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1、Double taxation treaties and their implications for investment:what investment policymakers need to knowDouble taxation treaties and their implications for investment:what investment policymakers need to knowGeneva 2024 2024,United NationsAll rights reserved worldwideRequests to reproduce excerpts o

2、r to photocopy should be addressed to the Copyright Clearance Center at .All other queries on rights and licences,including subsidiary rights,should be addressed to:United Nations Publications405 East 42nd StreetNew York,New York 10017United States of AmericaEmail:publicationsun.orgWebsite:https:/sh

3、op.un.org/The findings,interpretations and conclusions expressed herein are those of the authors and do not necessarily reflect the views of the United Nations or its officials or Member States.The designations employed and the presentation of material on any map in this work do not imply the expres

4、sion of any opinion whatsoever on the part of the United Nations concerning the legal status of any country,territory,city or area or of its authorities,or concerning the delimitation of its frontiers or boundaries.This publication has not been formally edited.United Nations publication issued by th

5、e United Nations Conference on Trade and DevelopmentUNCTAD/DIAE/PCB/2024/1ISBN:978-92-1-003056-4eISBN:978-92-1-358812-3Sales No.E.24.II.D.6TABLE OF CONTENTSACKNOWLEDGEMENTS.IVPREFACE.VEXECUTIVE SUMMARY:WHAT INVESTMENT POLICYMAKERS NEED TO KNOW ABOUT DTTS.VIINTRODUCTION.11.The reform of DTTs BEPS and

6、 beyond.32.Interaction between DTTs and investment policy.4SELECTED DTT PROVISIONS AND THEIR IMPACT ON INVESTMENT.71.Preamble.82.Personal scope.93.Substantive scope:taxes covered.154.Permanent establishments.175.Allocation rules.206.Methods for elimination of double taxation.267.Anti-abuse provision

7、s.308.Non-discrimination.339.Dispute resolution.3410.Exchange of information.37CONCLUSION.40REFERENCES.41ivDouble taxation treaties and their implications for investment:what investment policymakers need to knowACKNOWLEDGEMENTSThis guide was produced by the UNCTAD Division on Investment and Enterpri

8、se.As part of the UNCTAD report team,the International Investment Agreements Section contributed to the analysis,under the direction of Richard Bolwijn and the overall guidance of James Zhan.UNCTAD gratefully acknowledges the contributions of the WU Global Tax Policy Center.The WU Global Tax Policy

9、Center team,led by Jeffrey Owens,consisted of Joy W.Ndubai,Belissa Ferreira Liotti and Ruth Wamuyu.The WU Global Tax Policy Center is a part of the Vienna University of Economics and Business,Institute for Austrian and International Tax Law.Double taxation treaties and their implications for investm

10、ent:what investment policymakers need to knowvPREFACEThe UNCTAD Division on Investment and Enterprise is the focal point within the United Nations system for all issues related to investment and enterprise development.It conducts cutting-edge policy analysis,provides technical assistance,and builds

11、international consensus on investment and enterprise.The Division takes a lead role in advancing solutions to the development challenges faced by the international community in this area and is dedicated to support investment in sustainable development with its investment and enterprise policy toolk

12、its.Since the launch of the Investment Policy Framework for Sustainable Development in 2012(updated in 2015),UNCTAD has been at the forefront of efforts to reform the international investment regime and has provided valuable backstopping to this process.Building on UNCTADs long-standing expertise on

13、 FDI,investment policymaking and international investment agreements,this guide on double taxation treaties(DTTs)and their implications for investment policymakers complements the guide on international investment agreements and their implications for tax measures published in 2021 by UNCTAD in coop

14、eration with the WU Global Tax Policy Center.It also aims to stimulate interaction between investment policymakers and DTT negotiators.This guide assesses the most relevant DTT provisions and their implications for investment using the Model Conventions of the United Nations and of the Organisation

15、for Economic Co-operation and Development(OECD)as a basis.It provides guidance to investment policymakers on the working of DTT provisions,the proposed changes to DTTs following the OECD/G20 Base Erosion and Profit Shifting project and the implications of those changes for investment.It also draws o

16、n UNCTADs previous work on the impact of the global minimum tax on foreign direct investment,in the World Investment Report 2022(UNCTAD,2022)and the taxation paper in the UNCTAD Series on Issues in International Investment Agreements(UNCTAD,2000).viDouble taxation treaties and their implications for

17、 investment:what investment policymakers need to knowEXECUTIVE SUMMARY:WHAT INVESTMENT POLICYMAKERS NEED TO KNOW ABOUT DTTSDouble taxation treaties(DTTs)are international agreements,almost exclusively concluded on a bilateral basis,that aim to alleviate double taxation arising from cross-border busi

18、ness activities.They do so by distributing taxing rights over different items of income or capital between the contracting States.At the same time,DTTs aim to prevent instances of their improper use for the purpose of tax evasion and avoidance.They are the central pillars of international tax coordi

19、nation and despite their bilateral nature and divergent details,they all follow the same overall patterns determined by model conventions put forward by the United Nations and the Organisation for Economic Co-operation and Development(OECD).The overarching goal of DTTs is to facilitate cross-border

20、business activities,trade and investment,by preventing the double taxation that such activities might be subject to,while creating a level playing field.Given the material impact that DTTs can have on investment,it is important that investment policymakers understand their main features and are able

21、 to engage in debates related to different DTT policy options.This guide focuses on the most relevant features of DTTs.It revolves around what investment policymakers need to know about the different DTT design options,considering their investment implications.By doing so,it also aims to stimulate i

22、nteraction between investment and tax policymakers.Alongside the guide on international investment agreements(IIAs)and tax measures(UNCTAD,2021),this guide aims to allow the two communities to share expertise and ensure more coherent approaches to tax and investment policymaking with a focus on refo

23、rmed options.Personal scope of DTTsAn individual or legal person who is a resident in one or both contracting States may have access to DTT benefits.These conditions leave room for opportunities of jurisdiction shopping and allocation distortions.The international tax system has developed several to

24、ols to counter abusive practices at both the domestic and the DTT level.The anti-avoidance rules vary in complexity.Although more complex rules provide greater legal certainty for investors,they are more difficult to administer by tax authorities,which can be a challenge for jurisdictions with limit

25、ed administrative capacity.Taxes coveredDTTs generally cover direct taxes on income and capital.They do not cover indirect taxes or levies that are not considered taxes in the strict sense,such as social security contributions.Some types of levies,such as digital services taxes,may be specifically d

26、esigned in a way that leaves them outside the scope of DTTs.The vast majority of DTT provisions,including those on relief from double taxation,only apply with respect to covered taxes.Finally,the international tax system leaves a legal vacuum with respect to the coordination of value added tax(VAT),

27、one that could be filled by regional economic integration organizations.Attribution of taxing rights over active business incomeDTTs attribute taxing rights over active business income to the residence jurisdiction unless the enterprise has a physical presence(a permanent establishment)in the source

28、 jurisdiction.The physical presence test makes it possible for an online business to trade with or do significant business in a country without triggering compliance obligations for corporate income tax purposes,which is important from a trade and Double taxation treaties and their implications for

29、investment:what investment policymakers need to knowviiinvestment policy perspective.When deciding on the scope of the definition of a permanent establishment,it is important to keep in mind that the broader the criteria(i.e.the easier it is to trigger the permanent establishment threshold),the more

30、 foreign investors will be affected,including smaller ones.Hence,while the broadest possible definition may be appealing from a tax revenue perspective,it must be balanced against its investment implications.Certain types of business activities may not take place in a jurisdiction if they trigger a

31、permanent establishment and the concomitant compliance costs outweigh the business rationale.Attribution of taxing rights over passive business incomeDTTs allow source jurisdictions to tax passive business income derived from dividends,interests,and royalties under certain circumstances even where t

32、he enterprise has no permanent establishment in its territory.The tax is generally levied on a gross basis,by means of a withholding tax(WHT),and up to the amount of a cap established under the applicable DTT.The residence State can then also tax the income but must alleviate any double taxation tha

33、t arises.WHT is collected by the payer,acting as a withholding agent,simplifying tax enforcement for non-residents.WHTs are,thus,a convenient way for source countries to raise revenue,and they are easy to administer.The application of a gross basis WHT may have some distorting effects in certain sit

34、uations as it may represent an entry barrier or lead to taxation of loss-making entities.WHT rates vary across DTTs,creating incentives for treaty shopping.Attribution of taxing rights over personal incomeDTTs attribute the taxing rights over personal income exclusively to the State of residence of

35、the worker or self-employed person,unless the individual has a significant physical presence in the source State.These rules were developed before the spread of mobile and remote working.In the context of remote working,they can lead to a misalignment between where taxing rights are attributed and w

36、here the proceeds of work are enjoyed.Remote working arrangements allow firms access to foreign labour without the need to invest in an overseas jurisdiction.Such arrangements also allow firms to rely on independent rather than employed workers and to pass foreign tax and social security responsibil

37、ities on to the self-employed.Trade and investment policymakers should be aware of taxing rights applicable to remote working arrangements.Methods for elimination of double taxationDTTs either exclusively attribute taxing rights to one of the contracting States or they provide both States with the p

38、ossibility to tax,and the State of residence is obliged to provide relief from double taxation.This relief takes the form of either the exemption of the foreign income from the domestic tax base or a credit for the taxes paid abroad.The policy choice depends on whether the State in question wishes t

39、o ensure neutrality in the source State where the investment is located(exemption method)or in the residence State of the investor(credit method).From an investment policy perspective this choice can have important consequences as it affects,among others,the treatment of foreign tax incentives.Anti-

40、abuse provisionsDTTs include anti-abuse provisions to curb treaty shopping and tax avoidance arising from the improper use of tax treaties.States have three options:(i)a principal purpose test(PPT)provision,(ii)a combination of a PPT provision and a limitation of benefits(LoB)rule or(iii)an LoB prov

