An Introduction to Tax and Investment Treaties

Françoise L.M Hendy International Treaty Negotiator

(Tax, Investment, Trade)Attorney-at-Law

BARBADOS’ BARBADOS’ TREATY TREATY NETWORK : NETWORK : Double TaxationDouble TaxationAgreementsAgreements(DTAs)(DTAs)

Austria

Belgium

Botswana

Canada

CARICOM

China

Czech Republic

Finland

Ghana

Iceland

Italy

Luxembourg

Malta

Mauritius

Mexico

Panama

Portugal

Sweden

Switzerland

Spain

United Kingdom

United States

Venezuela

Vietnam

Awaiting signature

Initialed

BARBADOS’ BARBADOS’ TREATY TREATY NETWORK : NETWORK : Bilateral Bilateral InvestmentInvestmentTreaties (BITs)Treaties (BITs)

Belgium-Luxembourg Economic Union

Canada

China

Cuba

Ghana

Germany

Italy

Mauritius

Switzerland

United Kingdom

Venezuela

What is a TREATY ?What is a TREATY ?

o A ‘Proof’ and ‘Product’ of Diplomacy

o A Contract

concluded between Sovereign States

in written Form governed by Public International Law

whether in One or More Documents

regardless of its Description

Legal Effect of a Legal Effect of a TREATY ?TREATY ?

oContracting State Parties

DualismMonism

oThird States (Non-Contracting State Parties)

oTerritorial Application

oSuccession

What is a TAX What is a TAX TREATY ?TREATY ?

An agreement in writing between sovereign states governed by public international law which sets out the rights and responsibilities of the contracting states in respect of matters of international taxation including the exchange of tax information and the prevention of fiscal evasion.

International International Taxation: A Taxation: A Fiction!Fiction!

Under International law there does not exist an overarching body of ‘international tax law’ through which international prescriptive and enforcement powers in relation to the imposition of tax has been recognized or accepted by the community of states.

The right to impose tax and the administration of a taxation system along with the authority to impose sanction for breach of the obligation is a function of domestic law.

International Taxation therefore merely refers to the ‘foreign’ elements of a country’s domestic tax system which expose latent or patent conflicts with another country’s tax system which warrant a joint and sustained response by the countries whose national interests are affected by unilateral remedies which may not adequately or definitely resolve the problems in the application of the domestic tax law.  

Goals of Goals of International International Taxation Rules (1)Taxation Rules (1)

oAvoidance of Double Taxation The juridical meaning of ‘double taxation’ describes the concept where taxation occurs in two or more jurisdictions in respect of the same object of tax and exercised with respect to the same tax subject for the same taxable period

oTypes of double taxation

Source-Source Residence-Source Source-Residence

Goals of Goals of International International Taxation Rules: (2)Taxation Rules: (2)

Fairness

o Inter-state justice (Protection of tax-base)

Transparency Exchange of Tax Information Prevention of Fiscal Evasion

o Taxpayer Treatment Non-discriminatory treatment of taxpayer liability without reference to the source of the income

Tax liability should be contingent on tax payers ability to pay.

Goals of Goals of International International Taxation Rules: Taxation Rules: (3)(3)

Competiveness

o National

o Industry

o Firm

o Individual

Goals of Goals of International International Taxation: (4)Taxation: (4)

Neutrality

o A fundamental tax policy principle.

It requires that economic processes should not be affected by external influences such as taxation. In this way it is argued

productivity will be highest when income producing factors are distributed by the market preference without public interference. Neutral equates to efficiency and tax laws that do not

interfere with factor distribution by market forces are regarded as neutral.

o Capital Import vs. Export Neutrality

The Rules of The Rules of International International Taxation: Taxation: OverviewOverview

The purpose of tax treaties can be said to be the codification of rules that will be applied to resolve the conflicts that arise as a result of juridical double taxation.

In this respect they are three types of these distributive rules: source, assignment and relief.

The Rules of The Rules of International International Taxation (1)Taxation (1)

Source

Customary international law provides that a country has the primary right to tax income that has its source in that country.

Under the rules of source the tax objects over which the State has the principal though not exclusive right to tax include

immoveable property; industrial or business profits and professional services; shipping and air transport; dividend, interest payments and directors’ fees; employment services; artistes, entertainers and sportspersons; and government salaries and pensions

The Rules of The Rules of International International Taxation (2)Taxation (2)

Assignment

Assignment rules allocate either an exclusive or limited taxing right to countries using one or more of the following distributive principles on different income sources: the exclusive right to tax is conferred on the state of source of the tax object; the source country can reserve the right to limit or share its taxation right of the object; the source country may tax fully even in the absence of an exclusive tax right; and the exclusive right to taxation is with the country where the tax subject resides.

The Rules of The Rules of International International Taxation (3)Taxation (3)

Relief

The content of these rules also provide for mechanisms to eliminate or mitigate juridical double taxation when it arises by: the exemption method whereby full exemption or exemption with progression is provided in respect of the taxes suffered in the other jurisdiction; full or ordinary credit for the tax paid is provided at the marginal or average tax rate; of limited modern-day use is the tax sparing method where a tax sparing credit is granted by the residence country for foreign taxes that for some reason were not actually paid under the country’s normal tax rules.

