## htnea2021003

## Source details

**Canonical URL:** [htnea2021003](https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/howtonotes/2021/english/htnea2021003.pdf.md)
- [Structured JSON version](/-/media/files/publications/howtonotes/2021/english/htnea2021003.pdf.json)

---

### Key recommendations for regional tax treaty design
- Include provisions securing minimum withholding taxes on investment income and technical service fees.
- Include a taxing right in respect of capital gains from indirect offshore transfers.
- Include provisions guarding against treaty shopping (anti-treaty-shopping provisions such as PPT and/or LOB).
- Adopt a tax treaty policy framework—national or regional—that specifies main policy outcomes before negotiations to help developing countries avoid concluding problematic tax treaties.

### Risks, spillovers, and policy implications
- A regional tax treaty may inadvertently increase base erosion risks for member countries depending on its content and members’ administrative capacity (example: residents of a no- or low-tax jurisdiction exploiting benefits).
- Member countries should review one another’s existing tax treaties and domestic tax laws prior to commencing negotiations of a regional tax treaty.
- A regional tax treaty can:
  - reduce source taxing rights; and
  - strengthen cooperation through articles on exchange of information or assistance in the collection of taxes.
- A regional tax treaty aims to provide tax certainty through dispute resolution mechanisms and apply uniform taxation rules.
- Tax treaties have spillover effects: benefits of a tax treaty with one country can be exploited by residents of third countries via a tax treaty network or domestic laws of their residence country.

### Role and design of a regional tax treaty policy framework
- A regional model tax treaty is an agreement among community members on preferred treaty positions to pursue in negotiations with noncommunity countries.
- A regional model treaty alone does not prohibit members from concluding deviating bilateral treaties; a regional tax treaty policy framework is needed to require members to observe bottom-line (non-negotiable) positions on key source taxing rights and to prevent members from concluding bilateral tax treaties with prescribed types of countries.
- The framework should include a regional model tax treaty and can mitigate negative spillovers and reduce the risk of revenue erosion through treaty shopping.

### Sequencing, capacity, and alternatives
- Developing countries generally do not face an urgent need to conclude regional or bilateral tax treaties; they should first build capacity for tax treaty negotiations.
- Renegotiating problematic treaties in force is likely a higher priority than negotiating new ones.
- Eliminating double taxation can be achieved through domestic laws (e.g., foreign tax credit or exemption arrangements) without treaties.
- Certain objectives can be achieved through domestic instruments such as tax information exchange agreements (TIEA) or the Convention on Mutual Administrative Assistance in Tax Matters (MAAC).
- An anti-treaty shopping clause could prevent some spillover effects in theory, if the tax administration can apply it properly.

### Group negotiations and coordination benefits
- A regional tax treaty policy framework and a regional model tax treaty may enable group negotiations of a bundle of bilateral tax treaties with a noncommunity member because members share common preferred and bottom-line positions.
- Group treaty negotiations are facilitated when members agree on common preferred and bottom-line positions, increasing bargaining power and consistency.

### Empirical and contextual notes
- Coordination/harmonization across regional economic communities varies: some have concluded regional tax treaties and/or developed a regional model treaty; some have hard law (example: EU Directives).
- Africa has ten regional economic communities, all components of the African Union; WAEMU is an economic and monetary union within ECOWAS.
- The Africa Continental Free Trade Area entered into force on May 30, 2019, and is the third of six stages in establishing an African Economic Community by 2028.
- Illicit financial flows (IFFs) via trade mis-invoicing hamper mobilization of domestic resources; one study estimated IFFs from Africa at over $50 billion per annum (WCO 2018).
- Articles relevant to trade mis-invoicing and transfer pricing include Article 9 (Associated Enterprises) and Article 26 (Exchange of Information) of the OECD and UN Model Tax Conventions.

### Box 1 — Trade Mis-Invoicing and Regional Treaty Design (highlights)
- Regional treaties can facilitate regional economic/trade activity by eliminating double taxation and reducing source taxing rights.
- CARICOM treaty examples:
  - Provides that only a source country has a taxing right on investment income.
  - Provides "0% percent" as a ceiling rate for source taxing rights on dividends, creating potential "nontaxation anywhere" situations.
  - Ceiling rate of tax on dividends from preference shares, interest, and royalties is 15 percent in the CARICOM treaty.
  - Income of a dividend-paying company is subject to CIT.
- Risks: treaty shopping and base erosion by MNEs arising from "nontaxation anywhere."
- Inventory of regional tax treaties (members and entry into force):
  - Andean Community: Bolivia, Colombia, Ecuador, and Perú — 2005
  - CARICOM: Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago — 1994
  - CEMAC: Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon — 1966
  - WAEMU: Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo — 2009
- OECD/G20 Inclusive Framework two-pillar solution:
  - Pillar 1: unified approach revising nexus and profit allocation rules.
  - Pillar 2: global minimum tax including: an income-inclusion rule; an undertaxed payments rule; a subject-to-tax rule; and a switchover rule.
  - The proposed solution would require revision of existing tax treaties and affect regional tax treaty policy frameworks.
  - OECD aims to reach a global agreement on both pillars by mid-2021.

