International taxation is, in essence, a matter of agreement, since it will be necessary to recognize the importance of international treaties linked to avoiding situations of international double taxation.
Recognizing how harmful for international trade a hypothesis of international double taxation derived from the legitimate exercise of fiscal sovereignty by different jurisdictions linked to the same income unit and on the same taxpayer could be, international agreements to avoid double taxation (and recently double non-taxation or tax evasion situations) play a fundamental role in the coordination of fiscal wills or capacities of the jurisdictions involved.[1].
Currently, international agreements, at least within the framework of what is being studied in this document, are concluded on the basis of "negotiation models" that will then, naturally, undergo the adaptations specific to the agreements that each of the parties (countries) may reach.
Regardless of the need to know the particularities of each international agreement entered into (at the time of applying it), mastering the content of the model agreement, as well as its notes, will allow the tax analyst to better interpret the guidelines of each international agreement that is subject to scrutiny.
Finally, it should be noted that every model international agreement is accompanied by its explanatory notes; comments made to each article of the model agreement where we could even verify the position of different jurisdictions in relation to the reference commentary.
This will not be the place to discuss the character of the comments to the Convention as a “source of interpretation” in relation to the Vienna Convention on the Law of Treaties.[2]The reality is that these are part of the negotiation of every international treaty since, as we have previously indicated, the "base" document of said act will be the proposed model (even for non-OECD countries).
Dario Rajmilovich points out[3] that the comments are generally the only material available for the purposes of the guidelines set out in the model as well as the general agreements reached at a given date, are part of the body of international law (of consensus), contribute to the objective pursued by the agreement and provide certainty in the interpretation and application of the international pact. Naturally, the comments will be applied only when the body of the text of the agreement conforms to the general guidelines of the model and these have not been observed by the Nation that will apply the treaty.[4].
In the internal order we remember that the Treasury Attorney's Office of the Nation[5] It has been pointed out that international treaties are the expression of sovereign will agreements and must be interpreted in strict accordance. For its part, in the VOLKSWAGEN ARGENTINA TFN 2009 case, it has been said that the comments on the tax model proposed by the OECD have a “preparatory” character in the terms of the Vienna Convention on the law of treaties, which, without being binding, contribute to the correct interpretation of the guidelines of an international treaty.[6].
On the part of the national fiscal policy application authority (AFIP), we can observe the value of the comments to the model in opinions such as DI ATEC 811-2003 and instructions such as that issued in DI PYNF 747-2005. The importance given to the comments to the conventional model would be declared in the introduction to the commented conventional model 2017.[7].
It is in this context that the tax analyst must carefully study the guidelines provided by the tax agreement model proposed by the OECD (because it is the most influential model in our nation), as well as its comments, to incorporate, when deemed prudent, the variations observed with respect to another model that, because it is part of the Argentine Republic, as well as because our country follows some of its proposals, is interesting to know: the tax agreement model proposed by the United Nations.[8].
The reader should note, as has been stated, that the comments on the tax model are aimed at coordinating a common interpretation of its provisions in order to provide legal certainty among taxpayers in accordance with the limitation of action of the tax administrations of each signatory jurisdiction. The comments are, in short, “… a widely accepted guide for the interpretation and application of the provisions of existing bilateral agreements…”[9].
OECD reports[10] that by 1955 there were approximately 70 international treaties aimed at avoiding double taxation (in member countries of said international organization). The existence of general and accepted models by 1955 would have been necessarily derived from the activities initiated in 1921 by the then League of Nations, which culminated in 1928 with the first model of international tax agreement to avoid double taxation, leading to subsequent models in 1943 (Mexico Convention Model) and 1946 (London Convention Model).
In 1963, the final report entitled “Draft Convention on Double Taxation of Income and Capital” was presented to the OECD, inviting the different nations to conclude their international treaties based on this model. The model would be reviewed and updated in 1977. From 1991, a process of continuous review began, enabling the updating of its different parts (without the need for a comprehensive review). Thus, in 1997, new updates to the tax model were published that would include positions of non-member countries (among them the Republic of Argentina). Subsequent updates have been published in 1994, 1995, 1997, 2000, 2003, 2005, 2008, 2010 and 2014.[11] until reaching the current model dated 2017.
