Organisation for Economic Co-operation and Development Changing the OECD Model Tax Convention Mary Bennett Head of Tax Treaty & Transfer Pricing Division OECD Centre for Tax Policy & Administration Mary Bennett Head of Tax Treaty, Transfer Pricing & Financial Transactions Division OECD Centre for Tax Policy and Administration Swiss-American Chamber of Commerce Tax Chapter Zurich 4 November 2009 Centre for Tax Policy and Administration
Major Issues on Treaty Agenda Article 7 attribution of profits to PEs Collective investment vehicles and treaty claim procedures Permanent establishment definition Other issues Beneficial owner concept Short-term assignments Non-discrimination Phase 2 Telecommunications Sovereign Wealth Funds Exchange of information 2 2
Organisation for Economic Co-operation and Development Article 7 attribution of profits to PEs Centre for Tax Policy and Administration
Article 7 project Report on Attribution of Profits to Permanent Establishments introduced Authorised OECD approach (AOA) -- finalized July 2008 OECD Council Recommendation Functionally separate entity approach Report goes further than before in the recognition of dealings and in the analogy with a subsidiary 4 4
Article 7 project Report includes reversal of the OECD Commentary s traditional interpretations in some cases Decision regarding two-track implementation: First track: revised Commentary to existing Article 7 as part of 2008 Update to OECD Model Implementing as much as possible, without conflicting with prior Commentary Goal to maximize certainty for interpreting existing treaties Priority to Commentary in case of conflict with Report Second track: develop a new Article 7 for inclusion in 2010 Update to OECD Model 5 5
New Article 7 Discussion Draft released July 2008 Amended Article 7(1) (basic rule) and 7(2) (arm s length standard) Deleted old Article 7(3) (expenses), 7(4) (apportionment of total profits alternative), 7(5) (no profits to purchasing function), and 7(6) (same method year by year) Kept old Article 7(7) (precedence of other Articles) Introduced new Article 7(3) on symmetry : Resulted from the absence of OECD agreement on a single method for attributing free capital to a PE Provided for deference, by the head office State, to the determination of free capital by the State of the PE 6 6
New Article 7 Comments from 14 associations or individuals See www.oecd.org/ctp/tt Few comments on paragraphs 1 and 2 Most comments on paragraph 3 -- comments were critical of the narrow scope of the paragraph and the implicit suggestion that there are cases where double taxation is not eliminated by the treaty Public consultation held September 2009 7 7
New Article 7 Based on the comments received, the OECD sub-group in charge of the drafting of the new Article 7 has made a number of proposals for changes, particularly as regards the issue of relief of double taxation The approach underlying these changes has been endorsed by the Committee on Fiscal Affairs We expect that a revised discussion draft will be released in November or December The goal is still to have the new Article included in the next update in 2010 8 8
New Article 7 Proposals for changes No changes proposed to paragraphs 1, 2 and 4 of the new Article It is proposed that paragraph 3 be replaced by a broader provision providing a solution similar to that of paragraph 2 of Article 9 so that the combination of Articles 7, 23 and 25 will ensure that all cases of double taxation are eliminated thereby addressing the main source of concerns expressed in the comments 9 9
New Article 7 Proposals for changes It is proposed that the new Commentary expressly state that if each State recognizes that the taxpayer has determined the profits attributable to the permanent establishment in the same manner in each Contracting State and in accordance with paragraph 2 as interpreted by the Report, they will both refrain from making any adjustment to the profits in order to reach a different result under paragraph 2 10 10
New Article 7 Proposals for changes It is proposed that paragraph 23 be expanded to clarify that it is generally not intended that more burdensome documentation requirements be imposed in connection with dealings than apply to transactions between associated enterprises (but considering the nature of a dealing, countries would wish to require taxpayers to demonstrate clearly that it would be appropriate to recognise the dealing) Various other, more minor, changes also to be made 11 11
Organisation for Economic Co-operation and Development Collective Investment Vehicles and Treaty Claim Procedures Centre for Tax Policy and Administration
CIVs and treaty claim procedures Project was initiated to examine: Questions of treaty entitlement of CIV funds themselves Questions of availability of treaty benefits to CIV investors Compliance and administrative difficulties posed more generally by treaty claims on cross-border portfolio investment: large and fluctuating numbers of investors, involvement of intermediaries, etc. 13 13
CIVs and treaty claim procedures Project in 2007-2008 involved: Informal Consultative Group (industry specialists, as well as OECD and non-oecd government representatives dealing with tax policy and tax administration) Informal coordination with EU FISCO group 2 Reports published in January 2009: Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles -- on technical issues of treaty entitlement for CIV income Possible Improvements to Procedures for Tax Relief for Cross-Border Investors -- on procedural aspects of claiming treaty benefits for portfolio income more generally 14 14
ICG Report on technical CIV issues Report proposed Commentary additions to address: Whether CIVs qualify for benefits in their own right Where they do not, procedures that could be adopted to let them claim benefits on behalf of their investors Optional provisions countries could include in future treaties to deal with these issues CFA referred Report to WP1 for its consideration WP1 s draft follow-up Report likely to be released as a Discussion Draft in November 2009 Aim is to include new Commentary in 2010 Update 15 15