### Box 2 — International Corporate Taxation (highlights)
- CARICOM treaty-shopping mechanics:
  - Example: Parent (P) resident in CARICOM member (Z) invests in Company T in Country X (non-CARICOM). If dividends routed via a subsidiary (S) in CARICOM member (Y) whose domestic laws do not withhold taxes on dividends to nonresidents, dividends can be received and remitted tax-free, undermining source taxation.
  - CARICOM treaty lacks anti-treaty-shopping provisions; subsidiaries can claim benefits even without active business.
  - Round-tripping: residents of CARICOM member (Z) can receive dividends from T tax-free via S in country Y.
- Comparative regional treaty designs:
  - Andean treaty: only source country taxes interest; no ceiling rate on withholding taxes on investment income (so CARICOM-type treaty-shopping problem does not arise).
  - CEMAC and WAEMU: source country has taxing right; CEMAC does not provide a ceiling rate; WAEMU provides a ceiling rate of 10 percent on withholding tax on dividends and 15 percent on interest and royalties.
- MLI uptake:
  - Among CARICOM contracting states, Barbados, Belize, and Jamaica signed the MLI and included CARICOM treaty as covered agreements; as only Barbados ratified the MLI, the MLI anti-treaty-shopping provision is not applicable to the CARICOM treaty as of January 15, 2021.
  - Other regional treaty states (Colombia, Peru, Gabon, Burkina Faso, Cote d’Ivoire, and Senegal) signed or ratified the MLI but did not include their regional treaties as covered agreements.
- Costs and benefits:
  - Benefits: facilitate integration, eliminate double taxation, increase after-tax return, provide tax certainty, mutual agreement procedures, exchange of information, collection assistance.
  - Costs: direct revenue loss from reduced source taxation; increased base erosion and profit shifting if provisions are lenient or lack anti-treaty-shopping protections; quantitative assessment difficult due to lack of data on withholding tax revenue by recipient country.
- MFN clause risks:
  - An MFN clause in an existing bilateral treaty may require reducing ceiling rates to levels in a new treaty; a regional treaty that lowers or waives source taxation may trigger reductions in existing treaties with MFN clauses.
- Preserve minimum withholding taxes and anti-treaty-shopping provisions:
  - Regional communities should keep a certain level of source taxation on investment income to avoid becoming a magnet for MNE routing.
  - Include explicit articles on technical service fees and capital gains from offshore indirect transfers to prevent avoidance.
  - BEPS Action 6 minimum standard: include PPT, or LOB, or both in treaties.

### Box 3 — Technical Service Fees (highlights)
- Offshore Indirect Transfers (OITs):
  - OITs: sale of an entity owning an asset located in one country by a resident of another country.
  - Immovable assets typically cover land and buildings, may include mineral rights, telecom licenses, and other government-issued rights giving location-specific rents.
  - Location countries can tax gains from direct transfers, but face challenges taxing capital gains when shares of an entity owning an immovable asset are transferred.
- Practical guidance:
  - Platform for Collaboration on Tax (PCT) toolkit provides guidance for developing countries on taxing OITs. Toolkit reference (as given in source): https:// www .tax -platform .org/ sites/ pct/ files/ publications/ PCT _Toolkit _The _Taxation _of _Offshore _Indirect _Transfers .pdf
- Model treaty treatment:
  - Article 13(4) of the 2017 OECD and UN Models allows a location country to tax a gain on OITs where the value of the interest sold is principally (more than 50 percent) derived from immovable property in the location country.
  - Majority of existing bilateral treaties do not include Article 13(4).
  - Article 9 of the MLI is equivalent to Article 13(4).
  - Signing the MLI and opting for Article 9(4) enables modification of covered bilateral treaties only if the treaty partner also elects Article 9(4).
- Policy recommendations and anti-abuse:
  - BEPS Action 6 minimum standard: include (1) combination of PPT and LOB, or (2) PPT alone, or (3) LOB supplemented by mechanism addressing conduit financing arrangements.
  - LOB: specific anti-abuse rule limiting treaty benefits to entities meeting legal/ownership/activity tests.
  - PPT: general anti-abuse rule denying benefits where obtaining treaty benefits is a principal purpose, unless consistent with object and purpose.
  - Desirability of including both PPT and LOB because PPT is fact-intensive and LOB is complicated.
  - Given capacity constraints, retain minimum source taxation on investment income, technical service fees, and capital gains in the regional treaty.
- Regional review:
  - Members should periodically review regional treaties, members’ bilateral treaties, and domestic laws; revise provisions that increase base erosion risks (example: revise CARICOM Article 10 on dividends or include anti-treaty-shopping provisions).

