) more to their disadvantage.

The UN Model, unsurprisingly, therefore aims to shift the balance of concessions, or the limitations on source taxation, in favour of developing countries. Further the UN Model advocates tax sparing or matching credits as a means to uphold for investors the effects of tax incentives handed out by developing countries.

On the basis of these conclusions a number of authors has argued that tax treaties in general and tax treaties between developed and developing countries in particular do not serve their purpose and that the aim of avoidance of double taxation could be better achieved through unilateral or domestic measures. This argument assumes in the first place that in the case of unilateral avoidance of double taxation, the burden of limiting the tax burden falls mainly on the residence state.

At first glance this seems to be a convincing argument. If the double taxation in the, developing, source state and the, developed, state of residence actually is an obstacle to investing in the developing country, the absence of a tax treaty could very well result in the investment not being made at all. The developing country would not have any tax revenue in the first place and the residence country is not gaining in revenue, because it did not have to give relief from double taxation, or only based on an existing tax treaty with another developed or developing country. The conclusion of a tax treaty with the first mentioned developing country could in such a situation very well benefit that country by enabling it to attract investment from the other country.

In situations where the double taxation is not an effective obstacle to foreign investment, the tax treaty might very well benefit the investor only, or more than its state of residence, because of the difference between gross and net tax base. The tax at source on a gross basis may be significantly higher than the tax on the net income from the foreign investment in the country of residence, resulting in an excess credit position for the investor that may be hard to remedy under unaltered circumstances.

In the case of investment through a foreign subsidiary by a resident of a country having a participation exemption regime, concessions of the source country in respect of the taxation of outgoing intra-group dividends only benefit the investor, because the dividends were exempt from tax in the country of residence from the outset. Thus the conclusion of a tax treaty is a clear improvement of the investment climate of the source country.

Debate on necessity or use of concluding treaties

State position:

Treaties limit taxing rights of source country, budgetary loss; limitation of residence country's taxes may also benefit developing country

Investment climate; certainty for investors, avoidance of double taxation, improved return on investment through lower source taxation, possibly tax sparing, protection against discriminatory treatment, increase revenue

Mutual administrative assistance

Underline position as active member of international community

Investor's position:

Legal certainty, withholding rates, PE concept

Exemption vs. credit under treaties

Lower withholding results in better return on investment

Possibly lower excess credit

Mutual agreement for solving disputes

Non-discrimination

Protection against branch profit tax(?)

II. The Impact on Human Resources for the Tax Administration

A. Negotiating Stage

The process of concluding tax treaties can impose serious strains on the human resources of the government department(s) involved in terms of information to be gathered and of pure workload. In order to assess this impact it seems useful to analyse the process of the conclusion of (tax) treaties and its different stages. In the following the most important stages will be described and subsequently an attempt will be made to assess the HR impact.

The first stage would be to determine the aims of a country’s tax treaty policy. Is the emphasis on expanding the basis for the country’s domestic taxation in the form of comprehensive income taxation or of extensive taxation at source, then the UN Model presumably would be the basis for negotiation. Another important policy aim could be to secure relief in the country of residence for the taxes levied by the first mentioned country, as the assurance of such relief may have a strong effect on foreign investors.

In line with such policy aim would be the safeguarding of a country’s investment incentives through tax sparing or matching credits. The former Brazilian treaty negotiator and former Minister of Finance, Francisco Dornelles, in an article in the IBFD’s Bulletin for International Fiscal Documentation of 1989, mentioned this aim as one of the most important for developing countries. The international climate, however, seems not to be very favourable to tax sparing or matching credits at present.

Once the main policy aims have been determined, the preferred or preferable treaty partners can be selected. For this purpose it can be useful to study balance of payments and cross border payment statistics. They may provide support for the selection of prospective treaty partners, or indicate that actual investment and income flows do not correspond with perceived reality.

These statistics may also contribute to give a precise and correct picture of the budgetary importance of possible concessions to be made during negotiations. Finally the determination of treaty policy aims and the study ofthe statistics help to set priorities for the negotiations and the selection of countries to start negotiations with.

When the negotiating program has been settled, the preparation for the negotiations proper can start. If you allow me to draw on the Dutch practice of the time when I worked in the International Fiscal Affairs Directorate of the Dutch Ministry of Finance, we used to star by studying the tax system of the prospective treaty partner to see what were the differences between their system and the Dutch system. One of the purposes of such study was to chart the opportunities for tax avoidance that might be opened by a tax treaty with the other country.

Where such opportunities could be discerned, counter measures could be thought of, for instance by replacing relief in the form of exemption by the credit method, or by proposing deviations from the (Dutch) standard text or the OECD Model. At present the IBFD provides such studies in a number of cases to the Dutch Ministry. The basis for the IBFD’s study is usually a rather detailed questionnaire made by the ministry, the aim of which is to find out where dissimilarities between the two countries’ systems may give rise to avoidance opportunities, or where qualification problems could arise.

The complement to the study of the prospective partner’s tax system is the study of its treaty practice. It can be very useful to be aware of special elements in the other country’s treaty policy. If the other country has never agreed to withholding rates of less than, say 30%, it can be assumed that it will require considerable concessions to make it agree with you on a rate of 10%, if it will consider such concession at all.

Of course older treaties are less of a precedent than recent ones and treaties with neighbouring countries, with which very specific relations may exist which do not exist in relation to the prospective partner, may be of lesser value to rely on than treaties with countries that are in a similar or comparable position. Tax treaties are collected and published by several publishers, such as Tax Analysts and IBFD. As a short intermezzo I can give you a sneak view of our Tax Treaty Database….

