Criteria to distinguish DSTs and other taxes qualifying as
income tax for article 2 purposes
Adv LLM thesis
submitted by Diana Padilla
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law'
degree at the University of Amsterdam
supervised by
Otto Marres
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that in case of such a violation professional organisations in my home country and in countries where I may work as a tax professional, are informed of this violation. 2. I hereby authorise the University of Amsterdam and IBFD to place my thesis, of which I retain the copyright, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format. 3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in a footnote to the article's title or to the author's name:
"This article is based on the Adv LLM thesis the author submitted in fulfilment of the requirements of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam."
4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.
signature: Diana Padilla
name: Diana Padilla
Table of Contents
Table of Contents ... III
List of Abbreviations used ... V
Executive Summary ... VI
Main Findings ... VII
1.
Introduction ... 1
1.1. Background ... 1
1.2. Objectives ... 2
1.3. Research questions ... 2
1.4. Scope and delimitation of the study ... 2
2.
Article 2 – Taxes Covered ... 3
2.1. General scope of Article 2 ... 3
2.2. General rules of interpretation ... 3
2.3. Analysis of the scope of article 2 ... 4
2.3.1. Taxes on income and on capital ... 4
2.3.2. Definition of taxes on income ... 5
2.3.3. List of existing taxes... 6
2.3.4. Identical or substantially similar taxes ... 6
2.3.5. General remarks ... 7
2.4. Interrelation between article 2 and domestic tax laws ... 7
2.4.1. France ... 8
2.4.2. United Kingdom (UK) ... 8
3.
Digital services tax proposals ... 9
3.1. Overview from the EC ... 10
3.2. Purpose of the DST ... 10
3.3. Characteristics, functioning, and applicability ... 11
3.3.1. Characteristics ... 11
3.3.2. Functioning ... 11
3.4. The EC’s proposal and the unilateral measures ... 12
3.5. General remarks ... 13
4.
Criteria to distinguish taxes qualifying as income tax under the scope of the
tax treaties ... 13
4.1. Detailed analysis of the features and characteristics of the income taxes within the scope of article 2 ... 13
4.1.1. Taxable base ... 13
4.1.1.1. General cases ... 13
4.1.1.2. Income taxes – Alternative basis for taxation ... 16
4.1.1.3. Taxes over sales ... 16
4.1.2. Taxable object ... 17
4.1.2.1. Capital gains tax ... 17
4.1.2.2. Other cases ... 18
4.1.3. Purpose of the tax ... 19
4.1.3.1. Taxes that supplement a tax covered by the treaties ... 20
4.1.3.2. Taxes that substitute a tax covered by the treaties ... 22
4.2. Criteria to distinguish new taxes qualifying as income tax for tax treaty purposes .... 23
5.
Digital services tax and its relationship with tax treaties ... 24
5.1. Understanding of the applicability of the general provision in 2(1) and 2(2) or comparison with the list of taxes 2(3) ... 25
5.2. Analysis of the elements of the DSTs ... 25
5.3. Does article 2 of the tax treaties cover the DSTs? ... 27
6.
Conclusions ... 28
Bibliography ... 30
Annex I: Unilateral measures in France and the UK ... 36
List of Abbreviations used
(alphabetical list of abbreviations used in the Thesis)
B2B Business-to-business
B2C Business-to-consumer
DST Digital Services Tax
DTT Double Tax Treaties
EC European Commission
EU European Union
IFA International Fiscal Association
OECD Organisation for Economic Co-operation and Development OEEC Organisation for European Economic Co-operation
UN United Nations
TFEU Treaty on the Functioning of the European Union VCLT Vienna Convention on the Law of Treaties
Executive Summary
The digital economy is the current trending topic affecting many aspects of our lives. One of the fields experiencing a total revolution is the taxation systems around the world since governments, scholars and practitioners consider that current rules apply to traditional business and do not contemplate how the economic activities are performing nowadays. The specific concern is about the rules for profit allocation between states. There is a perception that those rules are not ensuring a proper and fair distribution of profits and, even worse, not solving issues of base erosion and profit shifting.
