AuthorBrown, Patricia A.
  1. INTRODUCTION 194 II. THE ROLE OF ARTICLE 24 196 A. What the 'Non-Discrimination Article Is Not 196 B. What the Non-Discrimination Article Is 199 1. Article 24(1) 200 2. Article 24(3) 204 3. Article 24(4) 210 4. Article 24(5) 213 5. Relationship Between Paragraphs of Article 24 215 III. OTHER SOURCES OF NATIONAL TREATMENT OBLIGATIONS 216 A. Treaties of Friendship, Commerce, and Navigation 216 B. General Agreement on Trade in Services 218 C. The "Four Freedoms" 222 IV. CASE STUDY--REINSURANCE AND THE BEAT 225 V. IS IT REALLY INCOHERENT, OR JUST BADLY DRAFTED? 228 VI. A POSSIBLE FIRST DRAFT 234 VII. CONCLUSION 236 I. INTRODUCTION

    Twenty years ago, one of the hot topics in tax circles was whether tax policy and trade disciplines could peacefully co-exist. Robert A. Green argued for "antilegalistic" resolution of tax disputes--as compared to trade disputes--in 1998. (1) Alvin Warren searched "in vain for a coherent norm" in the non-discrimination article. (2) Paul McDaniel made this the topic of his Tillinghast Lecture in 2003, concluding that normative tax rules are not in conflict with trade disciplines. (3) Yariv Brauner offered his riposte to Professor McDaniel's lecture in 2005, arguing for an international tax organization in order to keep tax disputes out of the WTO. (4) Mary Bennett used her own 2005 Tillinghast Lecture (5) to compare litigation outcomes under the non-discrimination article of tax treaties with EU litigation with respect to tax matters. In 2007, the Organisation for Economic Cooperation and Development ("OECD") issued a public discussion draft with proposed changes to the Commentary on Article 24 (non-discrimination) of the OECD Model Tax Convention on Income and on Capital (the "OECD Model"), which were finalized and included in the 2008 Update to the OECD Model. (6) The OECD's work led, perhaps inevitably, to the choice of non-discrimination as one of the main topics at the 2008 International Fiscal Association Congress. (7) Wrapping up the decade (or so), Arthur Cockfield and Brian Arnold asked what trade could teach tax and essentially concluded, "Nothing." (8)

    The OECD project that led to the 2008 changes to the Commentary was an opportunity for governments to re-think the piecemeal nature of the traditional non-discrimination article in tax treaties and develop a coherent national treatment system that takes into account legitimate tax policy concerns. Instead, the project resulted in a mishmash of changes that largely blessed the various discriminatory practices that governments had adopted to that date. But governments have gotten more creative, and the Base Erosion and Profit Shifting ("BEPS") project seems to have emboldened individual governments, who are adopting various "anti-abuse" rules that may be disguised trade barriers. The time seems ripe, therefore, to consider whether there may be a better process for developing such rules and whether there is a substantive model that does a better job than the current version of Article 24 (and the Commentaries thereon).

    Part II provides background, explaining how the nondiscrimination article of tax treaties differs substantially from the rest of the treaty provisions. Part III sets out some of the alternative sources of national treatment obligations that may constrain governments' ability to discriminate against nationals of other jurisdictions. Part IV provides a case study that considers where tax policy leaves off and trade barriers arise. Part V considers the extent to which critiques of Article 24 are justified. Part VI sets out a suggested path towards a more coherent (and accessible) provision. Part VII provides some concluding thoughts.


