This note was prepared by Kiyoshi Nakayama. The author would like to thank Ruud De Mooij, Michael Durst, Cory Hillier, Michael Keen, Sebastien Leduc, Zayda Manatta, Geerten Michielse, Victoria Perry, Adrian Pickering, Christophe Waerzeggers (in an alphabetical order), and other IMF colleagues for their useful comments.

As guidance for developing countries on tax treaty negotiations, the Platform for Collaboration on Tax released “Toolkit on Tax Treaty Negotiation” that provides capacity-building support to developing countries on tax treaty negotiation (https://www.tax-platform.org/publications/PCT_Toolkit_Tax_Treaty_Negotiations_Online_Version). The guidance may be also found in the UN Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (2019).

A regional economic community is a form of regional integration to foster cooperation and economic integration, such as a free trade area, a monetary union, or a custom union.

For example, Africa has ten regional economic communities, all of which are components of the African Union: AMU (Arab Maghreb Union), CEN-SAD (The Commission of Sahel-Saharan States), CEMAC (Central African Economic and Monetary Community), COMESA (Common Market for Eastern and Southern Africa), EAC (East African Community), ECCAS (Economic Community of Central African States), ECOWAS (Economic Community of West African States), IGAD (Intergovernmental Authority on Development), SACU (Southern African Customs Union) and SADC (Southern African Development Community). WAEMU (Western African Economic and Monetary Union) is an economic and monetary union within ECOWAS. In addition, the Africa Continental Free Trade Area, which is the third of six stages in establishing an African Economic Community by 2028, entered into force on May 30, 2019.

Tax ’coordination’ is meant here cooperative tax setting, where community members change their domestic tax system to one compatible with the aims of the community by giving up parts of their autonomy in tax matter. Tax ’harmonization’ is tighter than tax coordination, meaning that members’ domestic tax system are almost identical in tax bases and/or tax rate.

For example, the Nordic Tax Treaty, WAEMU Tax Treaty, and CEMAC Tax Treaty.

For example, the Association of Southeast Asian Nation (ASEAN) Model Tax Treaty and the Common Market for Eastern and Southern Africa (COMESA) Model Tax Treaty. While the African Tax Administration Forum (ATAF) is not a regional economic community, it has a model tax treaty. The ATAF Model Tax Treaty aims to promote common regional (African) policy and enhance a consistent approach.

Thus, a regional tax treaty differs from a multilateral tax treaty that is open to any countries such as the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) or the MLI.

A regional tax treaty also aims to provide tax certainty to taxpayers through dispute resolution mechanisms and apply a uniform taxation rule.

The regional tax treaty policy framework should also apply to negotiations of a bilateral tax treaty with other member of regional economic community, and to a regional tax treaty but in this case source country taxing rights such as ceiling rates of withholding taxes on investment income might be reduced.

The regional tax treaty policy framework should include a regional model tax treaty.

International Monetary Fund (IMF) (2014).

IMF (2014); IMF (2019) summarizes the key developments in tax treaties since the 2014 paper.

For a positive impact, Di Giovanni (2005), Neumayer (2007), Millimet and Kumas (2007), and Barthel and others (2010). For no or negative impacts, Blonigen and Davies (2004), Blonigen and Davies (2005); Egger and others (2006); Louis and Rousslang (2008).

There will be further and unanticipated revenue loss if a resident of a third country can exploit benefits of the treaty concluded by a developing country.

Foreign tax credit or exemption arrangements in domestic laws can alleviate double taxation of residents. However, corresponding adjustments that solve economic double taxation caused by transfer pricing adjustment can be provided only where competent authorities (meaning a representative in each treaty partner country who will be responsible for implementing the tax treaty and its provisions) agree under mutual agreement procedures (which is a dispute resolution mechanism between competent authorities provided in tax treaties,) in some countries.

Some developing countries are regional hubs for foreign direct investment, and their resident companies may have foreign-source income.

For example, a tax information exchange agreement (TIEA) or the MAAC enable the tax administration to use exchange of information.

An anti-treaty shopping clause could prevent such spillover effect, in theory, if the tax administration is capable of applying the clause properly.

For example, a treaty that waives source taxation on investment income.

In addition to the regional taxation treaties shown in Table 1, some regional treaties for mutual assistance in tax matters exist among developing countries, for example, the SAARC (South Asian Association for Regional Cooperation) Income Tax and Mutual Assistance Treaty (2011). The latest IBFD database does not indicate any other tax-related regional agreements of developing countries.

Brooks (2010) indicated that the CARICOM treaty has potential advantages in facilitating trade, preventing or reducing tax evasion and avoidance through exchange of information, developing common approaches to treaty interpretation, and reducing administrative costs.

Article 11 of the CARICOM treaty provides:

“1. Dividends paid by a company which is a resident of a Member State to a resident of another Member State shall be taxed only in the first-mentioned State.

2. The rate of tax on the gross dividends shall be 0% percent.” 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.

For example, Jamaica does not have a bilateral tax treaty that waives source taxation on dividends with a non-CARICOM member country and its domestic law imposes a 33.3 percent withholding tax on dividends paid to non-residents.