The OECD, acknowledging these problems, is working on the changes that can face those concerns. Until that happens, different organizations and governments have been undertaking some reforms that include a temporary measure to tackle the problems above-mentioned. This measure, initially proposed by the European Commission, is a Digital Services Tax (DST), that looks for taxing certain digital services provided within the same country but addressing primarily cross-border supplies.
By looking at this brand-new tax and its characteristics, it is not possible to readily recognise if it is a pure income tax, a turnover tax, a hybrid or any other possible qualification. Therefore, unconventional levies as the DST lead to myriad problems regarding how to identify whether a tax like this can fall within the scope of Article 2 – Taxes Covered of the OECD Model Conventions.
The aim of this thesis was to develop criteria about the features and characteristics that a new tax (a digital services tax or any other tax) should be met in order to be qualified as a tax on income, according to the definition and interpretation given by article 2. After reviewing articles about the interpretation of the provision alongside courts’ decisions around the world, it was possible to define features that must be examined in order to confirm whether the tax is a tax on income. Even though the pronouncements from different courts are not binding to the tax practice of different jurisdictions, this source and the literature consulted served to build a position and criteria about the topic.
When assessing a tax, the criteria for the qualification as a tax on income involves the following elements (in order of relevance) are the taxable base, taxable object, purpose of the tax and taxable subject. Thus, if the tax under evaluation shares the same elements as the taxes on income covered by the treaties, the new tax receives the same qualification. If the treaty involved includes a “deemed income tax” in the list of taxes covered by the convention, the comparison can also be made against that tax. However, the specific conditions of that tax treaty must be considered. In addition, other supplementary characteristics of taxes on income are provided as part of the criteria.
Further, the purpose of this guidance was to respond to the queries about the DST and whether this tax can be treated as a tax covered by article 2 of the model conventions. A detailed evaluation of this tax is provided. As a benchmark, the European Commission proposal was reviewed, as well as two of the interim measures that were proposed by France and the UK.
Thus, by applying the criteria developed for identifying taxes covered by the treaties, and analysing the features and characteristics of the DST, it may be concluded that it is not a tax covered by article 2. The reason is that the DST was designed as a tax on gross income, that does not allow deduction of costs or expenses, as usually happens with a tax on income. There is no link with the income tax since the DST can not be offset against the income tax, and it is closed to the definition of a consumption tax where the taxation follows the destination principle. Although its purpose can be considered as an approximation to an income tax, this sole element can not put this tax under the scope of the treaties. Although it may share other characteristics with the taxes on income, those are not strong enough to justify a qualification in that sense.
Main Findings
Article 2 – Taxes covered by the OECD Model Convention is a provision that historically has not received much attention, which is reflected in the few changes introduced from its conception in the 1963’s Convention. Even though the provision was drafted in a way that the scope could be expanded as much as possible in order to achieve the main goal of the Conventions, interpretation issues were found because of, (i) lack of uniformity in the adoption of the provision, i.e. some countries follow the OECD provision entirely, other countries include the paragraphs with the general definitions of the taxes covered but with an exhaustive list of existing taxes under the scope, and some other countries only include the list of taxes without the general definitions. In all cases, the paragraph about taxes introduced in addition or in replace of an existing one is covered given the ambulatory application of the provision. The latter is the rule that governs the treatment of new taxes introduced after the signature of a treaty; and (ii) different meaning of the terms included in the provisions as, taxes on income, taxes on capital, taxes on elements on income or taxes or element of capital. At the same time, controversy when new taxes are introduced in the individual tax systems, where precisely those taxes follow odd designs, and it is difficult to qualify them as taxes on income or capital covered by the tax treaties.
The main research question of this study was to define the criteria to identify taxes falling within the scope of the model conventions, in the light of the treaty interpretation provided by doctrine as well as case law around the world. According to this analysis, it was identified that objective features as the taxable base and the taxable object are the most relevant elements to examine new taxes that come into play. These elements prevail over the purpose of the tax, that, albeit reviewed, it is not the feature that leads to a conclusion. Thus, the criteria to distinguish taxes falling within the scope of the tax treaties are as follows.