The concluding part of preparations for negotiations is the drafting of a text that can serve as the basis for the negotiations. To submit a draft to the counterpart gives a certain advantage in that the possible points of conflict can be presented in a way that is not unfavourable to the interests of the country submitting the draft. Furthermore, discussion on the basis of the draft of one of the parties means that it is the other party that has to object, or propose amendments. The UN or OECD Model adapted to the specific wishes and interests of the drafting party will in most cases serve as the basis for the draft.

The negotiating process is the next stage to consider. Are negotiations conducted by the Ministry of Finance or the Foreign Office, or by one with participation of the other, in which case the chairmanship of the negotiating team may give rise to problems of competence. The Foreign Office will in most cases not have the expertise in tax matters, but it may be more experienced in negotiating with representatives of other countries. After initialling a text at the end of the negotiations, the finalisation of the treaty and its ratification may still be a quite time consuming affair.

In many countries most of these processes are taken care of by the Foreign Office, but material aspects can play a sometimes unexpected role, of which the Foreign Office may not be aware or appreciate the full consequences. It is important therefore that the Finance authorities remain involved in the process. Translation from the negotiating language into the national language is one such matter. Consistency in the translation of terms that are used as a matter of routine in treaties should be translated consistently in the same way, even if the linguistic value appears to be the same. Courts sometimes find cause for distinction on very subtle grounds.

HR consequences of all the points mentioned seem to be in the first place, that the staff involved should be familiar with the UN and OECD Models and the Commentaries, as these form the basis of common international understanding of the mechanics of tax treaties. To understand and appreciate the peculiarities of foreign tax systems requires an elevated level of general and legal education and such levels of education require sufficient levels of salaries to be able to attract staff with such qualifications.

To build expertise in tax treaty practice the OECD organises several events of varying character. In addition, the OECD has set up regional training centres oriented at present especially at Asia and Eastern Europe. One big advantage of these centres is that they are funded by the OECD Member states and can provide the training free of charge, or formulated otherwise, out of their national budget.

B. Administration and Implementation

The process of concluding tax treaties may have significant HR impact, the administration and implementation has no less significant consequences. Texts of any treaties concluded must be available to the tax service and to the public. The normal constitutional procedure for publishing laws may not be sufficient, but in the electronic age that should not be too much of a problem.

Next the field officers and investigators must be aware of the existence of treaties and of the way they work in combination with the domestic law; this may require a serious education effort and some expense on materials on application and interpretation of treaties, even if some of this material is not specifically written for the country in question. Field officers, investigators and auditors must acquire a basic degree of knowledge of tax treaties and of the way they are implemented. The UN and OECD Models are a good starter for anyone who is trying to get acquainted with the working of tax treaties.

If the treaties have any effect on foreign investment in your country, auditors and investigators will have to get familiar also with accounting standards and practices abroad and with sources of information that are generally available through the internet. For instance transfer pricing is a phenomenon that is relevant for all countries and information about transfer pricing policy and practices of a multinational enterprise (MNE) are surely to be found to a large extent outside your country. Techniques for finding such information must be learnt largely in practice, but courses and writing on transfer pricing abound.

Where treaties provide for limitation of taxation at source especially the question of procedures arises. The way in which and the speed with which such limitations are realised is a very sensitive factor in how taxpayers, and especially foreign investors, experience the effects of a tax treaty. Many countries have developed special forms for claiming treaty benefits, the main element of which is the so-called residence certificate.

If recourse to a tax treaty is but an occasional matter, the creation of special forms may make not much sense. A special form, however, may also contribute to the speed with which such claims can be handled. Concentration of the handling of such matters can help to build in a short time the expertise and the routine that enable speedy and effective handling.

The creation or designation of a special unit to deal with the application and implementation of tax treaties can be very useful and is a measure that has been taken in may countries having a wide treaty network.

An important aspect of tax treaties is that they provide for cooperation between competent authorities, information about developments and changes in their respective legislations, mutual agreement procedures in case of disputes about the correct interpretation of treaties and the exchange of information.

Although article 25 on the mutual agreement procedure does not compel authorities to resolve disputes, it would be against the intentions of this article to deal carelessly with such problems. Competent authorities have a duty to undertake all serious efforts to resolve questions or problems submitted under this article. This will require in many countries to build expertise not only on questions about interpretation of treaties, but also of domestic law.

The last topic I would like to discuss in dealing with HR impact of tax treaties and perhaps the most important one in terms of HR impact is the exchange of information. This topic could very well be the subject of a whole annual meeting, but I will try to limit myself to the essentials. You will all be aware of the importance the exchange of information has attained in recent years, for a large part in connection with the harmful tax competition discussion.

In effect the most tangible result so far of this discussion has been the publication in 2002 of a new Model Agreement on exchange of information in tax matters with commentary. A similar Model published by CIAT in 1999 should be mentioned as well in this place.

Mutual administrative assistance in the form of exchange of information may have very important consequences for the administrations concerned. It could put serious strains on the (human) resources of the requested state, if it can be of great significance for that state as well, because of the principle of reciprocity. This means that as well in powers that competent authorities have in tax matters, as in the practical use of the instrument by both parties too the treaty, there must be a certain balance.

The question of the powers which authorities have to acquire information may necessitate separate consideration. It is important to realise that provisions like article 26 presuppose that the requested authority will use its powers to meet the request of the applicant authority, even if the information requested is not relevant for the domestic law of the requested state.

This may raise questions of domestic legislation in order for the competent authorities to have the necessary powers. The fact that the requested information is not readily available to the requested authority is generally not considered a valid reason for not supplying the information. The applicant authority, however, must also exercise self-restraint. For all tax authorities the administration of its own domestic tax law is of course their paramount duty.

More recent forms of administrative assistance in the exchange of information, like “assistance in person”, may help to alleviate the burden of assistance, but it would seem not the overall solution to the problem of limited resources in connection with administrative assistance.