As is the case for St. Lucia, and St. Vincent and the Grenadines. Barbados also exempts a withholding tax on dividends by a resident company paid to nonresidents from income earned from sources outside of Barbados.

If Country X exempts dividends received from overseas subsidiaries regardless of the tax burden of the subsidiaries, the dividends received by P from T are not subject to any tax other than a corporate income tax in Country Z.

The Andean treaty does not include any anti-treaty shopping provision, either. The CEMAC and WAEMU treaties do not have an anti-treaty shopping provision as recommended by the final report on BEPS Action 6; the WAEMU treaty has a beneficial ownership requirement for the articles on dividends and interest. 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, anti-treaty shopping provision in the MLI is not applicable to the CARICOM treaty as of January 15, 2021. For other regional tax treaties, Columbia, Peru, Gabon, Burkina Faso, Cote d’Ivoire, and Senegal signed or ratified the MLI, but they did not include their regional tax treaties as agreements covered by the MLI. (https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm)

It is also possible for residents of a CARICOM member (Z) to receive dividends from a company (T) in his/her country (Z) tax free by establishing a company (S) in country (Y) and having S purchase T’s shares (“round tripping”).

The CEMAC treaty waives source taxation on royalties if they are taxed in a resident country.

If cross-border income and investment flows between members are balanced and members eliminate double taxation by means of a credit system, the amount of foreign tax credit allowed to residents would also decline. Thus, the amount of net revenue loss caused by a regional tax treaty under this assumption could be marginal.

To facilitate further integration of economic and trade activities among community members by ensuring the elimination of double taxation, reducing source taxation, providing tax certainty to taxpayers, and applying a uniform taxation rule.

Among other things, the VAT directive provides 15 percent as the minimum standard rate and 5 percent as the minimum reduced rate. The directive also provides detailed rules on a VAT such as places of taxable transactions. The directive is available at https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32006L0112. Its implementing regulation is available at https://eur-lex.europa.eu/legalcontent/EN/ALL/?uri=CELEX%3A32011R0282.

The Parent-Subsidiary Directive (PSD), the Saving Directive, and the Interest and Royalties Directive require EU members not to impose source taxation on investment income paid to nonresidents in prescribed cases. However, a new anti-abuse clause was added to the PSD in 2015, and the Saving Directive was repealed in January 2016.

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A31998Y0106%2801%29

The minimum standards of the Base Erosion and Profit Shifting recommendations and the internationally agreed standard for tax transparency may not be hard laws unless defensive measures for non-compliant jurisdictions are strictly applied.

Mansour and Rota-Graziosi (2013).

Even if a community has a regional court of justice, it rarely functions well (Mansour and Rota-Graziosi 2013).

Paragraph 1 of Article 107 of the Treaty on the Functioning of the European Union provides: “Any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

Even if the treaty has anti-treaty shopping provisions, it may take time for most developing countries to effectively detect and address treaty shopping.

For example, Article 10(6) of the Protocol to the South Africa-Sweden Tax Treaty provides: “If any agreement or convention between South Africa and a third state provides that South Africa shall exempt from tax dividends (either generally or in respect of specific categories of dividends) arising in South Africa, or limit the tax charged in South Africa on such dividends (either generally or in respect of specific categories of dividends) to a rate lower than that provided for in subparagraph (a) of paragraph 2, such exemption or lower rate shall automatically apply to dividends (either generally or in respect of those specific categories of dividends) arising in South Africa and beneficially owned by a resident of Sweden and dividends (either generally or in respect of those specific categories of dividends) arising in Sweden and beneficially owned by a resident of South Africa, under the same conditions as if such exemption or lower rate had been specified in that subparagraph.”

Some MFN clauses are not related to investment income, and not all MFN clauses are automatic. Some only require renegotiation.

The OECD’s “Harmful Tax Practices – 2018 Progress Report on Preferential Regimes indicates the criteria for assessing preferential tax regimes (https://www.oecd.org/tax/beps/harmful-tax-practices-peer-review-results-on-preferential-regimes.pdf). The latest per reviews results are available at https://read.oecd-ilibrary.org/taxation/harmful-tax-practices-2018-progress-report-on-preferential-regimes_9789264311480-en#page1.

It is likely desirable to align the minimum CIT rate with the Global Minimum Tax that could be agreed on Pillar 2 approach or even exceed the rate of that Global Minimum Tax.

This should also be considered when a regional community introduces a rule that requires its members to reduce source taxation on investment income derived by residents of other community members by domestic laws instead of a regional tax treaty.

Including those with no/low source taxation on investment income paid to nonresidents.

Changes in tax laws in a treaty partner after the treaty entered into force could expose the other treaty partner to an unanticipated risk of treaty abuse. To prevent this, each treaty signatory’s domestic tax laws should be monitored. The US 2016 Model Tax Treaty includes a new article entitled “Subsequent Changes in Law” (Article 28), which enables either the US or its treaty partner to cease granting treaty benefits in certain circumstances when changes to domestic tax law are enacted after the treaty has been signed. Paragraph 101 of the Commentary on article 1 of the 2017 OECD Model Tax Convention includes a provision similar to that in the US Model as an example.