41、ision together with a rule against conduit arrangements.These rules were implemented as a result of the OECD/G20 Base Erosion and Profit Shifting Project and are treated as minimum standards.The choice of one of the three anti-abuse options depends on the contracting States perceptions of their need

42、s and bargaining positions.The PPT is simpler to implement but may give tax authorities a greater deal of discretion,which brings uncertainty viiiDouble taxation treaties and their implications for investment:what investment policymakers need to knowto taxpayers.An LoB clause provides more predictab

43、ility and legal certainty to taxpayers,but it is more complex and may present challenges for tax administrations that have capacity constraints.Non-discriminationDTTs provide for non-discriminatory treatment in specified scenarios.Investment policymakers should take note of the key differences betwe

44、en non-discrimination in DTTs and the concept of discrimination in international trade and investment agreements.Most importantly,the non-discrimination provision in a DTT applies on the basis of residence whereas in investment and trade agreements such provisions generally apply on the basis of nat

45、ionality,leading to a potential mismatch between the different types of treaties.Dispute resolutionDTTs contain a system for dispute settlement that differs from the investorState dispute settlement mechanism used in IIAs.In tax disputes under DTTs,taxpayers are never direct participants in the inte

46、rnational resolution of disputes.Existing DTTs predominantly rely on the mutual agreement procedure(MAP)to resolve tax disputes between competent authorities on a best-efforts basis.The MAP is usually time consuming and requires significant administrative capacity on the part of competent authoritie

47、s.Such capacity is often lacking,especially in countries with limited resources.In some instances,providing for arbitration between the competent authorities as a prolongation of the MAP can make the procedure more effective because competent authorities have a greater incentive to reach an agreemen

48、t to avoid escalating the matter to arbitration.However,where the MAP fails due to limited administrative capacity,arbitration will do little to improve the situation.In addition,many developing countries do not have confidence in the arbitration process.The United Nations has tried to address this

49、in its DTT model by providing greater flexibility in implementing outcomes,placing caps on costs,encouraging greater transparency in the proceedings and appointing arbitrators familiar with the situation in developing countries.The key to moving forward is to give a greater voice to developing count

50、ries in the design of dispute settlement provisions and to provide for more capacity-building.Exchange of informationDTTs include exchange of information provisions that require competent authorities(typically the tax authorities of each contracting State)to exchange information where this is releva

51、nt to applying the provisions of the DTT or to administering or enforcing the domestic tax laws of either State.Although there is consensus on the importance of these provisions,the administrative aspects of exchange of information continue to be an area of concern,especially in developing countries

52、.The building of technical capacity is a fundamental aspect of reform.Double taxation treaties and their implications for investment:what investment policymakers need to know1INTRODUCTION2Double taxation treaties and their implications for investment:what investment policymakers need to knowDouble t

53、axation treaties(DTTs)are agreements entered into by two or more jurisdictions to,primarily,avoid international juridical double taxation of income and capital.Such taxation arises where comparable taxes are imposed in two or more jurisdictions on the same taxpayer in respect of the same income or c

54、apital and for identical periods.Double taxation can hinder the exchange of goods and services,and the movement of capital,technology and persons.The obstacles it presents can hamper investment.To avoid this,governments typically adopt unilateral measures to provide relief for taxpayers in national

55、laws.This is done by either exempting foreign-earned income from taxation or by providing a credit for the taxes paid abroad.Two jurisdictions with significant ongoing cross-border trade and investment may opt to conclude a DTT that provides the terms for eliminating double taxation.The rules of a t

56、ypical DTT provide two ways of eliminating double taxation.One is by allocating the taxing rights to a single jurisdiction this will determine the contracting State that will have the sole right to tax a category of income or capital.The other is an allocation rule,which may identify that both contr

57、acting States have a right to tax the income and,where double taxation arises,one jurisdiction is required to provide relief(by exemption or credit).International efforts to reduce the occurrence of double taxation are part of the international economic law framework that governs the flow of interna

58、tional goods and services,investment and transfers of technology.DTTs aim to prevent discriminatory treatment of taxpayers,increase certainty regarding the tax implications of an investment decision and manage the resolution of disputes related to double taxation between the contracting States.DTTs

59、have additional tax-specific goals.These include the prevention of non-compliance,tackling tax avoidance and evasion,as well as improving cooperation between tax authorities by providing for the exchange of tax information and mutual assistance in tax collection.A DTT is ordinarily structured as fol

60、lows:Title:identifies the contracting States and may refer to the elimination of double taxation and the prevention of tax avoidance and evasion.Preamble:identifies the objectives of the contracting States concluding the treaty.Chapter I Scope of the convention:determines the persons covered(residen

61、ts of either contracting State)and the taxes covered(taxes on income and capital).Chapter II Definitions of key terms.Chapter III Taxation of income:assigns,with regard to different classes of income,the right to tax to each contracting State depending on whether a taxpayer resides in or has sourced

62、 income from that jurisdiction.Chapter IV Taxation of capital:assigns,with regard to different classes of capital,to each State the right to tax depending on whether a taxpayer resides in or has sourced income from that jurisdiction.Chapter V Methods for the elimination of double taxation:designates

63、 the use of either the exemption or the credit method.Chapter VI Special provisions:covers treaty clauses on the prevention of discrimination,dispute resolution,exchange of information(EOI)and mutual assistance in the collection of taxes.DTTs have a long-established history,with the first treaty con

64、cluded between Prussia and Saxony in 1869.International cooperative efforts on the design of model rules formally began at the League of Nations in the 1920s(League of Nations,1925).Since then,a number of international and regional organizations have engaged in developing and evaluating model rules.

65、Examples include the Organization for Economic Co-operation and Development(OECD),the United Nations Committee of Experts on International Cooperation in Tax Matters(UNTC),the African Tax Administration Forum,the European Union and the Inter-American Center of Tax Administrations(CIAT),among others.

66、The two leading model tax conventions(MTCs)utilized by countries are those designed by the OECD and the UNTC,respectively(OECD,2017a;UN DESA,2021).Their overall structure is highly similar and the most important difference between the Double taxation treaties and their implications for investment:wh

67、at investment policymakers need to know3two models is that the UN MTC seeks to cater more strongly to source countries,which largely aligns with the needs of developing economies.The model rules have been subject to ongoing revisions triggered by globalization,changes in business and investment prac

68、tices and to respond to common schemes to avoid or evade the payment of taxes.Importantly,both MTCs contain detailed guidance on the application of their rules in the form of commentaries.The commentaries are frequently relied on by tax authorities,taxpayers,and courts in interpreting DTTs.At times,

69、the interpretations they propose are updated without revisions of the texts of the MTCs themselves.1.THE REFORM OF DTTS BEPS AND BEYONDOver the last decade,key provisions of model DTTs have experienced significant reforms.The economic impact and domestic revenue pressures of the 2007/2008 global fin

70、ancial crisis raised public concern about the tax compliance of multinational enterprises(MNEs).In the years following the crisis,as the financial recovery faced obstacles,the complex schemes used to engage in either tax evasion or aggressive tax avoidance came to the forefront.1 In response to publ

71、ic outcry,in 2012,the G20 reiterated the need to prevent tax base erosion and profit shifting(BEPS)and supported the work of the OECD on this issue(G20,2012).BEPS refers to“tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax”(OE

72、CD,2023a).At the request of the G20,the OECD published the Action Plan on BEPS in July 2013,stipulating 15 actions to comprehensively address BEPS(OECD,2013).The plan identified tax treaty abuse,particularly treaty shopping,as one of the most important sources of BEPS concerns.The individual reports

73、 on the different actions gave rise to key proposals for the amendment of specified sections of DTTs.To support the simultaneous reform of thousands of tax treaties,the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS was developed.Throughout the course of this guide,

74、reference will be made to pre-BEPS and post-BEPS DTTs as a representation of the changes following the finalization of the work done by the OECD.It is important for investment policymakers to know that the elimination of double taxation by one State is generally based on the understanding that this

75、income is taxable in the other State.The impacts of and response to BEPS also highlighted major concerns about the role of tax havens and preferential tax regimes in this respect.If the other contracting State levies no or low taxes on income,or there are insignificant flows of cross-border trade an

76、d investment between two jurisdictions,the OECD and the UN MTCs encourage governments to reconsider whether there is a risk of double taxation and whether it justifies entering into a DTT with that State.Policymakers should additionally consider the elements of the other States tax system that may i

77、ncrease the risk of non-taxation.A variety of tax incentive programmes may qualify as harmful,including some special economic zones(SEZs),international financial centres,special software and intellectual property regimes,innovation hubs and/or boxes,patent boxes and shipping regimes(OECD,2019).More

78、generally,the OECDs work on harmful tax competition identified that regimes with no transparency,a lack of EOI,low or no taxes on income,and no substantial activities could give rise to harmful outcomes such as facilitating tax avoidance(OECD,1998a).This work gave rise to the Forum on Harmful Tax Pr

79、actices,which peer reviews tax regimes.Investment policymakers should be aware of this process,as its outcomes can lead to the requirement to eliminate or redesign their tax regimes.1For instance,see Shaxson,N.and J.Christensen(2008).Not on My Watch Please.Tax Justice Network,Tax Justice Focus Quart

80、erly Newsletter,The Research Edition,Vol.4(2).Available at https:/ taxation treaties and their implications for investment:what investment policymakers need to know2.INTERACTION BETWEEN DTTS AND INVESTMENT POLICYIIA and DTT networks are among the most extensive treaty networks worldwide,with more th

81、an 2,500 IIAs and over 3,000 DTTs currently in force(UNCTAD,2023;Lang et al.,2017).The shared objectives of both frameworks are to provide certainty and protection to investors,raise investment attractiveness and promote cross-border investment.They aim to function as tools for promoting and advanci