    1. What the Non-Discrimination Article Is Not

      Tax treaties, it is often said, are intended to avoid double taxation of the same income by two different jurisdictions. They do so primarily by allocating taxing rights between the Contracting States. In more recent years, there has been an increasing interest also in preventing double non-taxation. (9)

      The parameters of the treaty itself support these goals. The tax treaty provides benefits only to "residents" of a Contracting State and defines a "resident" as a person who is liable to "comprehensive" taxation in the jurisdiction of which he claims to be a resident. (10) That is, the scope of the treaty is limited to persons who are likely to suffer double taxation. The "taxes covered" article is intended to ensure that the treaty applies to income taxes or taxes on capital--those taxes that will give rise to double taxation. Additions to the Introduction to the OECD Model in 2017 encourage governments to consider whether there are real risks of double taxation in the absence of a treaty (or the risk of creating opportunities for double non-taxation) before ever entering into a tax treaty relationship. (11)

      The allocation of taxing rights between Contracting States serves the same goals. The distributive articles--starting with Income from Immovable Property in Article 6 and usually ending around Article 21 with Other Income--establish a series of rules that may allow one country (frequently referred to as the "source" country but sometimes the "host" or "paying" country) to tax a resident of the other country if certain thresholds are met. In some cases, the non-resident country is provided an unlimited right to tax. In more cases, the non-resident country is prohibited from taxing. In still others, the non-resident country is permitted to tax but at a specified maximum rate or only if certain thresholds regarding in-State activity are met.

      In general, if the non-resident State is provided the right to tax, then the resident State is required to relieve double taxation. The OECD Model Tax Convention specifies two methods for relieving double taxation. Under Article 23A, the residence State will exempt from taxation the income that may be taxed in the other State. (12) Alternatively, a Contracting State may choose the credit method of Article 23B, reducing the residence State tax dollar-for-dollar for the taxes paid to the other State. The OECD Model provides that even countries that generally use the exemption method for relieving double taxation may choose to retain their taxing rights with respect to items of income taxed on a withholding basis by the source State by using the credit method for withholding taxes. (13)

      Although the formal structure of these provisions is quite consistent from treaty to treaty the details can vary considerably. Capital importing countries (whether developed or developing) frequently argue for higher withholding rates on dividends, interest, royalties, and so-called "technical services" than the capital exporting countries (which will be required to relieve double taxation) would prefer. Countries that import goods and services may argue to expand taxing rights by changing the applicable thresholds for taxation. (14) Countries with close economic ties may tailor provisions to address specific instances of double taxation (15) or double non-taxation (16) that arise from differences in their tax systems.

      Thus, the first 23 articles or so of the OECD Model and of most bilateral tax treaties consist of a highly negotiated set of rules allocating tax revenues between the two Contracting States, ensuring that taxpayers will not suffer double taxation because of the allocation of taxing rights, and attempting to mesh the tax systems of the two Contracting States so that income does not go completely untaxed. In its current form and as currently interpreted, Article 24 has little to do with any of that.

      Article 24, dealing with non-discrimination, may be the least negotiated provision of standard treaties. This is because it has nothing to do with the allocation of taxing rights and little to do with the relief of double taxation. (17) It is not limited to "residents" (with its carefully constructed definition intended to prevent double taxation and double non-taxation) or to the taxes covered by the rest of the treaty. Instead, it applies to "nationals" and to "taxes of every kind and description." Accordingly, the non-discrimination provisions of Article 24 are meant to limit one Contracting State's actions without regard to what the other Contracting State may do in terms of the affected taxpayer. In that sense, it appears very different from the rest of the provisions normally found in standard tax treaties.

    2. What the Non-Discrimination Article Is

      In concept, the non-discrimination article represents a statement of principle. However, even some practitioners seem confused about what that principle is. To the extent that they think about it at all, the sense seems to be "Don't abuse foreigners (at least if they come from a tax treaty country)." They then become frustrated because Article 24 doesn't accomplish that because Article 24 doesn't say that. Instead, it lays out several distinct rules that, together, do not begin to add up to that general understanding. (18) Moreover, the individual rules include limitations that further erode their effectiveness. Any remaining vitality mostly has been stripped away by countries' unwillingness to apply the rules in any meaningful way. The rest of this section describes each paragraph, what it is meant to do, and some significant limitations.

      1. Article 24(1)

        The first paragraph of Article 24 is the closest thing to a general statement of principle found in the article. In the OECD Model it reads:

        Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances, in particular with respect to residence, are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons...

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