(i) The main features that demand attention when assessing whether new taxes are covered by the tax treaties are elements (in order of relevance): the taxable base, taxable object, purpose of the tax and taxable subject.
(ii) Other characteristics that can serve as supplementary elements to evaluate are, the consideration of the “ability to pay” principle, the possibility to use the tax as a credit against the income tax and the possibility to pass the tax burden to the customer.
(iii) The features that are irrelevant to arrive at the qualification of a tax covered are, the temporal character of the levy, if the levy qualifies as an earmarked tax or the legal basis that serves for its introduction in the tax system.
In order to respond to the sub-question of the present study, the criteria mentioned above was relevant. The first conclusion was that the digital services tax could not be characterised as a tax on income, under the scope of the tax treaties. This conclusion applies, even though it is possible to justify that the purpose of the DST is the same as the income tax, which is to tax the “profits” made from an economic activity. However, the fact that the taxable base of the DST is the gross income of certain digital services, and the taxable object would be the revenue derived from those services, is what put this tax outside the scope of the treaties. Other elements are analised in detail in the respective chapter.
1. Introduction
1.1. Background
Article 2 – Taxes Covered provides the scope of the application of tax treaties signed between two states. From its conception, the intention was to encompass taxes on income and on capital in an extensive way. This article is aimed to have a broad scope following the intention supported from the first drafting of the provision made by a special delegation assigned to do so.1 Although several countries
do not strictly follow the OECD proposal, the recommendation is to include the full wording that ensures a proper application of the treaty in situations where double taxation may occur.
As will be reviewed along with this paper, this provision includes taxes on income and on capital that may create juridical double taxation, regardless of the different terminology that states may use. In fact, when states sign a tax agreement, they usually list the taxes under the scope of the treaty, which can receive different names. Besides, the model convention recommends including a paragraph with the possibility to extend the benefits to new taxes that are equal or substantially similar to the covered taxes. Considering the current business environment where the way to do business has dramatically changed in the last 20 years, new taxing rules have emerged, and with them, the necessity to adapt the tax systems to tax those modern models. A clear example of this trend is the possibility to perform services from one state to another, without any physical presence. It means that one enterprise can provide services from its state of residence and earn income without even mobilising to the state where the consumer is located by performing those services remotely. For that reason, companies, in particular, multinational enterprises (MNE), could increase their participation around the world. Consumers have simple access to a myriad of offerings by using online platforms, and the companies do need fewer resources to reach their clients by investing in new technologies.
For instance, Netflix is a company that provides streaming services that allow consumers around the world to watch thousands of tv shows, movies or documentaries from any device with an internet connection2. According to the last numbers reported, Netflix has more than 182 million subscribers, and
according to last year's financial statements, it reached USD 20B of revenue and net profit of USD 1.9B.3
With cases like this one, many governments and tax authorities are concern about the fairness of having these enterprises earning billions of euros and not paying taxes in the source state. From the government’s point of view, the users have a primary role in the acquisitions of those services, and the state where they are located should also benefit from the profits those enterprises are making. The European Commission (EC) proposed for the first time, the introduction of a Digital Services Tax, as an interim solution until the OECD come up with a total redefinition of international tax rules that tackle the problem of fair taxation among countries regarding digital services.
Naturally, the creation of new taxes comes along with questions about the fulfilment of policy considerations as proportionality, effectiveness, efficiency, but also, concerns about having an additional tax burden. For MNEs, paying this tax in the state where the consumers are located represents a relevant issue, and the question that emerges is whether the current treaties cover this new tax for the
1 OEEC, ‘FC/WP3(57)2: Working Party No.3 of the Fiscal Commitee (Italy & Switzerland) Report on the Listing
and Definition of Taxes on Income and Capital Which Should Be Covered by Double Taxation Agreements.’ (1957).
2 ‘What Is Netflix?’ (Help Center) <https://help.netflix.com/en/node/412> accessed 25 April 2020.