### Box 6 — Outline of a Typical Tax Treaty Policy Framework (highlights)
- Need for framework:
  - Coordination without common treaty policy is porous; members could defeat regional agreements via treaty exceptions.
  - Treaty shopping and base erosion are especially significant for developing-country regional economic communities due to limited anti-avoidance rules and limited tax administration capacity.
  - The case for a regional tax treaty policy framework is stronger for developing countries than for advanced countries.
  - A national framework should align with the regional framework; countries without treaty experts may rely on the regional framework.
- Review, monitoring, and enforceability:
  - Review framework regularly (example: every five years) and when significant international taxation developments occur.
  - Specify procedures for review and revision in the framework’s terms.
  - Monitor compliance and share negotiation information via peer reviews at least once a year.
  - Enforceability: hard law depends on existing coordination rules and enforceability; soft law (peer pressure, regular meetings, reporting to ministerial level) is feasible.
- Model choice:
  - Recommend following international norms in OECD and UN Model Tax Conventions; UN Model preserves more source taxing rights and includes Article 12A on technical service fees (2017 UN Model).
  - Regional developing-country communities may prefer the UN Model; UN Model Commentary offers alternative drafting for developing countries’ needs.
- Preferred positions, flexibility, bottom-line positions:
  - Decide preferred positions for substantive provisions; adhere to norms for provisions not affecting source taxing rights.
  - Bottom-line positions (nonnegotiable) for developing countries may include maintenance of minimum withholding rates for dividends, interest, royalties, technical service fees; taxation of capital gains from offshore indirect transfer; anti-treaty shopping.
  - Bottom-line positions should be treated as strictly confidential.
  - Minimum withholding rates should not be zero.
- Regional model treaty and national models:
  - After agreeing the framework, develop a regional model treaty based on preferred positions.
  - National model treaties should conform to the regional model and should not envisage lower source-country taxing rights.
- Group negotiations:
  - Group tax treaty negotiations are joint negotiations of a bundle of bilateral treaties by a single negotiating team, based on the regional framework and model.
  - Benefits: increased bargaining power, reduced tax competition, capacity-building, consistency, attractiveness to counterparties (example: East African Community).
  - Accommodations: special provisions for individual members allowed if they do not compromise bottom-line positions; participation can be optional.
  - Technical assistance from international organizations recommended for capacity building and simulated negotiation exercises.
- Example metrics for group bargaining power (EAC example):
  - East African Community total population: 177 million (2019)
  - East African Community GDP: US$194 billion (2019)

### 5. Conclusion (main conclusions and recommendations)
- Main conclusions:
  - Developing countries do not necessarily need to conclude tax treaties, regional or bilateral, to attract foreign investment at any expense.
  - When a regional economic community of developing countries decides to conclude a regional tax treaty, members should carefully design and negotiate it to mitigate spillover effects and reduce revenue base erosion risk.
  - The regional tax treaty should at least include provisions on minimum withholding taxes on investment income and technical service fees, capital gains from indirect offshore transfer, and anti-treaty shopping.
- Country-level recommendations:
  - A tax treaty policy framework specifying main policy outcomes before negotiations would enable a developing country with less expertise and capacity to avoid concluding problematic tax treaties.
  - For members of a regional economic community coordinating tax policies, a regional tax treaty policy framework can assist coordination/harmonization and reduce revenue erosion risks for members and noncommunity members.
- Regional coordination and negotiation recommendations:
  - A regional tax treaty policy framework and a regional model tax treaty that set out agreed preferred positions enable group negotiation of bilateral treaties, providing greater bargaining power and uniform interpretation/application among members.
  - A joint negotiation team could benefit from technical assistance from international organizations.

*Source: htnea2021003 — International Monetary Fund, How To Notes (April 2021).*

### references.

### References

### Key recommendations for regional tax treaty design
- A well-designed regional tax treaty should include provisions securing minimum withholding taxes on investment income and technical service fees.
- Include a taxing right in respect of capital gains from indirect offshore transfers.
- Include provisions guarding against treaty shopping.
- A tax treaty policy framework—national or regional—that specifies the main policy outcomes to be achieved before negotiations commence would enable developing countries with more limited expertise and lower capacity for tax treaty negotiations to avoid concluding problematic tax treaties.

### Risks, spillovers, and policy implications
- Depending on its content and the administrative capacity of member countries, a regional tax treaty may inadvertently increase base erosion risks for member countries (example: residents of a no- or low-tax jurisdiction exploiting benefits).
- Member countries should review one another’s existing tax treaties and domestic tax laws prior to commencing negotiations of a regional tax treaty.
- A regional tax treaty can reduce source taxing rights and strengthen cooperation through articles on exchange of information or assistance in the collection of taxes.
- A regional tax treaty also aims to provide tax certainty to taxpayers through dispute resolution mechanisms and apply a uniform taxation rule.
- Tax treaties have spillover effects because benefits of a tax treaty with one country can be exploited by residents of third countries through a tax treaty network or domestic laws of their residence country.

### Role and design of a regional tax treaty policy framework
- A regional model tax treaty is an agreement among community members on preferred tax treaty positions to pursue in negotiations of a bilateral tax treaty with noncommunity countries.
- A regional model tax treaty alone does not prohibit members from concluding bilateral tax treaties that deviate from the model; a regional tax treaty policy framework is needed to require members to observe bottom-line (non-negotiable) positions on key source taxing rights and to prevent members from concluding bilateral tax treaties with prescribed types of countries.
- The regional tax treaty policy framework should include a regional model tax treaty.
- The framework could mitigate negative spillover effects and reduce the risk of erosion of member countries’ revenue base through treaty shopping.
- The regional tax treaty policy framework should apply to negotiations of bilateral tax treaties with other members of the regional economic community and to a regional tax treaty (in which case source country taxing rights such as ceiling rates of withholding taxes on investment income might be reduced).

