By Francesca Amaddeo, Researcher, Tax Law Competence Centre (SUPSI), Manno, Switzerland
On 29 June, the Platform for Collaboration on Tax, a joint initiative of the IMF, OECD, UN, and World Bank Group (WBG), released a discussion draft on its toolkit on tax treaty negotiations.
Negotiation is an art, and (maybe) it is not for everyone.
These brief guidelines aim to help tax treaty negotiators, especially negotiators from developing countries, improve their skills. The Platform is seeking comments from the public, focusing on the completeness of their draft guidelines.
Tax treaties represent an important instrument to direct fiscal policies. Their preparation needs accuracy, structure, and savoir-faire.
The nature of tax treaties
The draft toolkit notes that usually, negotiating and signing treaties on tax matters involves political or economic leverage.
This concept might be misleading. Tax treaties are essentially tax instruments. Any non-tax reasons for entering into a tax treaty must, therefore, be evaluated critically, the Platform’s guidelines suggest.
An examination of other countries’ international relationships will help the negotiator properly face the dialogue, the toolkit states. Negotiators should consider economic factors, tax regimes enforced in other countries, and available resources.
Given these bases, tax authorities shall be able to choose the instrument which best fits their needs.
The most common tax treaties are double taxation conventions, which usually follow the UN or the OECD model. But they are not the only ones! These tools provide several rules, which profoundly affect fiscal sovereignty in cross-border circumstances.
For instance, jurisdictions that aim to attract foreign investment may opt for a domestic rule.
Notwithstanding, unilateral actions may lead to economic distortion and risk promoting a “race to the bottom,” the guidelines state.
Alternatives like tax information exchange agreements or the Multilateral Convention on Mutual Administrative Assistance in Tax Matters allow countries to receive administrative cooperation without being affected by such an influence.
(Un)fortunately, double taxation (and double non-taxation), as well as tax evasion and tax avoidance cannot be tackled without the main instrument.
The guidance stresses that since developing countries attract investors through a low or zero tax rate, treaty abuse must be prevented.
The tax treaty draft
It follows that authorities shall keep in mind the structure of the treaty draft, encompassing all key points they care to address.
The draft should include general provisions and definitions to clarify terms. Distributive rules are also crucial: the toolkit suggests providing exclusive taxing rights to the residence State. Source jurisdiction will reduce the amount of tax charged to non-residents.
Moreover, the draft must provide for the elimination of double taxation, a non-discrimination principle, and international cooperation and assistance.
In other words, negotiators must know what they want.
The tax treaty policy framework must be clarified: it encompasses priority countries, degree of flexibility in negotiation, and a minimum acceptable outcome to reach the agreement.
It follows that there will be non-negotiable provisions because of their intrinsic value. Some reflect strongly held policy which cannot be discussed, while others merely represent a strong preference, but which, under certain circumstances, can be accepted.
The treaty team plays with an open hand
Aside from tax treaty contents, several non-juridical issues are addressed in the draft guidance.
The team must get ministerial authorization to proceed and comply with all administrative requirements. The team must get appropriate signatures for all drafts and take the steps needed for the enforcement of the treaty, including obtaining official translations of texts.
Moving to the personal aspect, negotiators should lay the groundwork before entering into the institutional dialog. Internal organization is crucial: each member will have specific tasks in the negotiation. The team should agree on these lines before entering into talks.
Negotiation style represents a key factor. It depends on a series of elements strictly related to personalities. The approach shall be soft or aggressive or something in the middle. It implies a strong self-confidence and a particular ability in understanding your interlocutors.
Some thoughts
The assistance provided by this toolkit proposal is remarkable. Nobody is born ready to properly negotiate or represent his/her State at the international level.
Trying to help countries which are novice negotiators without sounding arrogant is not easy. Despite this, the document seems like a “how-to” guide, made up of three parts.
The choice of the more suitable instrument, based on the above considerations, represents the first important phase of negotiations. Indeed, authorities that are not confident with such practices may find some help by following this to-do-list.
Developed countries should not assume that administrative practices are ruled by domestic legislation. This could be a serious mistake because of the significant differences among countries. Suggestions for this area cannot be taken for granted.
Finally, regarding behavioral tips, the personal approach might tip the scale. Being friendly or aggressive may lead to a completely different result.
Of course, a charming personality is an asset, but others may join the dialog to determine what is expected.
Comments on the draft are open until 10 September. We don’t know what the summer holds!
Francesca Amaddeo
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