82、ng international economic relationships(UNECA,2020).Key differences exist between IIAs and DTTs.As specialized treaties,DTTs provide investors with rules regarding the tax treatment of their investments whereas IIAs are far broader in scope.DTTs and IIAs are designed and negotiated under different i

83、nstitutional frameworks.The Ministry of Finance takes the lead on tax treaties,whereas national investment promotion agencies and ministries of Trade,Industry,Investment,Finance or Foreign Affairs will usually guide the way for IIAs(Choudhury and Owens,2014).This often means that the key public offi

84、cials involved in concluding IIAs and DTTs do not interact.DTTs are based on models such as those developed by the OECD and the United Nations,whereas IIAs,despite their similar structure,do not follow a universal model.Lastly,the rules of a DTT are applied and implemented on an ongoing basis as inv

85、estors determine and pay their tax liability,whereas the standards of protection available in IIAs become most relevant when a treaty breach is alleged by a foreign investor.The UNCTAD guide on IIAs for tax policymakers points out that IIAs interact with DTTs and have important implications for tax

86、policymaking(UNCTAD,2021).It identifies the following key interactions:Since most IIAs do not exclude taxation from their substantive scope,tax measures of general or specific application including those falling within the ambit of a DTT may be covered by an IIA and could be challenged through inves

87、torState arbitration proceedings known as investorState dispute settlement(ISDS).Most IIAs are silent on their relationship with DTTs and only few IIAs provide for special mechanisms to address tax-related claims brought on the basis of IIAs.Some terms and concepts used in DTTs resemble those adopte

88、d in IIAs.However,they may have different implications.For instance,it is standard practice that the non-discrimination provision in DTTs permits differential tax treatment of resident and non-resident taxpayers.Non-discrimination provisions in IIAs are rarely explicit on this point.DTTs typically d

89、o not include most-favoured-nation(MFN)clauses because they are generally based on the principle of reciprocity and thus both parties should make concessions.By contrast,IIAs virtually always provide for MFN treatment.Generally,IIAs exclude DTT benefits in one way or another from the scope of the MF

90、N provision.However,where no tax carve-out is included,the MFN provisions in IIAs could potentially be used to claim the favourable treatment contained in a DTT between the host State and a third party.This can make the DTT less effective in preventing tax avoidance and evasion.There are shared conc

91、erns about the use of unreformed IIAs and DTTs as they often allow treaty shopping,nationality planning or the establishment of mailbox companies,to enjoy the benefits of a treaty.More recent,reformed IIAs may include a denial-of-benefits clause and circumscribe the types of covered investors to ens

92、ure that only investors with substantial business activities in the other contracting party can access treaty protections.Anti-abuse rules in DTTs aim to achieve similar goals.Here UNCTAD has highlighted the opportunities for cross-regime learning and shared solutions between the two communities(UNC

93、TAD,2021).Given the overlapping interests,issues and objectives of DTTs and IIAs,it is important that the ongoing reform efforts in both areas of policymaking are designed and implemented in a complementary manner.This recommendation extends to the investment-attraction policies designed by investme

94、nt authorities.Double taxation treaties and their implications for investment:what investment policymakers need to know5Synergy between both types of policies is also important to limit the incidence of forum shopping by taxpayers.This guide on DTTs for investment policymakers aims to support the mu

95、tual supportiveness between both fields of policymaking,encouraging reforms in international investment governance and advancing sustainable development objectives.It complements the guide for tax policymakers on IIAs and their implications for tax measures(UNCTAD,2021).It identifies the most import

96、ant DTT provisions that have implications for investment policymaking:Preamble Scope of DTTs Permanent establishments Allocation rules Methods for elimination of double taxation Anti-abuse provisions Non-discrimination Dispute resolution Exchange of informationFor each of these provisions,this guide

97、 sets out the implications of the pre-BEPS version.It then introduces the reform options and implications of the OECD/G20 BEPS Project proposals and makes reference to the United Nations recommendations.Double taxation treaties and their implications for investment:what investment policymakers need

98、to know7SELECTED DTT PROVISIONS AND THEIR IMPACT ON INVESTMENT8Double taxation treaties and their implications for investment:what investment policymakers need to knowPre-BEPS double taxation treaties(DTTs)were characterized by a conventional approach,seeking to prevent double taxation by defining k

99、ey terms,assigning and dividing taxing rights between the country of residence and the source country and including a number of special provisions such as on the diplomatic settlement of disputes through the Mutual Agreement Procedure(MAP).Post-BEPS DTTs are designed to adapt to the changing global

100、economy and feature innovative provisions to prevent treaty abuse,address modern business models and enhance dispute settlement.Reformed DTTs aim to prevent double taxation while limiting the frequency of non-taxation.They thereby seek to regulate the taxation of cross-border economic activities in

101、a shifting business landscape.1.PREAMBLEThe preamble sets out that DTTs do not intend to create opportunities for double non-taxation.What investment policymakers need to know about the preambleBefore BEPS,the OECD and UN MTCs did not contain a preamble.Individual States could,however,include one in

102、 their treaties.Following the OECD/G20 BEPS project proposals,the OECD and UN MTCs were amended to include a preamble that expressly provides that DTTs are intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.The n

103、ew preamble thus clarifies that the object and purpose of tax treaties is not to generate double non-taxation.It also serves as a part of the context within which courts will interpret ambiguous terms of DTTs.The preamble to the OECD and UN MTCs was included in 2017 following recommendations in the

104、BEPS Action 6 Final Report.The intention was to expressly recognize that the purpose of tax treaties is the elimination of double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance.Given the BEPS risks raised by treaty shopping,the preamble

105、expressly mentions that tax treaties should not result in tax avoidance through treaty-shopping arrangements.Previously,this was only done in the commentaries,not the text of the MTCs themselves.Under the 1969 Vienna Convention on the Law of Treaties,a treaty is interpreted in good faith in accordan

106、ce with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.The preamble plays two roles in this respect.First,it forms part of the context of the treaty.Second,it lays out the object and purpose of the treaty as agreed between the cont

107、racting States.The preamble,thus,supports the interpretation of ambiguous treaty terms.In effect it guides the interpreter in finding the ordinary meaning of DTT terms that best reflects the intentions of the parties.It cannot,however,create,undermine,or change treaty obligations included in the sub

108、stantive rules.For instance,although the preamble states that the objective of DTTs is to prevent non-taxation,this statement does not create new anti-abuse rules on its own and can only guide the interpretation of existing rules.Table 1.Post-BEPS approach frequently used in DTTsReform optionsGenera

109、l implicationsClarify in the preamble that the purpose of tax treaties is the elimination of double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance(including through treaty shopping).The preamble is not an anti-abuse provision in itself b

110、ut forms the context that supports the interpretation of ambiguous tax treaty terms.By clearly stating that DTTs do not aim to create opportunities for non-taxation,interpreters are guided in attributing meaning to ambiguous terms in the operative part of the treaty.Source:UNCTAD.Double taxation tre

111、aties and their implications for investment:what investment policymakers need to know92.PERSONAL SCOPEThe personal scope of the DTT determines what individuals and non-individuals are covered by the treatys provisions.Both pre-BEPS and post-BEPS MTCs provide that DTTs shall apply to“persons”who are“

112、residents”of one or both contracting States.Persons can be natural or legal persons,including unincorporated societies or associations.Residents,defined in Article 4 of the MTCs,are persons who are liable to tax in a jurisdiction by reason of their domicile,residence,place of management or other sim

113、ilar criterion.Post-BEPS,additional provisions were included on the treatment of income earned by fiscally transparent entities and the right of contracting States to tax their own residents.This additional guidance was intended to neutralize mismatches between two jurisdictions in the classificatio

114、n of entities.It provides that income earned by a transparent entity in a contracting State is only to be treated as income of a resident to the extent that it is treated as such in the that State.For investors this means that investment structures that have fiscally transparent entities may be deni

115、ed treaty benefits if the persons behind the transparent entity and liable to tax are not residents of a contracting State.Additionally,the clarification that contracting States have the right to tax their own residents is intended to prevent treaty interpretations used to circumvent domestic anti-a

116、buse rules.Except under specific exemptions,domestic anti-abuse rules are,thus,explicitly in line with DTTs and can be adopted by contracting States.A.Persons coveredWhat investment policymakers need to know about the pre-BEPS approach to persons coveredTo determine who should enjoy treaty benefits,

117、income must be attributable to a person.A person can be an individual,a company and any other body of persons such as partnerships,unincorporated societies or associations(Article 3(1)(a)of the OECD and UN MTCs).Differing rules at the domestic level make the attribution of income difficult.For insta

118、nce,some countries treat partnerships as fiscally transparent entities,effectively ignoring the partnership and treating the partners as the taxpayers,liable to tax on their respective income.The existence of disparate treatment is also the case for trusts,for which some countries focus on the legal

119、 entitlement(trustee)while others consider the economic entitlement(beneficiaries).Pre-BEPS,the OECD and UN MTCs did not contain specific guidance in the substantive text of the treaty on the treatment of such mismatches.However,the commentaries dealt with the treatment of partnerships that are trea

120、ted as fiscally transparent.In the absence of specific treaty provisions,taxpayers were able to take advantage of mismatches in the treatment of an entity or an instrument under the laws of two or more jurisdictions to avoid or reduce their taxes(OECD,2015a).10Double taxation treaties and their impl

121、ications for investment:what investment policymakers need to knowTable 2.Pre-BEPS approach frequently used in DTTsApproachGeneral implicationsTo enjoy treaty benefits,a taxpayer must be a“person”who is a“resident”of one or both contracting States.“Person”in-cludes an individual,a company and any oth

122、er body of persons.The DTT definition of a person is broad,and a non-exhaustive list is provided.Whether an individual or a non-individual counts as a person is determined on the basis of the domestic law of each tax jurisdiction.Though investors could use mismatches to reduce their tax lia-bility,i