### Sequencing, capacity, and alternatives
- Developing countries generally do not face an urgent need to conclude a regional tax treaty or a bilateral tax treaty; they should first build their capacity for tax treaty negotiations.
- If a developing country has problematic treaties in force, renegotiating such treaties is likely a higher priority than negotiating new ones.
- Developing countries can eliminate the double taxation of their residents by the enactment of domestic laws (e.g., foreign tax credit or exemption arrangements) without concluding tax treaties.
- Certain tax treaty objectives can be achieved through domestic laws and other measures (for example, tax information exchange agreements (TIEA) or the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) enable tax administrations to use exchange of information).
- An anti-treaty shopping clause could prevent some spillover effects in theory, if the tax administration is capable of applying the clause properly.

### Group negotiations and coordination benefits
- A regional tax treaty policy framework and a regional model tax treaty may enable community members to conduct group negotiations of a bundle of bilateral tax treaties with a noncommunity member because community members have common preferred and bottom-line positions.
- Group treaty negotiations can be facilitated when members agree on common preferred positions and bottom-line positions to pursue in negotiations.

### Empirical and contextual notes
- The extent to which regional economic communities coordinate/harmonize members’ tax policies varies: some communities have concluded regional tax treaties and/or developed a regional model tax treaty for negotiations with noncommunity member countries or established hard law such as European Union (EU) Directives.
- Africa has ten regional economic communities, all of which are components of the African Union; WAEMU is an economic and monetary union within ECOWAS.
- The Africa Continental Free Trade Area entered into force on May 30, 2019, and is the third of six stages in establishing an African Economic Community by 2028.
- As the G20 Leaders’ Communique September 2016 recognized, illicit financial flows (IFFs) via trade mis-invoicing are regarded as hampering the mobilization of domestic resources in developing countries. One study estimated IFFs from Africa at over $50 billion per annum (WCO 2018).
- Articles in model tax conventions relevant to trade mis-invoicing and transfer pricing include Article 9 (Associated Enterprises) and Article 26 (Exchange of Information) of the OECD and UN Model Tax Conventions.

### Box 1. Trade Mis-Invoicing and Tax Treaties

### Box 1. Trade Mis-Invoicing and Tax Treaties

### Model and design of regional tax treaties
- Regional tax treaties aim to facilitate economic and trade activities within the community by ensuring the elimination of double taxation and reducing source taxing rights.
- Example: the Caribbean Community (CARICOM) treaty:
  - Provides that only a source country has a taxing right on investment income.
  - Provides "0% percent" as a ceiling rate for source taxing rights on dividends.
  - As a result, dividends paid to residents of other CARICOM members will not be taxed in either the source country or the resident country, creating a "nontaxation anywhere" situation.
  - A ceiling rate of tax on the dividends from preference shares, interest, and royalties is 15 percent in the CARICOM treaty.
  - Income of a dividend-paying company is subject to CIT.
- Purposes of such provisions include promoting economic and trade activities among community members and avoiding double taxation at the entity and shareholder levels.
- Risks noted:
  - Treaty shopping and base erosion by multinational enterprises (MNEs) can arise from "nontaxation anywhere."
  - Example scenario described: an MNE (P), which a resident of a third country (non-CARICOM member) (X), has invested in a company (T) in a CARICOM member—such structures may exploit treaty features (scenario context provided in the source).

### Inventory of regional tax treaties (members and entry into force)
- Andean Community: Bolivia, Colombia, Ecuador, and Perú — 2005
- CARICOM (Caribbean Community): Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, and Trinidad and Tobago — 1994
- CEMAC (Central African Economic and Monetary Union): Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea, and Gabon — 1966
- WAEMU (West African Economic and Monetary Union): Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo — 2009

### International context and policy developments
- IMF Policy Paper (2019) summarized: "The international corporate tax system is under unprecedented stress. The G-20/OECD project on Base Erosion and Profit Shifting (BEPS) has made significant progress in international tax cooperation, addressing some major weak points in the century-old architecture. But vulnerabilities remain. Limitations of the arm’s-length principle—under which transactions between related parties are to be priced as if they were between independent entities—and reliance on notions of physical presence of the taxpayer to establish a legal basis to impose income tax have allowed apparently profitable firms to pay little tax. Tax competition remains largely unaddressed. And concerns with the allocation of taxing rights across countries continue. Recent unilateral measures, moreover, jeopardize such cooperation as has been achieved."
- OECD/G20 Inclusive Framework work (two-pillar solution) to address tax challenges of the digital economy:
  - Pillar 1: proposes a unified approach that revises nexus and profit allocation rules.
  - Pillar 2: proposes a global minimum tax, which includes four main components:
    - an income-inclusion rule;
    - an undertaxed payments rule;
    - a subject-to-tax rule; and
    - a switchover rule.
  - The proposed solution would require the revision of existing tax treaties and would affect regional tax treaty policy frameworks.
  - The OECD aims to reach a global agreement on both pillars by mid-2021.

