Tax treaty policy framework

The tax treaty policy framework should establish and explain the main policy outcomes that a country wishes to achieve when negotiating tax treaties (“to know what it wants”), including the identification of priority countries, the degree of flexibility that the negotiators may have and a minimum acceptable outcome in order to reach agreement. 

The UN and the OECD Models are helpful since it is harder to negotiate provisions that are not based on one of those Models. 

Some factors that should be taken into account include:

• international treaty norms reflected in the UN Model and the OECD Model;
• commitments related to, or impacting, tax treaty provisions made as participants in regional groupings and international organizations;
• key aspects of the country’s economy, including its main sources of revenue and areas of current or potential foreign investment;
• the domestic tax law and policy of the country and the way tax treaties will interact with that domestic tax law and policy; and
• the ability of the country’s tax administration to implement its treaty obligations.

Therefore, the tax treaty policy framework should be agreed on a whole-of-government basis and decisions to depart from specific policy choices endorsed in the UN or the OECD Models should be, if possible, limited and always carefully reasoned. Some regional organisations may also be helpful resources to obtain advice when designing a tax treaty policy framework and model.  

In light of the above factors, a sensible starting position for the development of the tax treaty policy framework would be for a country to carefully consider the provisions of the UN Model and the OECD Model (including the alternative provisions contained in its Commentary) and the interaction of those provisions with their own domestic and international tax policy, with a particular focus on defining a policy position on each of the following (with an inclination to protect source country taxing rights):

• Withholding tax rates for dividends, interest, royalties, technical service fees, and capital gains;
• A MAP-based tiebreaker for dual resident entities;
• A definition of permanent establishment (“PE”), which may include a services PE;
• A technical services fee article following Article 12A of the UN Model;
• A definition of royalties including payments for the use of industrial, commercial or scientific equipment;
• The right to comprehensively tax indirect transfers of immovable property;
• Assistance in the collection of taxes;
•  A principal purpose test (“PPT”), with the consideration of the use of a limitation-on-benefits (“LOB”) provision; and
• Other BEPS tax treaty-related measures, in particular those to protect tax treaties from inappropriate use (including treaty shopping) and to enhance dispute prevention and resolution.

In applying the tax treaty policy framework when designing a country’s model or preparing for a particular negotiation, countries should ensure that they analyze at least the following points and adapt as appropriate (see also subsection C.5.):

• The objectives of entering into the tax treaty, with confirmation that alternative instruments have been considered;
• The reasons for entering into a tax treaty with the specific treaty partner,
• The current volume of cross-border trade and investment with the treaty partner;
• How the tax treaty is expected to increase the level of cross-border trade and investment with the treaty partner;
• An estimation of the potential revenue effect of the treaty for the country;  
• Whether there are policies and existing tax legislation in the country, that may be in conflict with a treaty; and
• Any other benefits or costs to the country that may result from the tax treaty.

• See paragraphs 63 - 76 of the UN Manual
• Find the 2017 OECD Model (PDF)
• Find the 2021 UN Model (PDF)
• For an example of a regional treaty model, find the ATAF Model
• Find information about commitments in the context of the Inclusive Framework on BEPS
• Find information about commitments in the context of the Global Forum on Transparency and Exchange of Information
• Find the 2020 PCT Toolkit on “Taxation of Offshore Indirect Transfers”

The model treaty should reflect the choices made when developing the country’s tax treaty policy framework and should take the form of a draft treaty showing the different provisions that the country would ideally want to include in its tax treaties.  

Countries should, as far as possible and to the extent that this is consistent with their policy objectives, adopt the structure of the UN Model and the OECD Model and use the wording of the provisions found in these models and their commentaries. Countries should also be mindful of the benefits of a consistent approach (see subsection C.7).

• See paragraphs 63 – 68 and 77- 79 of the UN Manual
• See Section III of the UN Manual that provides a summary of the various provisions of the UN and OECD Models and discusses possible alternatives
• For an example of a regional treaty model, find the ATAF model