3 ‘Netflix: Net Income 2019’ <https://www.statista.com/statistics/272561/netflix-net-income/> accessed 7 July
avoidance of double taxation.
This thesis proceeds as follows. Chapter 2 explains the scope of article 2, considering the commentaries of the OECD Model Convention and some scholars’ point of view. Chapter 3 describes the DST proposal issued by the EC and some of the unilateral measures based on that initial project. Chapter 4 analyses in-depth the specific features of the taxes covered by the tax treaties with case law involving those features. By looking at these cases, it will be possible to understand how international courts value each characteristic in order to propose criteria to recognise taxes falling within the scope of article 2. Chapter 5 analyses the DST according to the rules found in section 4 to evaluate whether the tax is covered by the tax treaties pointing out the features that made it fall under or outside the scope. Chapter 6 concludes.
1.2. Objectives
The main objective of the thesis is to carry out an analysis of the scope of article 2 of the OECD Model Convention (OECD MC) and the criteria that are usually considered and weighed by the international courts to recognise taxes on income or similar levies within the tax treaties sphere. There has been little guidance to conclude when a tax is covered under article 2, especially when new taxes come into play; therefore, court decisions are a vital source to evaluate.
The secondary objective of the research concerns the introduction of a DST in the middle of the digitalisation of the economy. The DST proposals will be used as a benchmark to apply the rules found in the previous paragraph, in order to determine if a tax conceived in such a way can also be treated as a tax covered by the tax treaties.
1.3. Research questions
Since no specific guidance exists to recognise straightforward if a new tax is covered by article 2, the main research question this research seeks to answer is:
What are the criteria to qualify DSTs or other taxes as income taxes for Art. 2 purposes? The sub-questions of the research are as follows:
Does article 2 of the tax treaties cover the DSTs measures?
What are the elements of the DSTs that put them within or outside the scope of article 2? Through this test, I will be able to propose criteria that let us distinguish the existing elements in each type of tax and the relevance that those elements can provide in order to get a final qualification when we are evaluating a new tax and its inclusion under tax treaties.
1.4. Scope and delimitation of the study
The study will be focused on the EU Commission proposal and unilateral measures proposed, or already introduced, by France and the UK.
The bibliography to be taken into account is mainly based on official documents of the OECD, selected case law of international courts, and specialised articles and books related to the topic.
2. Article 2 – Taxes Covered
2.1. General scope of Article 2
The purpose of article 2 – Taxes covered, according to commentary 1,4 is to (i) ensure the identification
of the taxes covered regardless of the different nomenclatures and terminologies used by the states, (ii) to widen as much as possible the application of the Convention to taxes imposed in the states, always in harmony with domestic laws, (iii) to avoid the necessity to conclude new conventions when rules are changed and (iv) to ensure the notification of relevant changes when applicable.
Although model conventions throughout the years included a scope concerning the taxes covered, like the models culminated by the League of Nations5, it was not until 1957, where the Fiscal Committee of
the OEEC (currently OECD) came up with the first accepted proposal. This Committee appointed a specialised team to develop the listing and definition of the taxes that should be covered by tax treaties6.
This proposal was finally incorporated in the first model convention introduced by the OECD in 1963. From its introduction, the provision has not substantially changed. Only commentaries have been given a certain level of clarity to help in case of interpretation issues. The current version establishes mainly7:
Paragraph 1: The Convention shall apply to taxes on income and on capital8 imposed on behalf
of a Contracting State, irrespective of the manner in which they are levied.
Paragraph 2: There shall be regarded as taxes on income and on capital, all taxes imposed on total income, on total capital, or on elements of income or of capital.
Paragraph 3: This paragraph includes the list of the existing taxes covered by this article in each contracting state.
Paragraph 4: The Convention shall apply to any identical or substantially similar taxes that are imposed after the date of signature of the Convention, in addition, or replacing the existing ones. The competent authorities shall notify each other of any significant changes.
