Leiden Law Blog

Tackling double non-taxation

Tackling double non-taxation

Tackling double non-taxation is hot. In a world where governments are increasingly looking for tax revenue, battling tax mismatches, and in particular the abuse of these mismatches, is becoming increasingly important.

An example of a mismatch is for instance the case where state A considers a payment of a company in state B to a company in state A as (exempt) dividend, whereas state B regards this payment as (deductible) interest. The result: the taxpayer is not taxed anywhere.

Algirdas Šemeta, EU Commissioner for Taxation, Customs, Anti-fraud and Audit, said

“Fairness must be at the heart of our tax policies. Double non-taxation undermines fair burden sharing in taxation and allows an unjust competitive advantage to companies that seek to exploit it. Tackling double non-taxation will not only deliver important revenues to Member States, but it will also ensure a stronger, fairer Single Market for all EU businesses.”

In the effort to battle one of the issues of the abuse of tax mismatches, existing frameworks can be used. The OECD, as an influential participant in the world of tax, is one of the institutions that takes an active role in this respect.

The OECD has tried to tackle mismatches on the level of tax treaties. By encouraging its Member States to interpret their existing bilateral tax treaties as to include ‘inherent’ anti-abuse rules, the OECD hopes that the abuse of mismatches can be reduced. The OECD does this by periodically releasing interpretive material, in particular the OECD Commentary on the Model Tax Convention.

However, this effort does not always work out as planned as some states are skeptical about using interpretive material that is released after the conclusion of a tax treaty. For example, in a Canadian case where the issue was whether a tax treaty had to be construed as to include an ‘inherent’ anti-abuse rule, the cross-examination of an expert witness resulted in the following:

“Q. I think we both agree that trying to apply [2003] commentaries to interpret a treaty that was put in place in 1989 is nonsense. Would you agree with that?
A. That is correct.”

And in a Czech judgement, the Czech Supreme Administrative Court, when faced with interpretive material that was released in 1992 with respect to the interpretation of a 1974 treaty provision, held that it would not take into account this interpretive material. Notably, it seemed that the taxpayer was deftly making use of a mismatch.

If international consensus with respect to these interpretive issues can be established, existing tax treaty frameworks could provide a valuable tool in battling the abuse of tax mismatches. In any case, the momentum seems to be building.

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