An Introduction to Tax and Investment Treaties Françoise L.M Hendy International Treaty Negotiator (Tax, Investment, Trade) Attorney-at-Law

BARBADOS’ TREATY NETWORK : Double Taxation Agreements(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’ TREATY NETWORK : Bilateral Investment Treaties (BITs) Belgium-Luxembourg Economic Union Canada China Cuba Ghana Germany Italy Mauritius Switzerland United Kingdom Venezuela

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 TREATY ? o Contracting State Parties Dualism Monism o Third States (Non-Contracting State Parties) o Territorial Application o Succession

What is a TAX TREATY ? What is a TAX 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 Taxation: A 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 International Taxation Rules (1) o Avoidance 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 o Types of double taxation Source-Source Residence-Source Source-Residence

Goals of International Taxation Rules: (2) Goals of International 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 International Taxation Rules: (3) Competiveness o National o Industry o Firm o Individual

Goals of International 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 International Taxation: Overview 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 International 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 International 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 International 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 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 a Tax Treaty: (2) Residency o Not citizenship o Not 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 a Tax Treaty: (3) Apportionment of Taxing Rights o Business Income o Shipping and International Transport o Associated enterprises o Professionals o Investment Income Dividends Interest Royalties o Capital gains o Income from immoveable property o Income from employment o Pensions and other remuneration o Professors and teachers o Students and trainees o Treatment of Entertainers and sportspersons o Other income

Key Elements of a Tax Treaty: (4) Methods of Avoiding Double Taxation o Tax Sparing o Credit Method o Exemption

Key Elements of a Tax Treaty: (5) Prevention of Fiscal Evasion Avoidance and evasion distinguished Denial of treaty benefits Application of domestic GAAR Limitation of Benefits provisions Administrative co-operation Competent Authority Procedure Exchange of tax information Non-discrimination

CASE STUDY CHINA IBC JAMAICA VENEZUELA Dividends WHT 0%Dividends WHT 5%

What is a Bilateral Investment 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 Direct Investment Rules (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 Direct Investment Rules (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 Criteria Compensation Expropriation Dispute 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 Direct Investment Rules (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 Foreign Direct Investment: (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 Foreign Direct Investment (1) In relation to his investment the investor is entitled to the following minimum standards of treatment: o Fair and Equitable treatment o Full, Protection and Security o National treatment o Most-Favoured Nation treatment

The Rules of Foreign Direct Investment (2) In relation to the protection of his investment the investor is entitled to the certain minimum standards concerning: o Free Transfers o Expropriation o Compensation o Dispute Settlement

Key Elements of a BIT (1) Preamble and Definition o Intention of the Parties o Meaning of key terms Investment National Company

Key Elements of 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 a BIT (3) National Treatment Most-Favoured-Nation Treatment

Key Elements of 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 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 a BIT (6) Dispute Resolution. o State to State Disputes o Investor State Disputes Arbitration

Françoise L.M Hendy International Tax and Investment Attorney Invest Barbados October 2011