Tax treaties, although originally related to the intention of avoiding international double taxation, will not be the only objective pursued given that within their current body we find their orientation to avoid situations of tax evasion, tax avoidance, non-tax discrimination and even hypotheses of double non-taxation.
The main objective of an international agreement to avoid double taxation will be oriented towards the distribution of tax power by resignation of the exercise of jurisdiction (source) as well as the indication of the measures to be adopted by the jurisdictions of residence for the purposes of the recognition of credits for similar foreign taxes. The scope of application of the agreement as well as definitions of certain key issues are developed throughout its body.
The scope of application (referring to residents of both contracting States), as well as the taxes included (on income and assets) will be the first element of study for the tax analyst when faced with this type of treaty. However, possibly the most critical definitions will be those that establish special rules, excluding the general rule (Art. 7) such as interest, dividends, royalties or real estate.
The distribution of tax powers can be given by (a) exclusivity of jurisdiction of source of income, (b) distribution of jurisdiction[12] or (c) exclusivity of jurisdiction of residence. The tax jurisdiction (full or shared) agreed in the body of the treaty does not imply an obligation on the part of the counterparty in its exercise, that is: a treaty may recognize sole tax jurisdiction to the jurisdiction of the source of the income and this, in turn, may decide to exclude said income from taxation.[13].
As a general structure of the conventional model, unlike what happens with the proposal of the "Andean Pact", the model provided by the OECD provides that tax jurisdiction will be exercised by the State of residence, sharing it, for certain categories of income (interest, dividends or royalties).[14] or in accordance with specific situations (for example the installation of a Permanent Establishment) such jurisdiction with the source State.
An element that will mark what we could point out as the biggest point of conflict in terms of international taxation (due to the possibilities of evasion and arbitration demonstrated by tax planning schemes today considered aggressive)[15] since the business activity carried out by a resident of a foreign jurisdiction (originally anchored in Art. 7 of the agreement) will end up "attracted" to the jurisdiction of the source of income by virtue of the link that exists with the territory, this being another hypothesis of shared jurisdiction but without limitation for the State of residence of the owners of the permanent establishment located in the jurisdiction of the source of income.
Hypotheses of double taxation will arise, consequently, when we are faced with situations of shared tax jurisdiction, regardless of whether the source State exercises its tax jurisdiction with or without limitation, and in this case the State of residence must be responsible for arbitrating the means to avoid the indicated effect.[16].
Other expected functions of these international agreements will be given by the need to eliminate hypotheses of tax discrimination (Art. 24) as well as to promote collaboration between jurisdictions and a stable international business climate based on friendly procedures for the resolution of conflicts of interpretation (Art. 25) as well as promoting the exchange of information for tax purposes seeking mutual assistance, thereby making the agreement a tool to combat tax fraud (Art. 26 and Art. 27).
The OECD's position on the dynamic interpretation of international treaties is oriented to consider, for each situation, the interpretation of the convention guidelines taking into account the latest comments (as well as relevant observations and reservations) even when dealing with an international agreement concluded in light of another conceptual framework (comments).[17], except in the case of substantive changes. We continue to warn that the jurisdictions involved could exchange letters or initiate a friendly procedure in order to define any controversial issue.[18].
Final words
The application of international tax treaties has become an essential element for tax analysts, given that it would be unthinkable to expect a local taxpayer not to need to conduct business with international exposure and, from there, derive their taxation.
In the application of these agreements, the importance of the comments on said model is generally overlooked, where, even when they are not necessary to apply a particular clause (given that there are no debts before the interpreter regarding the objective sought by the agreement under reference), they will be illustrative of the different issues that each regulated topic seeks to regulate. As an illustration of this, one can check the comments to Art. 1 MOCDE that makes an excellent reference to the problems presented by companies without tax personality such as the "partnerships" today contemplated in Art. 130 inc. e) Law 20.628 on fiscal transparency.