2.2. General rules of interpretation
In the present case, the focal point is the OECD version; hence, for interpretation purposes, the OECD MC and commentaries will serve as an element with relevant influence9. If a specific treaty follows the
OECD MC, it will be reasonable to interpret that contracting states intended to apply the meaning of that treaty as indicated in the commentaries. However, if amendments are made to the MC after the conclusion of a treaty, the assumption may not always apply. Article 2 has not suffered essential changes; therefore, the intention of this provision has been practically intact from its conception. Articles 31 to 33 of the Vienna Convention (VCLT)10 deals with the interpretation of the treaties, being
possible to affirm that model conventions and commentaries are part of the relevant means of interpretation of any tax treaty. Although scholars do not agree about the level of significance11, it is
4 OECD, ‘Model Tax Convention on Income and on Capital 2017’.
5 Brian J Arnold, International Tax Primer (4th ed., Kluwer Law International BV 2019) 148. Both conventions (
Mexico and London) where not unanimously accepted and the work of drafting a new model was taken over the OECD.
6 OEEC (n 1). The only change between this proposal and the current version was the paragraph 5 that dealt with
a procedure of mutual consultation: “The competent authorities of the two States shall consult together in order to clarify doubts which may arise as to the taxes to which their Convention ought to apply”.
7 OECD (n 4). For the purposes of this study, I will refer only to the OECD since the UN follows the same rulings. 8 For the purposes of this thesis, further references will only mention taxes on income since taxes on capital is
out of the scope of this work.
9 Michael Lang and Florian Brugger, ‘The Role of the OECD Commentary in Tax Treaty Interpretation’ (2008) 23
Austl. Tax F. 107–108.
10 United Nations, The Vienna Convention on the Law of Treaties (1969).
undeniable that somehow they represent means to be considered for interpretation purposes.
In case of terms not defined by the treaty, treaties always include a provision in article 3(2)12 establishing
that a term not defined shall have the meaning that it has at that time under the law of that state, unless the context otherwise requires or the competent authorities agree to a different meaning. In other words, the interpretation of an undefined term should not rely automatically on the domestic rules that one state can provide. If it were so, states would be able to influence any obligation under the treaty by applying domestic concepts in an international environment when the idea should be to apply the ordinary meaning of the term depending on the context. The domestic concepts may be applied only if by following articles 31-33 of VCLT the problem is not solved13.
Finally, article 31(3)(b) and (c) of VCLT add as interpretation means subsequent practice in the application of the treaty and relevant rules of international law applicable in the relation between the parties. Moreover, article 32 of VCLT adds that it is possible to have supplementary means of interpretation in order to confirm the meaning resulting from the application of article 31. Therefore, by having foreign cases dealing with similar issues in International Tax Law and Tax treaty context, those foreign cases take relevance and would appear to be supplementary means as per this article 3214. In
this sense, foreign court decisions are also taken into account, mostly in common law countries (although civil law countries, can also consider them but just as references). Nevertheless, in general, it is a common practice in International Law to refer to foreign court decisions, albeit decisions are not binding. The analysis executed considering the international context of treaty language and the interpretative ideas resulting in those processes can provide a valuable interpretation of other treaties that share the same treaty language. Therefore those outcomes can play an essential role when clarifications are needed15.
Bearing in mind the means mentioned above, explanation and interpretation of the elements of article 2 will be provided in the following sections.
2.3. Analysis of the scope of article 2
The starting point is to determine what is a tax for the purposes of article 2. In general, the accepted definition is that a tax is a compulsory charge, imposed by an organ of government, for public purposes without relation to a particular benefit to be received by the taxpayer. Even though it is common not to find a straightforward definition, these general elements are found in most of the doctrines and supported by the OECD MC.16
The following is a detailed explanation of the paragraphs of article 2 with a special emphasis regarding the rules when new taxes come into light.
2.3.1. Taxes on income and on capital
The Convention establishes the application of this provision to all taxes on income without specifying that they will be applied only to “direct taxes” since the term is considered too imprecise. This position
of interpretation” under article 32 of the VCLT.
12 OECD (n 4).
13 Patricia Brandstetter, ‘ Taxes Covered’: A Study of Article 2 of the OECD Model Tax Conventions (IBFD 2011)
s 1.2.2.