ICG Report on procedural issues Makes best practice recommendations: Suggests relief at source rather than by refund Investor self-declarations should replace certificates of residence Intermediaries could enter into contracts with source countries to be authorised to make claims for investors on the basis of tax rate pools However, reporting of beneficial owner information by intermediaries to source country could be required Source countries would retain right to review compliance Countries would work on standardising reporting and documentation to minimise the burden for intermediaries 16 16
ICG Report on procedural issues CFA approved creation of Pilot Group to develop standardised documentation to: streamline procedures to maximise adoption by business; facilitate adoption by countries; and ensure information can be used by governments Ongoing cooperation with EU group conducting parallel work EU Recommendation released 19 October 2009 17 17
Organisation for Economic Co-operation and Development Permanent Establishment Definition Centre for Tax Policy and Administration
Article 5 developments Two developments: Alternative PE threshold for services included in 2008 Update to the Commentary on Article 5 Working Party 1 has new project on clarifying interpretive issues under existing Article 5 of the Model 19 19
Alternative PE threshold for services OECD Model has no special PE threshold for services UN Model triggers PE if enterprise furnishes services through employees or other personnel if activities continue for same or connected project within host State for period(s) of >6 months in any 12-month period WP1 developed a similar (but modified) version of such a provision for inclusion in 2008 OECD Commentary as alternative to OECD Model 20 20
Alternative PE threshold for services New paragraphs added to Commentary on Article 5 Services similar to other business Existing PE threshold appropriate NO CHANGE to Model itself But some OECD States prefer policy of source taxation of services even in absence of fixed place of business or dependent agent PE 21 21
Alternative PE threshold for services Compromise services PE alternative provision added to 2008 Commentary on Article 5 But all OECD States agree: No source State taxation of services performed by non-resident outside source State Taxation of services income should be only on a net basis Services should be taxed only once a threshold is passed 22 22
Permanent establishment definition New WP1 project on existing Article 5 PE threshold likely to address a series of interpretive issues, including the meaning of: Contracting in the name of Preparatory or auxiliary exceptions Fixed place of business, meaning of at the disposal of First meeting of Working Group held in September Mandate calls for WG report to WP1 in February 2012 23 23
Organisation for Economic Co-operation and Development Other treaty work Centre for Tax Policy and Administration
Beneficial owner WP1 has started work on the meaning of the beneficial owner concept Likely to include examination of recent jurisprudence from various countries WP1 has held preliminary discussions at February and September 2009 meetings Discussions to continue in 2010 likely to consider some examples 25 25
Short term assignments Work ongoing to clarify the circumstances relevant to determining whether an individual s remuneration for services performed in a State is paid by, or on behalf of, an employer who is not a resident of that State (a condition of the so-called short-term assignment exception of Article 15(2)) Discussion drafts were published in 2004 and 2007 Revised version under consideration by WP1 Aim is to include final version in 2010 update to Model 26 26
Nondiscrimination Status of Phase 2 of project: Launched by an invitational seminar in Leiden in April 2008 Also was a major topic at IFA Congress in Brussels in September 2008 Examples of policy issues to be reviewed in Phase 2: Should cross-border reorganizations be protected? Should trade/investment agreement concepts be adopted (e.g., prohibiting discrimination against foreign production or foreign investment)? Should ECJ jurisprudence be used in interpretation? Discussion to resume in 2010 27 27
Other treaty issues Sovereign wealth funds Proposed additions to Commentary to describe sovereign immunity doctrine, countries treaty practices, issues relevant to determining treaty entitlement Discussion draft likely to be released in November or December Goal is to finalize for 2010 Update Telecommunications Proposed additions to Commentary to address Article 5 and 12 issues relating to leasing of transponders, roaming payments, undersea cables and pipelines, and payments under spectrum licenses Discussion draft likely to be released in November or December Goal is to finalize for 2010 Update 28 28
Organisation for Economic Co-operation and Development Exchange of information Centre for Tax Policy and Administration
Key principles of transparency and information exchange for tax purposes Existence of mechanisms for exchange of information upon request where it is foreseeably relevant to tax administration and enforcement EOI in both criminal and civil matters No restrictions on EOI caused by application of dual criminality principle or domestic interest requirement Respect for safeguards and limitations Strict confidentiality rules for information exchanged Availability of reliable information (in particular bank, ownership, identity and accounting information) and powers to obtain and provide such information in response to a specific request 30 30
Recent progress Principles of transparency and exchange of information developed by OECD s Global Forum on Transparency and Exchange of Information have now been endorsed by all 87 countries surveyed by the Global Forum, including all 30 OECD countries, and by G20 and UN Committee of Experts More than 120 TIEAs signed since last November and more than 160 overall; scores more initialled or in negotiation Also over 60 new tax treaties or protocols since April incorporating the standard 31 31
Next steps ensuring implementation Global Forum meeting in Mexico on September 1-2, 2009 resulted in agreement on: Restructuring the Global Forum to expand its membership and ensure its members participate on an equal footing; Agreeing on how to structure an in-depth peer review and quickly implement it; and Identifying mechanisms to speed up the negotiation and conclusion of agreements to exchange information and to enable developing countries to benefit from the more cooperative tax environment 32 32
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