123、t also means that there may be instances of uncertainty for investors.Clarity on how these mismatches are addressed would therefore be beneficial for investors.Consequently,investment policymakers may consider supporting reforms to provide clarity on hybrid mismatches.Source:UNCTAD.Takeaways for inv

124、estment policymakers:post-BEPS reform of persons coveredFor investment purposes,it is necessary to identify whether the taxpayer satisfies the definition of a“person”.The wide definition adopted in the OECD and UN MTCs means that a broad range of entities qualify as“persons”.As opposed to pre-BEPS D

125、TTs,which do not make express reference to fiscally transparent entities in their texts,DTTs following the BEPS project clarify how to treat the income of fiscally transparent entities.To mitigate the effects of hybrid mismatches,differences in how two jurisdictions treat the same entity or instrume

126、nt,Article 1(2)of the MTCs states that income derived by or through fiscally transparent entities shall be treated as income of a resident of a contracting State only to the extent that the income is in fact treated as such in that contracting State.This ensures that treaty benefits such as reduced

127、withholding rates are not granted where neither of the contracting States treats the income of a fiscally transparent entity as income of one of its residents(OECD,2015a).The consequence of the BEPS proposal is to limit treaty benefits to income that is attributable to a resident in the contracting

128、State.To illustrate,one can imagine a partnership that is treated as a fiscally transparent entity in one State.The partners that are liable to tax on the income earned by the partnership are residents of that State.Interest income derived by the partnership from the other contracting State will ben

129、efit from the reduced withholding tax rates in the DTT.However,if the partners in this scenario are residents of a third State,the interest income would not be taxed at the reduced rate in the DTT.For investors this implies a need to analyse the specific treatment of fiscally transparent entities in

130、 the domestic law in their States of operation.Where the persons liable to tax on behalf of the entity are not residents of one of the contracting States,treaty benefits may be denied.For investment policymakers it is equally necessary to be aware that income derived by transparent entities may not

131、profit from treaty benefits if the entities are wholly owned by non-residents.A second clarification as a result of the BEPS Project relates to domestic anti-abuse provisions.Most of the provisions of DTTs seek to limit the rights of one State to tax residents of the other State.For example,business

132、 profits are taxable only in the State of residence of an enterprise unless it has a permanent establishment(see below)in the other State.The argument had been made that some DTT provisions may also restrict States in their ability to tax their own residents,even where this was not intended.Post-BEP

133、S,the MTCs explicitly confirm the right of States to tax their own residents,except in a limited number of circumstances.As a consequence,provisions of domestic law that seek to prevent DTT abuse are difficult to challenge by claiming that the contradict the treatys provisions.Double taxation treati

134、es and their implications for investment:what investment policymakers need to know11Table 3.Post-BEPS approach frequently used in DTTsReform optionsGeneral implicationAmend Article 1 to provide that income derived by or through a fiscally transparent entity shall be treated as income of a resi-dent

135、of a contracting State only to the extent that the income is treated as such in that contracting State.For purposes of fiscally transparent entities,treaty benefits will be afforded only where the persons liable to tax for the income of the entity are residents in one of the contracting States.The a

136、im is to prevent the allocation of benefits in inappropriate cir-cumstances.Investors therefore need to understand the treat-ment of fiscally transparent entities in their States of operation and determine whether persons liable to tax for income earned by the entity are residents of one of the cont

137、racting States.Clarify that the treaty does not affect the taxation by a contract-ing State of its own residents except with respect to a limited number of provisions of the DTT.This amendment is intended to expand the principle that contracting States may tax their own residents to most of the prov

138、isions of the DTT.It was previously contained only in the commentary to Article 1.This is to avoid instances where pro-visions aimed at the taxation of non-residents are interpreted in a manner that limits the right of a contracting State to tax its own residents.The amendment makes it difficult to

139、challenge domestic anti-abuse rules on the grounds that they contradict treaty provisions.Source:UNCTAD.B.Tax residencyi.Liability to taxWhat investment policymakers need to know about the pre-BEPS approach to liability to taxOnce the“person”requirement is met,the next issue is the residence criteri

140、on.Only a taxpayer that is a resident in one or both contracting States can have access to treaty benefits.Taxpayers are residents of one or both contracting States if they are subject to unlimited tax liability(worldwide taxation)triggered by their domicile,residence,place of management or any othe

141、r criterion of a similar nature(Article 4(1)of the OECD and UN MTCs).For purposes of a DTT,a taxpayer subject to limited tax liability(source taxation)cannot be a resident and gain access to treaty benefits.For example,if an individual resident in a third State has property in one of the contracting

142、 States that they rent out,the contracting State where the property is located would likely exercise source taxing rights over the income derived from the property.This,however,does not make the individual a resident of this State for the purposes of benefiting from its DTT network.DTTs do not defin

143、e what it means for a person to be“liable to tax”.Therefore,a determination of residence requires States to revert to domestic law.The key feature is whether the person is legally“liable to tax”in the State even if in practice they do not pay any tax there.This approach means that fiscally transpare

144、nt entities are not considered to be“liable to tax”and are,hence,outside the scope of the treaty.Failure to meet the“liable to tax”requirement immediately excludes a person from claiming treaty benefits.At the same time,entities that are“liable to tax”though exempted for one reason or another,such a

145、s some non-profit organizations or investors that benefit from tax holidays,would be within the scope of the treaty.Some States,like the United States,have taken the approach that entities that are“liable to tax”are only entitled to treaty benefits if they are actually“subject to tax”.12Double taxat

146、ion treaties and their implications for investment:what investment policymakers need to knowTable 4.Pre-BEPS approach frequently used in DTTsApproachGeneral implicationResidents of a contracting State are persons liable to tax on a worldwide basis in the contracting State by reason of their domicile

147、,residence,place of management or any other criteri-on of a similar nature.A person must be liable to worldwide taxation in the residence State.Liability to tax considers the legal situation as opposed to the actual payment of taxes.Therefore,exempt entities may be able to access treaty benefits as

148、they are still“liable to tax”,while fiscally transparent entities would not be liable to tax.Persons that fail to meet this requirement are not afforded treaty benefits.From an investment standpoint,it is necessary to consider existing and potential company structures and their interplay with DTT pr

149、ovisions.Entities that enjoy tax exemptions tend to have access to treaty benefits as they are theoretically“liable to tax”.From an investment policy perspective,tax-exempt entities as opposed to transparent entities,thus,create differ-ent consequences for foreign investors despite the seemingly sim

150、ilar immediate practical result of non-taxation.Source:UNCTAD.Takeaways for investment policymakers:post-BEPS reform of liability to taxAs the requirement to be“liable to tax”does not consider the actual payment of taxes,tax exempt companies such as foreign investors benefiting from a tax holiday me

151、et this requirement and are able to access treaty benefits.This,however,appears to contradict the purpose of DTTs,specifically,the aim not to lead to non-taxation or reduced taxation through tax evasion or avoidance.This is because investors could make use of exempt entities,as opposed to transparen

152、t entities,to access treaty benefits while paying little to no tax in their residence State.In this regard,there have been discussions about introducing a stand-alone subject-to-tax rule(STTR)at the OECD,under the two-pillar solution to address the tax challenges arising from the digitalization of t

153、he economy,and at the UNTC.The OECD has released detailed guidance on the STTR in October 2023(OECD,2023b).The UNTC has equally approved a subcommittee draft text(Committee of Experts on International Cooperation in Tax Matters,2023).Apart from design differences,with the UN rule being wider in scop

154、e,in general both types of STTR allow source States to tax income which is subject to a low level of taxation in the residence State.The impact of such a provision would be that where a source jurisdiction has ceded taxing rights and the resident jurisdiction does not exercise the right at a prescri

155、bed minimum level,taxing rights revert to the source State.As stated above,some treaties signed by countries like the United States already deny treaty benefits to an exempt entity if that entity is not actually subject to tax.For investment policymakers,these amendments have a direct impact on tax

156、incentives for foreign investors.That is,if a country imposes low or no taxes on income,or where companies are given significant exemptions such as tax breaks for specific income,this may trigger additional tax in the source State.Policymakers must therefore follow up with the newly proposed rules a

157、nd ensure that the investment regimes in their respective countries are aligned with these proposed changes.Where domestic rules lead to no or low taxation,taxing rights under a DTT would revert to the source jurisdiction.This means tax revenue is lost without providing a tax benefit to the investor

158、 as initially intended.Double taxation treaties and their implications for investment:what investment policymakers need to know13Table 5.Proposed amendments by the UNTCReform optionsGeneral implicationIntroduce an STTR.The inclusion of an STTR provision in bilateral DTTs or a multilateral instrument

159、 could have a significant impact on investment policymaking.Although tax exempt entities would theoretically be“liable to tax”and therefore satisfy the residen-cy requirement,if left unexercised,taxing rights revert to the source State.Investment policymakers must therefore consider the implica-tion

160、s of this new provision on the tax incentive regimes they operate.This may lead to a shift away from low or no taxation as a means to attract investment.Source:UNCTAD.ii.Dual residencyWhat investment policymakers need to know about the pre-BEPS approach to dual residencyA finding of residency is a m

161、atter of domestic law,which means that a person may be resident of none,one,or even both contracting States of a DTT.The latter occurs where a person has unlimited tax liability in both States by reason of the criteria set out in Article 4(1)of the MTCs.For example,individuals can have their domicil

162、e or a habitual abode that meets residency requirements in multiple States.Similarly,companies may also meet the residence requirements in multiple States,for example,when they are incorporated in one State but have their place of management in another State.Dual-residence situations are dealt with

163、under explicit tie-breaking rules whose aim is to attribute tax residence to only one of the contracting States for the purposes of applying the allocation rules or to neither State if no agreement can be reached.For individuals,Article 4(2)of the OECD and the UN MTC set out a hierarchical approach