*FISCAL AFFAIRS DEPARTMENT HOW TO NOTES — International Monetary Fund | April 2021*

### Box 2. International Corporate Taxation

### Box 2. International Corporate Taxation

### CARICOM treaty example and treaty-shopping mechanics
- Scenario: Parent (P) resident in CARICOM member country (Z) invests in Company T in Country X (non-CARICOM). If dividends are paid directly by T to P, domestic law of Country Z subjects them to withholding tax.
- Alternate structure: P establishes a subsidiary (S) in CARICOM member Country Y whose domestic laws do not withhold taxes at source on dividends paid to nonresidents; dividends paid by T in Country X to S can then be received and remitted to P tax free.
- Consequences:
  - This undermines efforts by some CARICOM members not to waive source taxation on dividends with non-CARICOM members.
  - Because the CARICOM treaty lacks anti-treaty-shopping provisions, the subsidiary can claim the treaty benefits even if it conducts no active business activities.
  - Similar effects can be achieved by establishing a subsidiary in a non-CARICOM country that has a bilateral treaty waiving source taxation on dividends with a CARICOM member and then purchasing shares in another member country.
- Round-tripping: Residents of a CARICOM member (Z) can receive dividends from a company (T) in their country tax free by establishing company S in country Y and having S purchase T’s shares.

### Comparative regional treaty designs and outcomes
- Andean treaty: Provides that only a source country has a taxing right on interest and does not provide a ceiling rate on withholding taxes on investment income; therefore the CARICOM-type treaty-shopping problem does not arise.
- CEMAC and WAEMU treaties: Also provide that a source country has a taxing right, but do not restrict the taxing rights of a resident country. CEMAC does not provide a ceiling rate; WAEMU provides a ceiling rate of 10 percent on withholding tax on dividends and 15 percent on interest and royalties.
- MLI (Multilateral Instrument) uptake and applicability:
  - Among contracting states of the CARICOM treaty, Barbados, Belize, and Jamaica signed the MLI and included the CARICOM treaty as agreements covered by the MLI. However, as only Barbados has ratified the MLI, the MLI anti-treaty-shopping provision is not applicable to the CARICOM treaty as of January 15, 2021.
  - For other regional tax treaties, Colombia, Peru, Gabon, Burkina Faso, Cote d’Ivoire, and Senegal signed or ratified the MLI but did not include their regional tax treaties as agreements covered by the MLI.

### Costs and benefits of a regional tax treaty
- Potential benefits:
  - Facilitate integration by eliminating double taxation and reducing source taxation, increasing after-tax return of investment.
  - Provide tax certainty and facilitate mutual agreement procedures, exchange of information, and assistance in collection.
- Potential costs and risks:
  - Direct revenue loss from reduced source taxation equivalent to the reductions.
  - Risk of increased base erosion and profit shifting if treaty contains lenient provisions or lacks anti-treaty-shopping protections.
  - Difficulty in quantitative assessment for developing countries due to lack of data on withholding tax revenue by recipient country.
- Trade-off:
  - Regional treaty can better facilitate integration than bilateral treaties unless bilateral treaties are harmonized; but an ill-designed regional treaty can exacerbate treaty-shopping and revenue loss.

### Harmonization as a substitute and limits
- Where tax policy harmonization and domestic laws eliminate double taxation, many objectives of a regional treaty can be achieved without a treaty.
- A regional treaty limited to mutual agreement procedures and administrative cooperation could be an option if harmonization is infeasible.
- Hard regional laws could require minimum CIT rates and withholding taxes and forbid bilateral treaties with nonmembers that could be abused; however, few communities have enforceable tax coordination law.
  - Example: EU maintains a VAT directive with minimum standard rate 15 percent and minimum reduced rate 5 percent, but lacks hard law on CIT rates.
  - The EU Code of Conduct for business taxation requires rollback of harmful tax competition measures but is not hard law.

### Risks from existing bilateral treaties and MFN clauses
- Existing bilateral treaties that waive or significantly reduce source taxation can interact with a regional treaty to enable tax planning and treaty-shopping.
- Most bilateral treaties are difficult to revise in the direction of increased taxation.
- Most-favored-nation (MFN) clauses:
  - An MFN clause in an existing bilateral treaty may require reducing ceiling rates to the level in a new treaty. If a regional treaty provides a lower ceiling—or waives source taxation—the ceiling in existing treaties with MFN clauses may be reduced accordingly.
  - Some MFN clauses are not automatic; some only require renegotiation.

### Need to preserve minimum withholding taxes and anti-treaty-shopping provisions
- Recommendation: Regional economic communities of developing countries should keep a certain level of source taxation on investment income in their regional tax treaties to avoid creating a magnet for MNEs to route investment through the most generous member.
- If members wish to maintain source taxation on technical service fees or capital gains from offshore indirect transfers that appear in bilateral treaties, they should include explicit articles on these items in the regional treaty to prevent avoidance via the regional treaty.
- Anti-treaty-shopping:
  - An anti-treaty-shopping provision should be included to prevent MNEs from claiming treaty benefits via subsidiaries in low- or zero-tax community members.
  - The BEPS Final Report on Action 6 requires, as a minimum standard, that countries include in their treaties a principal purpose test (PPT) provision, or the limitation on benefits (LOB) provision, or both.