Comprehensive data on the existing tax treaty policy framework are not available.

A foreign affairs ministry may be the ministry in charge of treaty negotiations. However, given the required expertise for tax treaty negotiations, the ministry of finance most often plays the primary role in negotiating substantial matters.

If a country has no CIT or an extremely low CIT rate, there is no/little risk of significant double taxation, but a tax treaty with such country could create or increase nontaxation in either country. The MLI noted the need to ensure that existing agreements for the avoidance of double taxation on income are interpreted to eliminate double taxation with respect to the taxes covered by those agreements without creating opportunities for nontaxation or reduced taxation through tax evasion or avoidance. While there is usually no need to conclude a comprehensive tax treaty with countries with no CIT or an extremely low CIT rate, there is a need for a Tax Information Exchange Agreement with such no- or low-tax jurisdictions or the MAAC because such countries could be more likely used for tax avoidance or evasion than countries with a certain level of a CIT rate. The OECD’s final report on BEPS Action 6 provides useful guidance on tax policy consideration that are relevant to the decision of whether to enter into a tax treaty or amend an existing treaty.

A minister of finance or deputy. It is preferable that the policy framework be agreed on a whole-of-government basis (PCT 2021).

No one would disclose cards voluntarily in a card game.

For example, the U.S publishes its model income tax convention. (https://www.treasury.gov/resource-center/tax-policy/treaties/documents/treaty-us%20model-2016.pdf). The Netherlands also publishes its tax treaty policy.

As mentioned in Footnote 6, ASEAN, COMESA, and ATAF have a model tax treaty but comprehensive data on regional tax treaty policy frameworks are not available.

If a community has no hard law to coordinate/harmonize domestic tax policy at present but intends to introduce rules, a regional tax treaty policy framework is still useful in preventing tax competition. A regional tax treaty policy framework could narrow the room for tax planning, because the framework requires members to conclude tax treaties that are identical in key provisions.

For example, the tax treaty policy of the Netherlands has been revised in 1996, 1998, 2011, and 2020 since its publication in 1987. The U.S. Model Income Tax Convention has been revised in 1981 (draft), 1996, 2006, and 2016 since its publication in 1976.

There may, for instance, be cases in which the ceiling rates for withholding taxes on the investment income of a regional tax treaty are lower than those of the bottom-line position of the regional tax treaty policy framework.

A ministerial level meeting of the regional economic community, which approved the tax treaty policy framework, can be used to ensure the agreed review and revision procedures be implemented.

For example, the code of conduct may include types of tax incentives that member countries should avoid adopting.

Pickering (2013), 29.

Article 12A of the UN Model.

The UN Model Commentary includes alternative drafting that could meet the needs of developing countries so that a developing country can tailor the provision to meet its needs.

Pickering (2013), 37–38.

The version prior to the 2017 update of the OECD Model had the following footnote on a paragraph on arbitration (Article 25 (4)):

[In some states] national law, policy or administrative considerations may not allow or justify the type of dispute resolution envisaged under this paragraph. In addition, some States may only wish to include this paragraph in treaties with certain States. For these reasons, the paragraph should only be included in the Convention where each State concludes that it would be appropriate to do so based on the factors described in paragraph 65 of the Commentary on the paragraph. (to continue).”

Pickering (2013), 43.

A subject to tax rule clause applies to undertaxed payments that would otherwise be eligible for relief under a tax treaty. This clause is based on the idea that certain treaty benefits would only be granted if the item of income is sufficiently taxed in the other state.

As another example, the 20th session of the UN Committee of Experts on International Cooperation in Tax Matters discussed the addition of a new Article 12B (Income from Automated Digital Services) to the UN Model (UN 2000).

As all OECD member countries made public their reservations to the OECD Model, a developing country negotiating with an OECD member country can find the counterpart’s positions that deviate from the OECD Model in advance. Some non-OECD member countries also made reservations to the Model.

It is also likely to require concessions on other issues that are not bottom-line positions.

IMF (2014), 25–27.

The minimum withholding rates should not be zero.

There are many papers on this issue. The latest one focusing on Africa is Quak and Timmis (2018).

If, for example, a developing country has significant natural resources such as oil reserves, it may wish to ensure that its tax treaties do not unduly restrict its ability to tax the income from activities relating to the exploitation of such resources. Similarly, if there are significant road or rail transport activities between two neighboring countries, those countries may wish to extend the operation of Article 8 (Shipping, inland waterways transport and air transport) to those forms of transport (Pickering (2013)).

Even if a country’s current tax law does not provide taxing rights on certain type of income, the country can include such taxing rights in its bottom lines if it believes it may wish in future to change tax laws.

As group negotiations are joint negotiations of a bundle of bilateral tax treaties by a single negotiating team, the decision to ratify signed treaties is up to each member.

Such international organizations have no conflict of interest in providing advice and can draw expertise from both advanced and developing countries, for example providing simulated negotiation exercises using former treaty negotiators of advanced and developing countries and retired tax practitioners. There are some lawyers who provide such assistance pro bono.