164、to the determination of residency.The article provides a list of criteria to be used,including permanent home,centre of vital interest,habitual abode and nationality.This approach is adopted in both pre-BEPS and post-BEPS MTCs.For legal persons,pre-BEPS treaties settled dual residency based on the p

165、lace of effective management(POEM)test.This was the preferred approach for two reasons:it was not a purely formal requirement that could easily be manipulated;and while companies could have many places of management,they could have only one POEM(Brumann,2019).The POEM is the place where senior offic

166、ials make key management and commercial decisions connected to the operations of the entity in question,going beyond mere supervision.Given its fact-based nature,there may be divergences in the domestic interpretation and practical application of the POEM test.As a consequence,two States may be the

167、place of effective management,which defeats the purpose of a tie-breaker rule.Moreover,changing business models make it easy to shift meeting locations.This means that it is increasingly difficult to pinpoint the actual location of effective management.14Double taxation treaties and their implicatio

168、ns for investment:what investment policymakers need to knowTable 6.Pre-BEPS approach frequently used in DTTsApproachGeneral implicationWhere an individual is a resident of both States,residency shall be determined based on the following criteria,ordered in se-quence of application:the presence of a

169、permanent home,the centre of vital interests,the presence of a habitual abode and nationality.In cases where these do not result in the determina-tion of a single tax jurisdiction,the competent authorities shall determine residency through mutual agreement.Individuals should consider the criteria se

170、t out in Article 4(2)to determine the place of residency for purposes of the treaty allocation rules.Where a non-individual is a resident of both States the POEM test is used to determine residency.The changing business environment and differing approaches of States make it at times difficult for in

171、vestors and compe-tent authorities to identify the POEM for the application of the allocation rules.Generally,the POEM is the place where key management and commercial decisions are made.Despite being an autonomous treaty term,domestic approaches to the test differ,leading to uncertainty for investo

172、rs.Uncertainty can act as a barrier to investment.Therefore,where States opt to include the POEM test as the tie-breaker rule,it may be worth adopting a shared interpretation.Source:UNCTAD.Takeaways for investment policymakers:post-BEPS reform of dual residency of non-individualsThe issues with the

173、POEM test largely resulted from the lack of additional criteria when the test failed to provide satisfactory results.Article 4(3)of the 2017 OECD and UN MTCs were both fundamentally changed following the BEPS Action 6 Final Report by abolishing the test altogether.Though the POEM test is still inclu

174、ded as an alternative approach in the OECD MTC Commentary,it should be used only to the extent that countries agree on a shared interpretation of the meaning of a POEM(paragraph 24.5 of the Commentary to Article 4 of the 2017 OECD MC).In the post-BEPS MTCs,dual residency of non-individuals is dealt

175、with on a case-by-case basis through the MAP.During the MAP,competent authorities are only required to endeavour to reach a resolution,which implies the absence of a binding obligation to do so.Where there is no agreement on a single residence,the non-individual is denied access to treaty benefits.U

176、nlike the previous test in which a single residence State is identified,the post-BEPS approach,hence,envisions instances when there is no single residence for the purposes of the applicable DTT.As a consequence,investors run a risk of satisfying the person and residence requirements,yet do not gain

177、access to treaty benefits.Table 7.Post-BEPS approach frequently used in DTTsReform optionsGeneral implicationAbolish the POEM test and introduce a new rule which deter-mines residency on a case-by-case basis through the MAP,and where there is no agreement,the non-individual does not gain access to t

178、reaty benefits.Significantly,there is no requirement for competent authorities to come to an agreement and therefore there may be instances in which a non-individual with dual residency is denied access to treaty benefits because of a lack of agreement.Investors are therefore likely to be more cauti

179、ous with the structures they adopt to avoid triggering dual residency.Source:UNCTAD.Double taxation treaties and their implications for investment:what investment policymakers need to know153.SUBSTANTIVE SCOPE:TAXES COVEREDThe substantive scope determines what types of taxes are included and exclude

180、d from coverage under the DTT.What investment policymakers need to know about taxes coveredArticle 2 of the OECD and the UN MTCs determines which taxes are covered by DTTs.These are taxes on income,capital and any identically or substantially similar taxes imposed after the signing of the treaty.Thi

181、s includes taxes on total income,total capital or elements thereof,including capital gains tax and employment tax.The provisions broad scope also includes taxes imposed by regional and municipal bodies.Social security contributions and other charges that are imposed in return for a public service or

182、 for a revenue-raising objective do not fall within the scope of DTTs.Indirect taxes are also outside the scope of DTTs.A number of treaties provide for a list of covered taxes.The vast majority of DTT provisions only apply with respect to covered taxes.Article 2 envisions application of the DTT to

183、all income taxes irrespective of how they are levied.There is,however,generally a distinction between taxes on income and taxes on revenue.This distinction has been challenged,and affirmed,in a number of domestic court cases.From an investment standpoint the interpretation of Article 2 is particular

184、ly important as it is related to the ability of States to bring about fundamental changes to international taxation through new revenue taxes.An example of such relatively new taxes are digital services taxes(DSTs).They are generally imposed on gross revenue and considered to be outside the scope of

185、 DTTs as they are not computed on net income.While this is not universally accepted,the practical reality is that often for such DSTs no relief from double taxation is available,which may affect investment.In addition,taxpayers may also not receive double tax relief under the domestic tax law of the

186、ir residence States in respect of DSTs charged abroad.Apart from not being covered by DTTs,other reasons,beyond the scope of this guide,may speak for or against DSTs.2 Given their potential impact on the investment climate,it is important for investment policymakers to understand their nature and ta

187、ke part in the domestic dialogue on whether or not to introduce and how to design DSTs.In addition,indirect taxes such as value added tax(VAT)that have a significant impact on cross-border trade are outside the scope of DTTs.Increased trade has led to greater interaction between VAT systems,which in

188、creases the risk of both double taxation and non-taxation.These risks are exacerbated by the lack of international VAT coordination.In response to this gap,the OECD released the international VAT/GST guidelines,which“present a set of internationally agreed standards and recommended approaches to add

189、ress the issues that arise from the uncoordinated application of national VAT systems in the context of international trade”(OECD,2017b).VAT coordination is currently spearheaded by regional economic integration organizations such as the European Union,which has harmonized intra-EU VAT rules since t

190、he 1970s.As global coordination may prove elusive for the time being,regional economic organizations are uniquely positioned to fill the coordination gap.2These include,for example,their imposition on gross revenue,thus,including in the case of loss-making entities;divergent approaches to implementa

191、tion across jurisdictions,creating compliance costs;their revenue potential;and their interaction with the OECD-led two-pillar solution to address the tax challenges arising from the digitalisation of the economy.16Double taxation treaties and their implications for investment:what investment policy

192、makers need to knowTable 8.Approach frequently used in DTTsApproachGeneral implicationDTTs cover taxes on income and capital and any identical or substantially similar taxes imposed after the signing of the treaty.Only taxes on income and capital are covered by DTTs.In some cases,contracting States

193、include a list of covered taxes.The approach has been that only taxes on net income are covered while taxes on gross revenue are outside the scope of DTTs.No tax treaty relief is available to taxpayers for double taxation with respect to out-of-scope taxes.Double taxation arising from out-of-scope t

194、axes may place an unintended burden on investors.Digital services taxes,for example,are a relatively new kind of tax generally imposed on gross revenue and,thus,outside the scope of DTTs.The cross-cutting impact of these taxes presents room for cooper-ation between tax and investment policymakers to

195、 develop a suitable approach to specific tax concerns,including taxation of the digital economy.Indirect taxes such as value added tax have a significant impact on cross-border investment.As they are not covered in DTTs,regional blocs may be well positioned to fill the vacuum and work to create a sy

196、stem of VAT coordination.Source:UNCTAD.Double taxation treaties and their implications for investment:what investment policymakers need to know174.PERMANENT ESTABLISHMENTSThe definition of a permanent establishment is of crucial importance to the allocation of taxing rights under DTTs.What investmen

197、t policymakers need to know about the pre-BEPS approach to permanent establishmentsThe definition of a permanent establishment(PE)is one of the core concepts in international taxation.Article 5 of the OECD and UN MTCs provides the conditions for the establishment of a PE in a source State.Generally,

198、a PE requires a physical presence,often for a certain duration.The existence of a PE in the source State means that income generated in that State becomes taxable there.Consequently,a common technique to avoid taxation in the source State is to avoid the creation of a PE.Post-BEPS approaches aim to

199、tackle this problem.More generally,the requirement of a physical presence to attribute taxing rights to the source State is increasingly unsuited to the modern business environment.Some DTT provisions refer to the concept of a permanent establishment(PE)for the allocation of taxing rights.For exampl

200、e,under Article 7 of the OECD and UN MTCs,business profits of an enterprise are taxable only in the State of residence of the enterprise.This rule applies unless the enterprise has a PE in the source State.In that case,the source State may tax part of the enterprises profits.Similarly,for Articles 1

201、0,11 and 12,relating to dividends,interest payments and royalties,the existence of a PE in the source State may,depending on the circumstances,be relevant to the allocation of taxing rights.More generally,the existence(or not)of a PE greatly influences which State(source or residence)taxes certain i

202、ncome.A PE is defined in Article 5 of the OECD and UN MTCs.The basic rule is that it is a“fixed place of business through which the business of an enterprise is wholly or partly carried on”(Article 5(1)MTCs).This includes,for example,a place of management,a branch,an office,a workshop,and a mine(Art

203、icle 5(2)MTCs).Determining whether there is a fixed place of business involves consideration of the geographical and temporal aspects of the place.The geographical aspect means that the place is fixed in a geographical sense,so that a moving vehicle would not be able to form a PE.The temporal aspect

204、 refers to permanence in regard to the period for which the fixed place of business has existed,ordinarily six months.A building site or construction or installation project establishes a PE where it meets the agreed time threshold;for the OECD MTC it is 12 months,while the UN MTC provides for 6 mon