### Table 2 highlights (CARICOM members’ withholding taxes and treaties waiving source taxation on dividends)
- Selected domestic law withholding tax rates on dividends paid to nonresidents and bilateral treaties waiving source taxation (as reported from IBFD):
  - Antigua and Barbuda: Withholding tax rate on dividends paid to nonresidents in domestic law (in percent): 25; Bilateral tax treaties waiving source taxation on dividends: UK
  - Barbados: Withholding tax rate entries: 0/15/25; Bilateral treaties waiving source taxation: Bahrain, Cyprus, Luxembourg, Qatar, Singapore, Spain***, Switzerland, UAE, UK; Others: Bahrain, Cyprus, Qatar, Singapore, Switzerland, UAE, UK
  - Belize: 15; Bilateral treaties waiving source taxation: UK
  - Dominica: 15; Bilateral treaties waiving source taxation: none****
  - Grenada: 15; Bilateral treaties waiving source taxation: Switzerland, UK
  - Guyana: 20; Bilateral treaties waiving source taxation: none
  - Jamaica: 33.33; Bilateral treaties waiving source taxation: none****
  - St. Kitts and Nevis: 10; Bilateral treaties waiving source taxation: UK**
  - St. Lucia: 0; Bilateral treaties waiving source taxation: none
  - St. Vincent and the Grenadines: 0; Bilateral treaties waiving source taxation: none
  - Trinidad and Tobago: 5; Bilateral treaties waiving source taxation: Spain*** *****; Others: none
- Notes from table:
  - “Qualified companies” are those owning a certain percentage of voting shares of a dividend-paying company.
  - Some treaty footnotes: The treaty with Monaco waives source taxation on dividends if a beneficiary owner is an individual.
  - Some treaties include anti-abuse clauses.
  - “none****” indicates a country does not have a bilateral tax treaty that waives source taxation on dividends.
  - Specific participation thresholds and varying rates apply in certain treaties (e.g., zero rate applies with respect to participations of at least 50 percent; 5 percent rate applies to at least 25 percent participation and 10 percent for the rest).

### Technical service fees and model conventions
- The UN introduced Article 12A (technical service fees) in the 2017 update of the UN Model for the following reasons:
  - A source country has limited scope for taxing income from technical services provided cross border if a service provider does not have a fixed base or permanent establishment in the source country.
  - Uncertainty about whether fees for technical services can be taxed as royalties is undesirable.
  - Inability to tax fees for technical services provided by nonresident service providers may erode the source country’s tax base and facilitate profit shifting—especially problematic for developing countries that are net importers of technical services and often lack administrative capacity to control such base erosion.
- The OECD Model has not included an article on technical service fees to date.

*Italic source attribution: IMF — Box 2. International Corporate Taxation (How To Design a Regional Tax Treaty and Tax Treaty Policy Framework in a Developing Country), April 2021*

### Box 3. Technical Service Fees

### Box 3. Technical Service Fees

### Definition and scope of Offshore Indirect Transfers (OITs)
- OITs is the sale of an entity owning an asset located in one country by a resident of another country.
- Immovable assets typically cover land and buildings but may also include mineral rights, and can also possibly be expanded to capture telecom licenses and other rights issued by government that give rise to location specific rents.
- A country in which an immovable asset is located can tax gains from direct transfers of the asset; location countries have encountered challenges in taxing capital gains when shares of an entity owning an immovable asset are transferred.

### Practical guidance and toolkit
- The Platform for Collaboration on Tax (PCT) – a joint initiative of the IMF, OECD, UN and World Bank Group – has developed a toolkit that provides practical and coherent guidance for developing countries on considerations that might arise when deciding to tax OITs, types of assets to tax in such cases and how to design and implement OIT taxation in domestic law.
- Toolkit reference (as given in source): https:// www .tax -platform .org/ sites/ pct/ files/ publications/ PCT _Toolkit _The _Taxation _of _Offshore _Indirect _Transfers .pdf

### Model treaty and multilateral instrument treatment
- Article 13(4) of the 2017 version of OECD and UN Model Tax Conventions allows a location country to tax a capital gain realized on OITs where the value of the interest sold is principally (more than 50 percent) derived from immovable property in the location country.
- The majority of existing bilateral tax treaties do not include Article 13(4) of the Models.
- Article 9 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) is equivalent to Article 13(4) of the Model.
- Signing the MLI and opting for Article 9(4) to apply will enable the signatory to modify their existing covered bilateral treaties efficiently, but only if their relevant treaty partner also elects for Article 9(4) to apply (which is not guaranteed).