14 Brian J Arnold, ‘Tax Treaty Monitor: The Use of Foreign Court Decisions to Interpret Tax Treaties’ (2009) 63
Bulletin for International Taxation s 2.
15 Brandstetter (n 13) s 1.2.3.
16 Ekkehart Reimer and Alexander Rust, Klaus Vogel on Double Taxation Conventions, Art 2 (Taxes Covered)
was also introduced since the beginning by the Working Party of the Fiscal Committee17.
The method of levying those taxes is not relevant to determine the application of the Convention since each member state can employ different mechanisms to enforce the tax payments. It does not matter whether those taxes are paid by a direct assessment from the taxpayer, or by a deduction at the source state (through the application of a withholding tax), or even in the form of surtaxes or additional taxes. In this way, the Convention aims to include in the scope those taxes on income without requiring them to be paid in a particular form, disallowing state to create taxes that comply in substance and not in form. The substance of a “tax” shall be taken into account, also analysing it in the light of the domestic laws18.
Yet the question that may arise regarding these statements is what is a tax on income and if states share the same concept. Indeed, the meaning of taxes on income should be understood within the treaty meaning but also within the domestic law meaning. The taxation in a country is always based on fictions created by the different states in their tax systems. As such, applying a fully autonomous treaty meaning would be incorrect19.
Those definitions, in relation to taxes on income, are important due to the evolution of the way to perform business alongside changes in the systems of corporate income tax in the different jurisdictions. It is therefore essential to analyse the application of the provision of the tax treaties in the light of the domestic laws of each state. It has been found, for instance, that sometimes tax bases differ from net profits where some scholars call them “alternative or non-traditional taxes”. For instance, tax bases as cost of business, gross revenue or a combination of them.20
2.3.2. Definition of taxes on income
Through the second paragraph, it is clarified that the Convention applies to taxes on total income and on elements of income, such as alienation of movables or immovable property, taxes on capital appreciation and taxes on wages or salaries.
Although these explanations could appear quite vague and even as a tautology21, it would be possible
to affirm, that these are inclusive definitions of the terms whereby they should receive ordinary meaning, alongside the meaning under the domestic tax laws of the contracting states.
Even though no straightforward definitions are included in most domestic tax systems for the term income, myriad of doctrine has come up with an answer to this question. A good approach to a definition of income is the definition provided by Haig.22 According to him, “income becomes the increase or
accretion in one’s power to satisfy his wants in a given period in so far as that power consists of (a) money itself, or (b) anything susceptible of valuation in terms of money.” In other words, “income is the money value of the net accretion to one’s economic power between two points of time23.
It is also possible to recognise other criteria to define “tax on income”24. Ismer and Jescheck explain
17 OEEC (n 1).
18 Wei Cui, ‘Article 2–Taxes Covered’ [2016] VANN, Richard. Global tax treaty commentaries. Online Books IBFD
s 2.2.
19 ibid 3.1.1.; Hilkka Marjaana Helminen-Kossila, ‘The Notion of Tax and the Elimination of Double Taxation or
Double Non-Taxation: General Report’ (International Fiscal Association 2016) 23,24,34,35.
20 Mario Tenore, ‘Document - European Union - “Taxes Covered”: The OECD Model (2010) versus EU Directives
- Tax Research Platform - IBFD’ (66 Bull. Intl. Taxn. 6 (2012), Journals IBFD) s 1.
21 Brandstetter (n 13) s 2.1.
22 David Duff, Rethinking the Concept of Income in Tax Law and Policy (University of Toronto, Faculty of Law
2005) 8.
23 ibid 8.
these criteria clearly as, taxes on income focus on the recipient of payments instead of on the payer. This differentiation becomes relevant since taxes that takes into account the ability to pay of the recipient are usually regarded as taxes on income; that is why the income tax is often calculated considering the gross revenues less all costs and expenses. Conversely, turnover taxes are those that seek to tax the spending power of the payers.