205、ths.The UN MTC also includes assembly projects and supervisory activities.The time period for a construction PE varies between actual treaties,with some providing for 90 days and others providing for as long as two years(Arnold and Loomer 2023).A dependent agent can also establish a PE.This is a per

206、son who has the authority to conclude contracts on behalf of the enterprise and habitually exercises this authority.Persons acting as independent agents cannot set up a PE for an enterprise.DTTs exclude preparatory and auxiliary activities conducted in the source State through a fixed place of busin

207、ess or a dependent agent from establishing a PE.Exclusive to the UN MTC but relatively widespread in actual treaty practice(Wijnen and de Goede,2014),a PE may also be established through the furnishing of services for a specified time in any given 12-month period.Thus,where a foreign enterprise prov

208、ides,for example,consultancy services without a fixed place of business in the source State,after a sufficiently long period,income from such services 18Double taxation treaties and their implications for investment:what investment policymakers need to knowbecomes taxable in the source State.There i

209、s disagreement between States whether such services must be rendered through a physical presence or become taxable even when provided as remote services.As can be seen,traditionally,the concept of PE heavily relies on the assumption of a physical presence.The digital economy,including remote busines

210、s models and digital services,as well as the rise of the economic importance of intangible property rights increasingly challenge the assumed importance of a particular physical location.ApproachGeneral implicationA PE is established by one of three means:a fixed place of business through which an e

211、nterprise operates;a building site or construction or installation project that meets the agreed time threshold;a dependent agent that has the authority and habitually ex-ercises it to conclude contracts on behalf of the enterprise.Preparatory and auxiliary activities conducted through a fixed place

212、 of business or a dependent agent do not create a PE.From an investment standpoint,establishment of a PE is a key element,as it determines whether the source jurisdiction may tax the business profits of an investor.Whether or not the creation of a PE is desirable from the point of view of investors

213、depends on their specific business and tax strategy.For pre-BEPS treaties,PEs can be established through a fixed place of business,a dependent agent and construction projects that meet the time threshold.UN MTC services PE.A PE may be established in the source State through the furnishing of service

214、s.Source:UNCTAD.Takeaways for investment policymakers:post-BEPS reform optionsIn the past,MNEs at times artificially avoided the establishment of a PE to avoid taxation in the source State.To tackle this,BEPS Action 7 directly addressed the definition of PEs.Its recommendations aim to,for example,mi

215、tigate instances of circumventing the establishment of a PE by splitting contracts or fragmenting services.Regarding the splitting of construction contracts,the OECD noted that specific time thresholds were susceptible to abuse.Instead of carrying out a single construction project over the course of

216、,for example,12 months,MNEs would split the project between different sub-entities that carry out the work.This way,it is possible to avoid PE status as no single entity works on the site for the period required to meet the temporal threshold.The commentaries to the OECD and UN MTCs now recommend th

217、at where connected activities are carried out at the same site by closely related parties during different periods of time,these activities are aggregated and treated as one.Relatedly,there were instances of artificially avoiding the creation of a PE by fragmenting business activities into several s

218、mall operations.MNEs could then argue that these activities are preparatory and auxiliary to the main business and therefore,when viewed in isolation,not capable of establishing a PE in themselves.However,if viewed holistically,the same activities are complementary operations and part of a larger,co

219、hesive business which would establish a PE in the source State.The post-BEPS approach aims to prevent this type of abuse and may affect how investors structure their global value chains.Another issue identified under the OECD/G20 BEPS project was the use of so-called commissionaire agreements to avo

220、id dependent agent PE status.In such arrangements,an individual would sell products in their own name,representing a foreign enterprise that owns the products.This allows the enterprise to market its products without creating a PE.The individual making the sales is not taxed on the profits from the

221、sales,as they do not own the products,but rather on the remuneration received for their services.Amendments were included following the BEPS project to tackle this avoidance technique.Articles 5(5)Double taxation treaties and their implications for investment:what investment policymakers need to kno

222、w19and(6)now provide that a PE shall be established where a person in the source State habitually plays the principal role leading up to the conclusion of contracts and these contracts are in the name of an enterprise,or for the transfer of ownership of property of that enterprise or for the provisi

223、on of services by that enterprise.Moreover,where an otherwise independent agent acts exclusively or almost exclusively on behalf of one MNE,a PE is also established.As a consequence,the source State gains taxing rights over the income attributable to the PE,meaning the income arising from the sales.

224、Table 10.Post-BEPS approach frequently used in DTTsReform optionsGeneral implicationRevise the approach to split up construction contracts and aggregate periods of time spent by closely related entities.This is intended to mitigate the risk of splitting contracts be-tween closely related parties.For

225、 investors and policymakers,it is necessary to consider the investment structures adopted by entities.MNEs that split contracts based on specialization of specific entities are likely to be most affected.If the aggregate activities undertaken by the different entities meet the time threshold,a PE is

226、 established and income attributable to it is taxable in the source State.Include DTT provisions to tackle the fragmentation of services.Preparatory or auxiliary services offered in a source State will be considered within the context of all services offered by the entity or entities of the same MNE

227、 group to determine whether a PE is established.Investors can therefore form a PE through previously excluded preparatory or auxiliary services if they form part of a cohesive business operation.Extend coverage to dependent agent PEs no requirement to sign contracts,enough to play principal role lea

228、ding to the conclusion of contracts.Independent agents that act exclusively or almost exclusively for one enterprise can establish PEs in the source State.Investors operating through commissionaire arrangements or other similar arrangements could trigger PEs in the respective States.Therefore,it is

229、necessary to review structures and iden-tify instances when this may occur.A similar approach should be taken for investors operating through independent agents.Investment policymakers should be aware of circumstances in which PEs are created,to provide adequate guidance on the best operational stru

230、ctures to adopt.Source:UNCTAD.20Double taxation treaties and their implications for investment:what investment policymakers need to know5.ALLOCATION RULESThe allocation rules of DTTs distribute taxing rights for certain types of income or capital between the two contracting States with the aim of el

231、iminating double taxation.What investment policymakers need to know about the pre-BEPS approach to allocation rulesDTTs provide for different allocation rules to determine which contracting State will have taxing rights for a certain item of income or capital.These rules are generally divided into t

232、wo groups:those that allow taxation in both contracting States,and those that grant exclusive taxing rights to only one State.In the case where a taxing right exists in both States,source State taxation is usually limited to a certain percentage and double taxation is avoided through the application

233、 of the method article by the residence State(exemption or credit method).In the case where one State has the exclusive taxing right on certain income or capital,the other State is obliged to refrain from taxing under the DTT.In this case,double taxation is avoided without the need to use the method

234、 article.Different types of income such as active business income and passive income,for example,from interest payments,are treated differently with respect to the allocation of taxing rights between the source State and the residence State.One of the ways by which DTTs eliminate double taxation is

235、through the allocation of taxing rights between the contracting States.When concluding a DTT,the two contracting States commit themselves to restrict their domestic taxing rights.This limitation in the domestic tax liability of the contracting States is done through the so-called allocation rules an

236、d the method article.While the allocation rules limit the taxing rights of the source State,the limitation in the residence States right to tax is provided for in the method article(the exemption and credit method,see below).In the OECD and the UN Models,the allocation rules are found in Articles 6

237、to 8 and Articles 10 to 21 for taxes on income and in Article 22 for taxes on capital.Each item of income or element of capital is attributable to only one allocation rule.Overlaps are mediated through priority rules in the DTT.The allocation rules of a DTT distribute the taxing rights on the income

238、 and capital covered by the treaty between the“residence State”and the“source State”.In some instances,one State is exclusively entitled to tax whereas in others,taxing rights exist concurrently.When the allocation rule allows a certain item of income or capital to be taxed in both contracting State

239、s,the residence State will have to apply the method article to ensure that double taxation is eliminated.A.Treatment of active business incomeArticle 7 of the OECD and UN MTCs deals with active business income,which is described as all income derived from the active conduct of a business of an enter

240、prise,for example,income earned through the sale of goods or the provision of services.It is typically referred to as income earned from a business source other than investment income.As a general rule,business profits,wherever arising,are exclusively taxable in the State of residence of the enterpr

241、ise.An exception exists where an enterprise has a PE in the State where the income arises.The PE State may tax those profits that are attributable to the PE.If both,the source and residence State Double taxation treaties and their implications for investment:what investment policymakers need to know

242、21tax the income attributable to a PE,the residence State is obliged under the DTT to eliminate any double taxation that may arise.In this context,the PE concept,discussed above,is used in DTTs as a threshold rule for determining whether a State has taxing rights over the business profits of a non-r

243、esident taxpayer.It acts as a source rule by setting the level of nexus(or presence)that is required.Once the PE threshold is met,it will be necessary to determine how much of these profits the source State may actually tax.For DTT purposes,the general rule is that the PE State is only entitled to t

244、ax the profits that are attributable to such a PE.The attribution of profits to a PE is generally based on the separate entity accounting and arms length principles.Accordingly,the profits that are attributable to a PE are those that it could be expected to make if it were a distinct and separate en

245、terprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with other parts of the enterprise.As each legal entity or PE is treated separately,the conditions of intragroup transactions may be readjusted to reflect those that would prevail

246、 if these were carried out between independent enterprises(the arms length principle).While this approach is endorsed by both the OECD and the UN Models,some deviations between them exist.For example,the UN Model provides for the limited force of attraction principle(Article 7(1)(b)of the UN MTC),wh

247、ich has been implemented in a large number of DTTs.Under this principle,the PE State is allowed to tax not only the profits that are attributable to the PE,but also business profits from similar transactions generated by the enterprise in the PE State,even if conducted outside the PE.The idea behind

248、 this provision is to extend the taxing rights of the source State.Although the PE definition adopted in DTTs is widely used for the purposes of allocating taxing rights for business profits,it may not be sufficient or no longer appropriate for the increasingly digitalized economy.This is because,as