### Policy recommendations and anti-abuse measures
- The BEPS Report on Action 6 requires countries to include in their treaties as the minimum standard one of the following:
  - (1) the combination of a principal purpose test (PPT) provision and limitation on benefits (LOB) provision, or
  - (2) a PPT provision alone, or
  - (3) an LOB provision, supplemented by a mechanism to deal with conduit financing arrangements not already dealt with in tax treaties.
- LOB provision: a specific anti-abuse rule that limits the availability of treaty benefits to entities that meet certain conditions, which are based on the legal nature, such as a public company test, ownership in, and general activities of the entity; and that seeks to ensure a sufficient link between the entity and its state of residence.
- PPT provision: a more general anti-abuse rule based on the principal purposes of transactions or arrangements. Under this rule, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied unless it is established that granting these benefits would be in accordance with the object and purpose of treaty provisions.
- It is desirable to include both the PPT and LOB provisions because jurisdictions may experience difficulties in applying a PPT provision due to challenges in assessing facts and circumstances that often occur outside of their jurisdictions, and because the LOB provision is complicated.
- Given that it is likely to take years for tax administrations in developing countries to build the capacity to apply anti-treaty shopping provisions effectively—even if the regional treaty includes such provisions—it is desirable to keep minimum source taxation on investment income, technical service fees, and capital gains in the regional tax treaty.

### Regional treaty review and design considerations
- If a regional economic community has a regional tax treaty in force, community members should periodically review the existing treaty, the bilateral tax treaties and domestic laws of each member.
- They should revise any provisions of the regional treaty that may increase the base erosion risks for member countries. Example noted: if Jamaica needs to stop treaty shopping by residents of a non-CARICOM member using the CARICOM tax treaty, the article on dividends (Article 10) should be revised, or at a minimum, anti-treaty shopping provisions should be included.

*International Monetary Fund | How to Design a Regional Tax Treaty and Tax Treaty Policy Framework (April 2021), Box 3. Technical Service Fees*

### Box 6. Outline of a Typical Tax Treaty Policy Framework

### Box 6. Outline of a Typical Tax Treaty Policy Framework

### Need for a Regional Tax Treaty Policy Framework
- Regional coordination without a common treaty policy is porous and community members could defeat regional agreements on minimum tax rates and similar measures by providing for exceptions in treaties.
- Risks:
  - Treaty shopping and base erosion are especially significant for regional economic communities of developing countries due to often limited anti-avoidance rules and limited tax administration capacity.
  - Many developing countries compete by providing tax incentives to attract foreign direct investment.
- Implication:
  - The case for a regional tax treaty policy framework is stronger for developing countries than for advanced countries.
  - A community member can have a national tax treaty policy framework in addition to a regional framework, but the national framework should be in line with the regional framework while modifying components that are not bottom-line elements.
  - If a country has no or few tax treaty experts, it may be most practical to rely on the regional tax treaty policy framework.

### Review, Monitoring, and Enforceability
- Review and revision:
  - Community members should review any regional tax treaty policy framework on a regular basis, for example, every five years, and whenever there is a significant development in international taxation issues, such as changes in the UN or OECD Model.
  - The procedures for reviewing and revising the regional tax treaty policy framework should be specified in its terms.
- Monitoring:
  - It is important to monitor whether and how member countries comply and share information on the latest negotiations through peer reviews; such monitoring should be conducted regularly, at least once a year.
- Enforceability:
  - Whether to make the framework hard law depends on how strictly other coordination/harmonization rules require compliance and on enforceability.
  - If members do not agree to hard law, soft law is feasible: peer pressure, regular meetings of tax treaty negotiators/tax policy makers, and reporting to a ministerial level meeting can be used.

### How to Design a Regional Tax Treaty Policy Framework: Model Choice
- Recommendation:
  - To promote efficiency, community members should follow, to the extent possible, the international norms in the OECD and UN Model Tax Conventions because both models have detailed commentaries that relieve negotiators from explaining common treaty provisions.
- OECD Model versus UN Model:
  - The UN Model, drafted with developing countries in mind, preserves more source taxing rights than the OECD Model.
  - Example: The 2017 UN Model includes an article for withholding taxes on technical services fees (Article 12A), while the 2017 OECD Model does not.
  - Regional communities of developing countries may prefer the UN Model.
  - The UN Model Commentary includes alternative drafting that could meet developing countries’ needs.
- Inclusion of arbitration in the Mutual Agreement Procedure:
  - Depends on community decision.
  - The UN Model provides alternative drafting including arbitration (Alternative B); the provision differs from the OECD Model.
  - Inclusion of arbitration is optional in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