Key Elements of Key Elements of a Tax Treaty: (1)a Tax Treaty: (1)

Scope and Coverage

o Persons Covered

Individual Company Other body of person

o Taxes Covered

Income ( Corporate , premium, petroleum

winnings)Capital Gains

Key Elements of Key Elements of a Tax Treaty: (2)a Tax Treaty: (2)

Residency

oNot citizenship

oNot nationality

o‘Liable to tax’

Residence Incorporation Central Management

and Control

Domicile Intention + Stay +

Notification Place of management

Permanent Establishment Any other similar criterion

o

Key Elements of Key Elements of a Tax Treaty: (3)a Tax Treaty: (3)

Apportionment of Taxing Rights

o Business Incomeo Shipping and International Transporto Associated enterpriseso Professionals o Investment Income

DividendsInterestRoyalties

o Capital gainso Income from immoveable propertyo Income from employmento Pensions and other remunerationo Professors and teacherso Students and traineeso Treatment of Entertainers and sportspersonso Other income

Key Elements of Key Elements of a Tax Treaty: (4)a Tax Treaty: (4)

Methods of Avoiding Double Taxation

o Tax Sparing

o Credit Method

o Exemption

Key Elements of Key Elements of a Tax Treaty: (5)a Tax Treaty: (5)

Prevention of Fiscal Evasion

Avoidance and evasion distinguished

Denial of treaty benefitsApplication of domestic

GAARLimitation of Benefits

provisionsAdministrative co-operation

Competent Authority Procedure

Exchange of tax information

Non-discrimination

CASE STUDYCASE STUDY

CHINA

IBC

JAMAICA VENEZUELA

Dividends WHT 0% Dividends WHT 5%

What is a What is a Bilateral Bilateral Investment Investment Treaty?Treaty?

An agreement in writing between sovereign states governed by public international law which sets out the rights and responsibilities of the contracting states in respect of matters related to the reciprocal protection and promotion of investment including the resolution of investment-related disputes.

Goals of Foreign Goals of Foreign Direct Direct Investment Rules Investment Rules (Overview)(Overview)

OVERVIEW

to protect investment abroad in countries where investor rights are not already protected through existing agreements (such as modern treaties of friendship, commerce, and navigation, or free trade agreements);

to encourage the adoption of market oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory way;

and to support the development of international law standards consistent with these objectives

Goals of Foreign Goals of Foreign Direct Direct Investment Rules Investment Rules (1) (1)

Protection of Private Investment Abroad

o Certainty and predictability of treatment of private Foreign Direct Investment (FDI)

o Transparency in government activities in relation to private FDI.

Performance CriteriaCompensationExpropriationDispute Settlement

o Non-discriminatory treatment of investors in relation to their investments

o Application of most-favoured nation treatment in relation to the investment of investors

Goals of Foreign Goals of Foreign Direct Direct Investment Rules Investment Rules (2) (2)

Promotion of Inbound and Outbound Private Investment

o Creation of mechanisms including Joint Commissions to actively promote and encourage private investment in both countries.

The Rules of The Rules of Foreign Direct Foreign Direct Investment: Investment: (OVERVIEW)(OVERVIEW)

The purpose bilateral investment treaties can be said to be the codification of rules that will be applied to resolve the conflicts that arise as a result of the existence of private investment in a foreign jurisdiction while instituting means of directly facilitating the creation and retention of such investment.

In this respect they are three types of these rules: standards of treatment; investment protection; and dispute resolution.

The Rules of The Rules of Foreign Direct Foreign Direct Investment (1)Investment (1)

In relation to his investment the investor is entitled to the following minimum standards of treatment:

oFair and Equitable treatment

oFull, Protection and Security

oNational treatment

oMost-Favoured Nation treatment

The Rules of The Rules of Foreign Direct Foreign Direct Investment (2)Investment (2)

In relation to the protection of his investment the investor is entitled to the certain minimum standards concerning:

o Free Transfers

oExpropriation

oCompensation

oDispute Settlement

Key Elements of Key Elements of a BIT (1)a BIT (1)

Preamble and Definition

oIntention of the Parties

oMeaning of key terms

Investment

National

Company

Key Elements of Key Elements of a BIT (2)a BIT (2)

Promotion and Protection

“Each Contracting Party shall encourage and create favourable conditions for national or companies of the other Contracting Party to invest capital in its territory, and, subject to its right to exercise powers conferred by its laws, shall admit such capital. Investments of nationals or companies of each Contracting party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.

Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party. Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.”

Key Elements of Key Elements of a BIT (3)a BIT (3)

National Treatment

Most-Favoured-Nation Treatment

Key Elements of Key Elements of a BIT (4)a BIT (4)

Compensation for Losses

“Nationals or companies of one Contracting Party whose investments in the territory of the other Contracting Party suffer losses owing to war or other armed conflict, revolution, a state of national emergency, revolt, insurrection or riot in the territory of the latter Contracting Party shall be accorded by the latter Contracting Party treatment, as regards restitution, indemnification, compensation or other settlement, no less favourable than that which the latter Contracting Party accords to its own nationals or companies or to nationals or companies of an third State.

Resulting payments shall be freely transferable.” 

Key Elements of Key Elements of a BIT (5)a BIT (5)

Expropriation

“Investments of nationals or companies of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Party except for a public purpose related to the internal needs of that Party on a non-discriminatory basis and against prompt, adequate and effective compensation.

Such compensation shall amount to the market value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier, shall include interest at a normal commercial rate until the date of payment, shall be made without delay be effectively realizable and be freely transferable.”

Key Elements of Key Elements of a BIT (6)a BIT (6)

Dispute Resolution.

oState to State Disputes

oInvestor State Disputes

Arbitration

Françoise L.M Hendy International Tax and Investment Attorney

Invest BarbadosOctober 2011