249、 mentioned earlier,the PE concept still largely relies on physical presence in the source State as a trigger for taxation.Nowadays persons can carry on business or provide services abroad without the need for a physical presence.This is of particular concern for so-called market jurisdictions,the pl

250、ace where the value is created.If the physical presence threshold established under DTTs is not met,that State may not be entitled to tax the income,for example,from digital activities and services.As discussed below,post-BEPS reform to address this problem is currently underway.B.Treatment of passi

251、ve incomePassive income,not derived from any active business,generally encompasses income from investments,such as dividends,interest and royalties.DTTs often allow for such income to be taxed by the source State by means of a withholding tax(WHT)on gross income.No PE is required to exist in the sou

252、rce State for such taxation.DTTs impose certain limitations on the source States taxing rights,by providing that it cannot exceed a certain tax rate on gross income.The residence State,in turn,is not precluded from also taxing the income but is required to alleviate any double taxation that arises.A

253、s the taxpayer has no physical presence in the source State,the tax is collected by means of a WHT,a mechanism whereby the counterparty of the taxpayer,meaning the person who makes the payment,acts as a withholding agent and remits the WHT to its local tax authorities.This makes a WHT a simple,relia

254、ble and efficient method of enforcing the tax imposed on non-resident taxpayers.The recipient of income from dividends,interest or royalties will benefit from the DTT limitations on WHT rates only if this person is the“beneficial owner”of the income.The requirement was introduced to address situatio

255、ns where recipients of the payment are legally,contractually or factually obliged to immediately pass it on to another person.22Double taxation treaties and their implications for investment:what investment policymakers need to knowThe application of a gross basis WHT may have some distorting effect

256、s in certain situations as it may represent an entry barrier or lead to taxation of loss-making entities.Despite these issues,the WHT mechanism is still a convenient and effective method for countries,especially developing countries,to collect and administer taxes levied on non-residents.Different W

257、HT rates are found in DTTs.The OECD MTC explicitly provides for source taxation rates in relation to different types of income.For dividends it limits the taxation at source to 15 per cent.If the beneficial owner is a company that directly holds at least 25 per cent of the capital of the company pay

258、ing the dividends the limit is reduced to 5 per cent.For interest income,the WHT rate is 10 per cent under the OECD Model.With regard to royalties,the OECD MTC grants exclusive taxing rights to the residence State.The UN Model does not stipulate any rate for dividends,interest payments or royalties,

259、leaving it open to both States to negotiate bilaterally.Many treaties deviate from the OECD MTC approach to royalties and follow the UN Model,agreeing bilaterally to a certain rate.The approach of the UN MTC is a consequence of its generally greater deference to tax rights for source States.After th

260、e WHT is applied by the source State,the State of residence is also entitled to tax but required to alleviate any double taxation that arises.C.Treatment of individuals incomeIn addition to earning passive income,individuals may also receive other types of cross-border income that are specifically c

261、overed by the allocation rules of DTTs.The OECD and UN Models apply different rules to the allocation of taxing rights on individuals income depending on whether such income is derived from dependent or independent personal services in general terms,corresponding to income from employment and self-e

262、mployment.Income from dependent personal services,or employment,is addressed in Article 15 of the OECD and the UN MTCs and treated similarly by both.The taxing rights on salaries,wages and other similar remuneration are exclusively allocated to the residence State of the recipient(the employee),unle

263、ss this person exercises the employment in the other State.The rule,thus,relies on the State of activity,i.e.the place of work principle,with limited exceptions in Articles 15(2)and(3)of the OECD and UN MTCs.Income from independent personal services is dealt with separately in the UN MTC under Artic

264、le 14 and until 2000 also the OECD model.“Professional services”for the purposes of the UN MTC include especially independent scientific,literary,artistic,educational or teaching activities as well as the independent activities of physicians,lawyers,engineers,architects,dentists and accountants.The

265、allocation rule determines that income from professional services or other activities of an independent character shall be taxable only in the residence State of its recipient unless the individual has a fixed base available in the other State or if the individual stays in the other State for 183 da

266、ys in any 12-month period.The income that the other State may tax is only so much as is attributable to that fixed base or derived from the individuals activities performed in the other State.The residence State is not prevented from taxing this income.For DTTs following the current OECD approach,in

267、come derived from professional services or other activities of an independent character is now dealt with under the provision on business profits.The current framework for source taxation of personal services,both dependent and independent,hinges heavily on the physical presence of individuals,which

268、 faces challenges in todays digital world.While the issue of physical presence has been largely discussed in the field of corporate income taxes,especially under the BEPS Project,the physical presence of individuals as a key component in the allocation of taxing rights under DTTs may require increas

269、ed attention in the future.Applying existing rules to this“new”reality could give rise to significant tax competition in attracting digital nomads and potentially eroding the tax base of countries.It is important for the investment community to be aware of the likely debate on the Double taxation tr

270、eaties and their implications for investment:what investment policymakers need to know23nexus for taxing labour and inform the discussion with its perspectives on the matter,as changes in the tax framework could have profound consequences for certain types of investment.Table 11.Pre-BEPS approach fr

271、equently used in DTTsApproachGeneral implicationActive business income:the allocation of taxing rights on the business profits of an enterprise favours taxation in the residence State of the enterprise.The only exception arises if the enterprise has a PE in the source State through which the busines

272、s is conducted.The allocation of taxing rights varies depending on the existence of a PE in the other(source)State.In principle,the enterprises residence State has exclusive taxing rights on its profits.If,however,the enterprise carries on business in the other State through a PE situated therein,th

273、e PE State may also tax the profits attributable to that PE.Double taxation of the profits attributable to the PE will be avoided through the application of the method article.Passive income:the allocation of taxing rights on passive income usually allows it to be taxed in both States(with some exce

274、ptions).Passive income may be taxable in the source State even if no PE or fixed base is located therein.The source State will tax on a gross basis,by means of a WHT.However,its right to tax is normally limited to a certain tax rate.Whether in these cases the residence State also has the right to ta

275、x depends on the method through which double taxation is alleviated.Individuals income:DTTs assign taxing rights on personal in-come to the State of residence of the worker or self-employed individual.However,the rules also follow the place-of-work principle,whereby the State where the activity is p

276、erformed may also be entitled to tax,subject to exceptions.The allocation rule for income received from individuals pro-fessional activities differs based on whether it is income from dependent(employment)or independent(self-employment)services.Income from dependent personal services is allocated ex

277、clu-sively to the residence State of the recipient,unless the activity is exercised in the other State.The taxation of income from independent personal services is also exclusively allocated to the residence State of the recipient,unless this person performs the activities in the other State through

278、 a fixed base regularly available to this person or stays in the other State for more than 183 days.Source:UNCTAD.Takeaway for investment policymakers:reform options for the allocation rulesDigitalization is greatly transforming the organization and functioning of the global economy.The physical pre

279、sence of a business or an individual to carry on activities or provide services in the market jurisdiction is becoming less relevant.DTTs,however,have long relied on physical presence as a nexus criterion for source State taxation.Consequently,the rules on business profits,for example,make it possib

280、le for an online business to extensively trade with or do business in a State without triggering compliance obligations for corporate income tax purposes.Similarly,an individual must be physically present in the source State when exercising its dependent or independent work for the purposes of sourc

281、e taxation.These rules were developed before the spread of mobile or remote working and can lead to a misalignment between the State to which taxing rights are attributed and the State where the income is actually generated.Put differently,current DTT rules pose challenges to the allocation of taxin

282、g rights to market jurisdictions.In response,structural reforms are being undertaken at the OECD and the UN to bring taxing rights in line with the new digital reality by creating new nexus rules that are not exclusively based on physical presence.24Double taxation treaties and their implications fo

283、r investment:what investment policymakers need to knowProposals are being put forward to adopt alternatives to the PE threshold in DTTs as a trigger for source taxation,including under Pillar One of BEPS 2.0.3 Pillar One might lead to a conceptual expansion of the nexus traditionally enshrined in th

284、e PE concept.The idea is to allow the allocation of taxing rights to the State where the economic activities take place and the value is created.This would imply allocating taxing rights to user and market jurisdictions or locations where business activities are conducted without a physical presence

285、.The UN MTC has equally introduced two novel provisions on technical services and automated digital services in 2017 and 2021 respectively.Some countries have traditionally considered that services(in particular,technical services)should be taxed in the State of the recipient of the service even wit

286、hout the physical presence(PE or fixed base)of the provider in that State.However,previously no specific allocation rules existed,requiring countries to find a workaround by adopting the policy of including fees for(technical)services in the definition of royalties.Now,a specific template for countr

287、ies wanting to tax fees for technical services at source is included in Article 12A of the UN MTC.For the purposes of the Model,fees for technical services include any payment for managerial,technical or consultancy services,unless the payment is made(i)to an employee of the person making the paymen

288、t,(ii)for teaching in or by an educational institution or(iii)by an individual for services for personal use by an individual.Its allocation rule is similar to that applicable to royalties,discussed above.Fees for technical services may be taxed in the source State,on a gross basis WHT;however,sourc

289、e taxation is limited to a certain rate,which is left open in the UN MTC for States to bilaterally negotiate.Also,the residence State is still entitled to tax these fees but will have to alleviate double taxation that may arise.In its 2021 version,the UN Model included another new provision to speci

290、fically deal with income from automated digital services(ADS)(Article 12B of the UN MTC).The significant growth in the number of businesses providing digitalized and automated services raised doubts as to whether existing DTT provisions would be suitable.Since the PE threshold is highly dependent on

291、 a physical presence in the source State,concerns have emerged over the potential lack of taxation of ADS in the country where“value creation”occurs(referred to as source or market jurisdiction),which have raised a strong sense of unfairness.To address these concerns,the UN MTC added a new allocatio