### Preferred Positions, Flexibility, and Bottom-line Positions
- Preferred positions:
  - Members need to decide preferred positions for all substantive provisions, including whether to comply with international norms or deviate.
  - Generally adhere to international norms for provisions that do not affect source taxing rights (e.g., elimination of double taxation, nondiscrimination, mutual agreement procedures, exchange of information).
- Deviations:
  - Members may deviate from international norms where clear and strong reasons exist (for example, branch profit tax or provisions on technical service fees).
  - It is prudent to align with international norms unless there are legitimate reasons and agreement among members.
  - It is useful to engage in international fora to propose new provisions not yet international norms (example given: a treaty provision applying treaty benefits only to income subject to tax in a resident country; and discussion of a new Article 12B (Income from Automated Digital Services) at the 20th session of the UN Committee).
- Flexibility and nonnegotiable (bottom-line) positions:
  - Members need clear internal views on which preferred positions are bottom-line (nonnegotiable) and which have flexibility.
  - Bottom-line positions that are identical in both UN and OECD Models are less likely to derail negotiations.
  - Bottom-line positions that deviate from models—e.g., with respect to technical service fees—have a greater likelihood of becoming problematic in negotiations.
  - Bottom-line positions for developing countries may include provisions on:
    - maintenance of minimum withholding rates for dividends, interest, royalties, technical service fees
    - taxation of capital gains from offshore indirect transfer
    - anti-treaty shopping
  - Bottom-line positions should be treated as strictly confidential.
- Factors to consider when deciding preferred and bottom-line positions:
  - Key aspects of members’ national economies, including main sources of revenue and areas of current or potential inbound foreign investment.
  - Any limitations on taxing rights under domestic law (for example, limits on withholding taxes and incentive provisions such as tax holidays for new investment).
  - Regional rules on tax competition or coordination/harmonization of domestic tax policy.
  - Presence of a regional tax treaty.
  - Ability of members’ tax administrations to comply with treaty obligations.
- Note:
  - The minimum withholding rates should not be zero.

### Regional Model Tax Treaty
- Once a regional policy framework is agreed, members should develop a regional model tax treaty based on the preferred positions of the policy framework.
- For developing-country communities, it may be desirable to use provisions of the UN Model unless members have clear and strong reasons to deviate.
- National model treaties maintained by individual members should conform to the regional model to the extent possible and should not envision lower source-country taxing rights than those in the regional model.

### Group Treaty Negotiations: Design and Benefits
- Definition:
  - Group tax treaty negotiations are joint negotiations of a bundle of bilateral tax treaties by a single negotiating team; they differ from multilateral tax treaty negotiations.
  - The regional tax treaty policy framework and any regional model treaty serve as the basis for negotiating positions.
- Benefits:
  - Increased bargaining power compared with one-on-one negotiations; helps resist tax competition among members and preserves desired withholding tax levels.
  - Reduces likelihood of differences among treaties that could facilitate base erosion.
  - Capacity-building: countries with little or no experience can pool personnel resources; group negotiations provide training and facilitate cooperation among revenue administrations (exchange of information, collection assistance).
  - Consistency: process increases consistency of application and interpretation of tax treaties.
  - Attractiveness to counterparties: small developing countries may be more attractive negotiating partners when they negotiate jointly (example: East African Community).
- Accommodating individual needs:
  - Special provisions can be included in a treaty or protocol for an individual member (e.g., a member with a branch profit tax can add a special provision to apply it) as long as such provisions do not compromise bottom-line positions.
  - Participation is optional: some members may not participate because they have bilateral treaties they do not wish to renegotiate; this should not preclude others from engaging in group negotiation.
- Technical assistance:
  - A joint negotiation team could benefit from technical assistance from international organizations that draw expertise from both advanced and developing countries; assistance should be limited to advice on international norms, treaty precedents, and tax laws of counterpart countries.
  - Such assistance can provide capacity building and simulated negotiation exercises using former treaty negotiators and retired tax practitioners; some lawyers provide assistance pro bono.

### Example: East African Community (EAC) — Aggregate Scale for Group Negotiations
- The members of the East African Community (EAC) have a total population of 177 million (2019) and GDP of US$194 billion (2019).
- The text notes that potential negotiating partners might find it preferable to deal with the community as a whole rather than with member countries individually.

*International Monetary Fund | April 2021*

### 5. Conclusion

### 5. Conclusion

### Main conclusions
- Developing countries do not necessarily need to conclude tax treaties, regional or bilateral, to attract foreign investment at any expense.
- When a regional economic community of developing countries decides to conclude a regional tax treaty, the community members should carefully design and negotiate the regional tax treaty to mitigate the spillover effects and reduce the risk of erosion of the revenue base.
- The regional tax treaty should at least include provisions on minimum withholding taxes on investment income and technical service fees, capital gains from indirect offshore transfer, and anti-treaty shopping.

### Recommendations for country-level tax treaty policy
- A tax treaty policy framework that specifies the main policy outcomes intended to be achieved by tax treaties before negotiations commence would enable a developing country with less expertise and capacity for negotiation to avoid concluding problematic tax treaties.
- When a developing country is a member of a regional economic community and that community aims to coordinate/harmonize its members’ tax policies, a regional tax treaty policy framework can help community members’ efforts for regional coordination/harmonization of tax policies and reduce the risk of erosion of revenue base of members and noncommunity members.

### Recommendations for regional coordination and negotiation
- A regional tax treaty policy framework and a regional model tax treaty—which set out agreed preferred positions to be pursued in negotiations—can enable members of a regional economic community of developing countries to negotiate a bundle of bilateral tax treaties as a group with a third-party country.
- This group negotiation provides member countries more bargaining power than they would have in one-on-one negotiations, as well as other benefits such as enabling uniform interpretation and application of tax treaties among member countries.
- A joint negotiation team could benefit from technical assistance from international organizations.

*Source: htnea2021003 - 5. Conclusion*

---


_Source: https://www.imf.org/-/media/files/publications/howtonotes/2021/english/htnea2021003.pdf_