Choosing between the UN and OECD Tax Policy Models: An African Case Study
| Published date | 01 February 2014 |
| Pages | 1-21 |
| DOI | 10.3366/ajicl.2014.0077 |
| Author | VeronikaRichard DaurerKrever |
| Date | 01 February 2014 |
Most of the world's income tax systems impose tax on the worldwide income of their residents and on profits with a source in the country where the income is derived by a non-resident. In the event of cross-border investments or business activities, two jurisdictions may wish to tax the same profits: the source country because the income is attributable to factors within that country and the residence country because all residents are taxed on their worldwide incomes. In the absence of any agreement between the source country and the residence country of the cross-border investor or business operator, the source country would have primary taxing rights if only because it is in a position to extract the tax before the profits are repatriated to the residence country. Unless the residence country wished to double tax the income and in effect discourage any outward investment or business activities by its residents, it will have no choice but to forgo its claimed taxing rights and limit its tax to the difference, if any, between a lower tax rate imposed in the source country and a higher rate imposed in the residence country.
Wealthier countries, particularly OECD nations, very often enter into treaties with each other to divide more evenly the taxing rights flowing from their competing claims to tax the same income. Treaties limit the source country's taxing rights, leaving more room for the country in which the investor or business is resident to tax the profits. Where two capital exporting nations enter into a tax treaty, the limitation of the source country's taxing rights has little overall impact if they enjoy roughly equal cross-border investment from one another. If one party to a treaty is a capital importing nation, a treaty would shift overall taxing rights (and tax revenue) from the poorer country to the richer country.
A. Easson, ‘Do We Still Need Tax Treaties?’, 54(12)
K. P. Sauvant and L. E. Sachs (eds),
D. Rosenbloom, ‘Current Developments in Regard to Tax Treaties’,
T. Dagan, ‘The Tax Treaties Myth’, 32(4)
Easson,
Country representatives commonly draw on two model treaties prepared by the OECD and UN respectively when negotiating tax treaties. The OECD treaty shifts more taxing powers to capital exporting countries while the UN treaty reserves more taxing powers for capital importing countries. A study of East African countries reveals reliance on both treaties, but some jurisdictions have been able to retain more taxing rights than others by greater reliance on approaches based on the UN model. The extent to which a capital importing nation relies on precedents drawn from the OECD treaty rather than from the UN treaty may reveal the degree to which it is willing to pay a price by way of reduced tax revenue in the short term to generate hoped-for benefits over the longer term. A comparison of treaty positions taken by neighbouring countries may also reveal the relative negotiating strengths of the countries and the positions taken by other members of the target group with respect to each other, as well as the positions taken by different outside groupings of countries when dealing with the target group generally. Finally, a look at treaty positions taken by a single country across different types of investment and business income may reveal the relative importance different countries attach to maintaining or sacrificing taxing rights over profits from different elements of the economy.
This paper reports on a study of the tax treaty policy of a group of eleven East African countries. It compares the policy outcomes in treaties signed by these countries with African nations, with relatively wealthy OECD countries, and with non-African countries that are not members of the OECD. It also compares selected outcomes in African–OECD treaties with those results in treaties between a group of Asian countries and OECD members to see whether African countries have been more or less successful at wringing preferences from wealthier nations.
The substantive findings part of this paper charts all tax treaties entered into by the eleven target nations post independence.
Not all of them are already in effect (as of 1 January 2012).
All but one of the treaties are bilateral treaties between two countries. The bilateral treaties comprise ninety-two treaties between individual countries in the target group and single country partners outside the groupOf the 92 treaties, two are between the same countries: Tanzania and India. The second treaty, however, has not yet entered into effect.
These are between Zambia and Kenya, Zambia and Tanzania, and Zambia and Uganda.
The signatories to the multi-lateral treaty are Kenya, Tanzania, Uganda, Burundi and Rwanda. This treaty, signed in 2010 and not in effect yet, replaced a 1997 treaty between Kenya, Tanzania and Uganda which never came into force.
These are Malawi's treaties with France, the Netherlands, Norway (soon replaced by a new treaty already signed but not yet in effect), Switzerland and the United Kingdom; Zambia's treaties with South Africa, Switzerland and France; and Zimbabwe's treaty with South Africa.
Nearly all African countries are former colonies of European powers and, not surprisingly, their trade orientation is (still) towards Europe, with some investment from other OECD countries and some non-OECD countries. Over the last decade, a shift towards new investors coming from emerging economies can be observed. However, the treaty patterns still reflect alignment according to the former trade orientation with fifty-one of the 105 treaties entered into by these countries signed with OECD countries and a further twenty with non-OECD, non-African countries, leaving less than one-third of the total treaties with other African countries (
The study reveals patterns in treaties and hence the willingness of these target countries to give up taxing rights with different types of partners. The data does not reveal whether the fiscal cost of forgoing tax revenues is offset by other investment, strategic or administrative benefits. While
durga The number of treaties differs from the figures above because it takes into account effective tax treaties, including treaties stemming from before independence and excluding treaties signed more recently but not in force yet.
Both the United Nations and OECD Model Treaties have their genesis in work by the League of Nations following World War I. Although a limited number of jurisdictions had imposed income taxes prior to World War I, the number grew significantly during that war as an increasing number of countries adopted income taxation to fund war expenditures. A combination of post-war rises in tax rates in countries that imposed income tax and a rise in cross-border investments had led to increasing instances of international double taxation. While some countries had adopted unilateral solutions to the problem – providing a credit for taxes paid abroad on foreign-source income (the United States) or exempting foreign income from tax in the residence state (the Netherlands) – many had not and the inconsistent unilateral responses...
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