292、n rule on ADS.For the purposes of the provision,ADS are services provided on the Internet or other electronic network requiring minimal human involvement from the service provider.Under Article 12B of the UN Model,the term ADS includes especially(a)online advertising services,(b)supply of user data,

293、(c)online search engines,(d)online intermediation platform services,(e)social media platforms,(f)digital content services,(g)online gaming,(h)cloud computing services and(i)standardized online teaching services.Similarly to other provisions,the allocation rule for income from ADS allows the source S

294、tate(i.e.the State where the payer of the fees for the service is located)to impose a gross basis WHT.Source taxation is limited to a bilaterally negotiated rate.As with fees for technical services,the residence State of the recipient is also entitled to tax and will have to grant relief for any pot

295、ential double taxation.The nexus established under the ADS provision is the location of the payer of the ADS fee.It does not require the recipient of the payment to have a source State PE,fixed base or spend a minimum period of time in the source State.While this solution has been assessed as a simp

296、ler and better suited proposal for the needs of developing countries than that of Pillar One,several concerns about its adoption have been put forward.4 Nevertheless,3For an overview,see,the Website of the OECD,Action 1-Tax Challenges Arising from Digitalisation,https:/www.oecd.org/tax/beps/beps-act

297、ions/action1/.4As set out in paras 8-16,of the Commentary on Article 12B of the UN MTC.See also,for example,Baez Moreno(2021).Because Not Always B Comes after A:Critical Reflections on the New Article 12B of the UN Model on Automated Digital Services,13 World Tax J.4;Andrade Rodrguez(2021).Developin

298、g Countries and the Proposed Article 12B of the UN Model:Some Known Unknowns,4 Intl.Tax Stud.6;and Chand and Villaseca,The UN proposal on automated digital services:Is it in the interest of developing countries?sec.4(a),Kluwer International Tax Blog(5 March 2021).Double taxation treaties and their i

299、mplications for investment:what investment policymakers need to know25as it is a newly proposed provision,its implementation in DTTs may still take some time and allow for certain amendments as deemed necessary.It is important for investment policymakers to be aware of these international tax reform

300、s aimed at reallocating taxing rights in a digitalized economy,as they may have an impact on the location of investment and the strategies used to attract FDI flows.These reforms may cause a change in the way firms and individuals trade goods and services or do business in a country,which can have a

301、n effect on how investments are strategized and placed worldwide.Table 12.Post-BEPS approach frequently used in DTTsReform optionsGeneral implicationActive business income:Implement changes in the nexus for source taxation,by(i)broadening the PE concept in DTTs and(ii)providing alternative threshold

302、s to the PE requirement,taking into consideration where the economic activities take place and value is created.By reforming and broadening the PE concept and the nexus for source taxation in DTTs,States will expand not only the tax rev-enues collected at the source,but also the compliance burden fo

303、r foreign investors.This may have implications for investment decisions as investors would ponder how additional compli-ance costs and tax payments affect their business.Moreover,contracting States need to ensure a consistent interpretation of the relevant provisions,so that their application does n

304、ot result in double taxation.Passive income:Improve anti-abuse rules to avoid granting the reduced WHT rates of DTTs in abusive situations(discussed below).The reliance on gross basis WHT in relation to passive income stems from the fact that this mechanism is considered a simple,reliable and effici

305、ent method to enforce taxes imposed on foreign income,being especially useful for the potentially limited administrative resources of developing countries.Investors have a strong incentive to engage in treaty-shopping structures in pursuit of the most beneficial rate.Policymakers may want to conside

306、r adopting DTT anti-abuse provisions on the determination of beneficial ownership and/or a general anti-avoidance rule,discussed below.Individuals income:Clarify and amend the application of the allocation rules on income from dependent and independent personal services to align them with the new re

307、mote working reality.The BEPS Project has raised the issue of the heavy reliance in DTTs on physical presence with respect to corporate income tax.Similar issues exist in respect of the taxation of remote workers providing dependent and independent personal services.Investment policymakers need to b

308、e aware of potential tax reforms to address international mobile work situations and reduce or remove the reliance on physical presence for the allocation of taxing rights between States.Reforms may have an impact on the strategies adopted by firms and individuals with respect to the location of inv

309、estments.Source:UNCTAD.26Double taxation treaties and their implications for investment:what investment policymakers need to know6.METHODS FOR ELIMINATION OF DOUBLE TAXATIONDTTs provide for two alternative methods for the residence State to eliminate double taxation,the exemption method and the cred

310、it method.What investment policymakers need to know about the pre-BEPS approach to methods for the elimination of double taxationThe method article is the provision of DTTs that eliminates double taxation that can arise where the allocation rules allow concurrent taxation by the source and residence

311、 States.When concluding a DTT,the contracting States can choose from two methods:(i)the exemption method,under which the residence State will not tax certain income derived in the source State,by excluding it from the residents domestic tax base;and(ii)the credit method,under which the residence Sta

312、te may tax the foreign-sourced income but will grant a credit for the taxes already paid in the source State.The different methods have different impacts on tax incentives adopted in source States to attract foreign investment.The ongoing BEPS process is likely to profoundly affect such incentives t

313、hrough the adoption of the global minimum tax and subject-to-tax clauses in DTTs.If,as a result of the application of the relevant allocation rule of a DTT,taxing rights exist for both contracting States,double taxation has to be eliminated by applying the method article.The method article addresses

314、 the residence State,which is obliged to grant relief for the double taxation of income or capital covered by the DTT.In cases where the allocation rule assigns exclusive taxing rights to only one State,the application of the method article is not necessary.During negotiations of a DTT,contracting S

315、tates can choose between two alternative methods for the relief of double taxation:the exemption method and the credit method.Both the OECD and the UN Models feature two provisions:Article 23A dealing with the exemption method,and Article 23B featuring the credit method.Contracting States are free t

316、o adopt different methods in a single DTT or to use a combination of the two.For DTT purposes,the method article deals only with so-called juridical double taxation,i.e.where the same income or capital in the hands of the same person is taxable by the two contracting States.It does not,in principle,

317、deal with economic double taxation,i.e.where two different persons are taxable in respect of the same income or capital.For example,under DTTs,dividends paid by a company to a foreign shareholder may be taxable in both States.In this situation,juridical double taxation arises because the dividends a

318、re taxable in the hands of the same person,the shareholder,in the State of the distributing company(by means of a WHT)and in the State of the foreign shareholder upon receipt.Economic double taxation also arises because the company in the source State pays corporate income tax on its profits.These(a

319、lready taxed)profits are subsequently distributed as dividends and taxed again.In the second case,the same income is taxed at different times in the hands of different persons.DTTs only deal with the first type of double taxation.The decision to apply one method to eliminate double taxation over the

320、 other is underpinned by specific investment considerations and policy goals that States pursue.A question of interest for investment policymakers with regard to the methods for the elimination of double taxation in DTTs may be what a State intends to achieve in terms of neutrality,competitiveness,s

321、implicity and economic efficiency with the tax system.Double taxation treaties and their implications for investment:what investment policymakers need to know27States choosing the exemption method generally aim at achieving capital import neutrality,focusing on guaranteeing equally competitive condi

322、tions in the source State.As such,all investors investing in a State are subject to the same tax treatment:the one applicable in the State of the source of the investment income.States choosing the credit method instead aim to achieve capital export neutrality by ensuring equal treatment in the resi

323、dence State,regardless of where a capital investment is made.A.Exemption methodThe exemption avoids double taxation by disregarding the foreign earned income for purposes of calculating the tax base in the residence State.This method,thus,does not affect the applicable tax rate but the amount of inc

324、ome included in the taxable base.Sometimes specific clauses are included in the method article of DTTs to avoid double non-taxation that can arise from the application of the exemption method.First,“subject-to-tax clauses”are often found in DTTs,where the exemption in the residence State will depend

325、 on whether taxes are levied in the source State.That is,the residence State will be obliged to grant an exemption for the relevant income according to the method article in the DTT only if the source State actually levies a tax on such income.Otherwise,the residence State is allowed to tax such inc

326、ome according to its domestic law and is not limited by the DTT.The subject-to-tax clause can be adopted either only in relation to specific rules that concern income more prone to double non-taxation or in general,as a condition for applying the exemption method.The OECD and UN MTCs do not contain

327、such clauses.5Moreover,“switch-over clauses”are also often included in DTTs to allow the residence State to change from the exemption to the credit method in certain circumstances.These clauses are usually applicable where the use of the exemption would result in double non-taxation,and in cases of

328、abuse.The OECD and the UN Models include a provision in Article 23A(4)that generally has a similar effect to these clauses.It grants the residence State the right to switch from the exemption to the credit method whenever different interpretations of the DTT(also known as conflict of qualification)w

329、ould result in double non-taxation or low-taxation because of the application of the allocation rules on dividends,interest,royalties(in the UN Model),fees for technical services and income from ADS.B.Credit methodThe credit method has no effect on the taxable base in the residence State;it affects

330、only the amount of tax levied by that State.That is,when the credit method applies,the residence State will first determine the tax due on the worldwide income of its resident taxpayer under domestic law.It then reduces this tax by the foreign tax paid at the source.As such,the credit method allows

331、taxation in both contracting States and double taxation is avoided only in relation to the amount of tax levied at source.The credit method guarantees that cross-border income will be taxed at least in one of the contracting States.States usually choose the credit method for passive income.If the ta

332、x rate in the residence State is higher than that applied in the source State,the taxpayer will pay the difference until the higher rate in the residence State is achieved.However,Article 23B(1)of the OECD and UN MTCs stipulates that if the tax rate in the source State is higher than in the residenc

333、e State,the latter is obliged to grant a credit only for the maximum amount of tax that would be levied in the residence State(before the credit).This means that the residence State is limited to a“maximum tax credit”,whereby it will not credit any more tax from the source State than it would levy under its domestic law.The amount of tax that will be offset in the residence State is,in principle,t