For the reasons stated above, it will be mandatory to read the comments on the general tax model (OECD) in order to subsequently, and due to the attention that the Argentine Republic pays to different guidelines proposed by the model established by the UN, expand the study with the comments on the last of the models indicated.
Comments are not “additional reading” but should be considered “required reading” such that omission of this obligatory task is close to a negligent exercise of the entrusted function.
Sergio Carbone is a Public Accountant (UBA)
[1] Double taxation that seeks to avoid the use of international treaties on tax matters is that aimed at avoiding the incidence of similar taxes, in two or more States, on the same taxpayer, with respect to the same taxable matter and for the same period of time (MOCDE Comments – Introduction – Par. 1)
[2] Art. 31 (1), 31 (4) or Art. 32 of the Convention mentioned
[3] Darío Rajmilovich in “International Tax Planning” – ISBN 978-987-03-2427-0 – Ed. La Ley (2013). Page 42
[4] The Argentine Republic is a non-member State, but since 1996 it has attended OECD meetings and expressed its opinion on the comments of the conventional model. The observations of the countries imply disagreement with the interpretation expressed in said comments (MOCDE Comments – Introduction – Paragraph 30)
[6] Coincident positions in backgrounds such as LA INDUSTRIAL PARAGUAYA SA TFN 1980, TAYLOR Y CIA SRL TFN 2005, COMPAÑÍA ERICSSON SACI TFN 2007, among others
[7] MOCDE Comments – Introduction – Parr. 29.1
[8] The Argentine Republic has been a member since 24-10-1945 (https://www.un.org/es/about-us/member-states). As regards the particularities of the tax convention model proposed by the United Nations, it should be remembered that it is based on the model provided by the OECD, which today largely reproduces the normative guidelines and comments of the conventional model published in 1997.
[9] MOCDE Comments – Introduction – Parr. 15
[10] https://www.oecd.org/acerca/
[11] https://www.oecd.org/tax/treaties/oecd-model-tax-convention-available-products.htm. To consult the OECD model in force as of 2014, see https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2014_mtc_cond-2014-en#page1; to consult the OECD model in force in 2010, consult https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2010_9789264175181-en#page1
[12] It may be limited (interest, dividends or royalties) or not (income from real estate - which includes agricultural and forestry operations), capital gains derived from said property, income from artists or athletes, remuneration of directors or remuneration derived from dependent work, among other hypotheses) at source. For more see Art. 6, Art. 13 and Art. 22 MOCDE).
[13] Although in the reference case we were not dealing with an international agreement to avoid double taxation under the OECD model, it is worth remembering what was decided in what we could call "the Argentine leading case" in terms of aggressive tax planning: Molinos Río de la Plata SA v. Dirección General Impositiva s/ recursos directo de cuerpo externo CSJN 2021 – CAF 1351/2014/CA1–CS1 CAF 1351/2014/1/RH1 –
[14] Limited as to the exercise of tax jurisdiction in the source State up to a maximum withholding amount at the time of payment with more obligation to recognize credit for foreign tax in the jurisdiction of residence (Art. 23A or 23B MOCDE).
[15] The Action 7 BEPS (2015) is a merit of the above. For more information, see https://www.oecd.org/ctp/treaties/draft-action-7-impedir-elusion-artificiciosa-ep-statute.pdf
[16] Exemption from foreign income (with or without reservation of progressivity) or tax credit, even allowing for “tax sparing” considerations (in addition to the credit for tax paid at source, the State of Residence recognises an additional credit for tax exemptions from the country of source) – a method rejected by the USA and outside the OECD recommendations. Finally, we could recognise within these categories “matching credit” type strategies consisting of recognising foreign tax credits at effective rates higher than those paid at source.
[17] MOCDE Comments – Introduction – Parr. 33 and 34.
[18] For a discussion regarding the dynamic interpretation “versus” a static mechanism in the field of international agreements, see Darío Rajmilovich in “International Tax Planning” – ISBN 978-987-03-2427-0 – Ed. La Ley (2013). Pages 38 and 39.