Finally, commentary 5 to paragraph 2 mentions that article 2 does not make any difference between ordinary and extraordinary taxes, so it is expected that, unless expressly agreed otherwise, extraordinary taxes are also covered by the provision.
2.3.3. List of existing taxes
The model convention prescribes the inclusion of the taxes covered at the time of its signature; however, the commentaries clarify that the list is not exhaustive, with a purely illustrative character. In other words, even existing taxes at the time of the signature of the treaty not listed in paragraph 3, could be caught by paragraph 1 and 2 if they comply with the general definition.
On the other hand, by reading paragraph 6 to the commentaries of article 2, it is also possible to interpret that the list should be conclusive as it mentions “it will be a complete list of taxes imposed in each state at the time of signature and covered by the Convention.” Notwithstanding this approach, if the provision is written in paragraph 3 using the words “ in particular”, it will be closer to an illustrative nature. Thus, many countries have opted for just including the list of taxes covered in this paragraph without establishing the rules set in paragraphs 1 and 225, narrowing the scope of the treaties since.
Taking into account paragraphs 1 and 2 with a generic definition and, paragraph 3 with the list of taxes covered, it can be assumed that the first part (general definition) does not preclude the application of the other one (list of taxes). Both approaches should be read jointly without restricting the application of either one. For instance, if a tax is listed as covered by the treaty, it should be accepted even if it does not comply with the generic definition.26 Conversely, if a tax is not listed but falls under the generic
definition, it can also be covered by the treaty, since the list is not exhaustive. This rationale has been accepted by scholars27; however, it is always necessary to review the exact wording of the provision in
order to confirm the same conclusion28.
2.3.4. Identical or substantially similar taxes
From the OECD perspective, the article should be designed to operate even when new taxes are introduced, or the existing ones are modified, keeping the aim of the Convention to avoid the imposition of double taxation over the same income.
In practice, determining if a tax is identical or substantially similar has been, in many cases, a matter of controversy due to the subjectivity that this evaluation may raise. Up to what point it is possible to affirm that a tax is equal or considerably similar to a tax covered by the treaty is a complicated question to answer.
Application of Tax Treaties: Pushing the Boundaries of Article 2 of the OECD Model?’ (2018) 46 Intertax s 2.
25 Cui (n 18) s 5.1.2.2.
26 Reimer and Rust (n 16) 23. According to Vogel, if the Contracting States include a tax in article 2(3), the tax is
irrefutably a deemed tax on income and thus covered by the Convention. Even if such listed tax does not fulfil the criteria in article 2(1)-2(2), the treaty would be expanding the substantive scope of the provision.
27 Michael Lang, ‘“Taxes Covered” - What Is a “Tax” According to Art. 2 OECD Model Convention?’ [2005]
Bulletin for International Fiscal Documentation 221; Brandstetter (n 13) s 2.3.
28 Some treaties include all the provisions as OECD guidance, but omitting the word “in particular” in the para. 3.
Considering that a tax is introduced in a state which has signed tax treaties that follows the OECD model convention, the comparability test should be performed on two levels29. The first one would be
comparing the new or modified tax with the taxes included in the list drafted in paragraph 3 and, secondly, contrasting such new tax with the general definitions in paragraphs (1) and (2). Further, this analysis should also contemplate how domestic regulation defines taxes on income and the new tax introduced. This comparability should look at the characteristics or elements of those taxes under evaluation like tax subject, tax object, tax base, the purpose of the tax, and any other criteria identified; nonetheless, neither model conventions nor commentaries define the parameters to do so.30 Further,
the denomination and any formal characteristic of a tax can not be more than a starting point in this analysis, since, if given more weight to these elements, one state could introduce new taxes and manipulate the inclusion or not in the scope by just adopting particular terminologies.
Finally, by including the last sentence of the paragraph31, the model convention recommends including
a commitment from each contracting state to communicate any significant change regarding new or substitute taxes in their domestic legislation. This action would help to avoid interpretation issues when relevant changes in domestic legislation occur. In that situation, this notification results essential in order to confirm the application or termination of the treaty if no agreement is achieved.
In any case, when new taxes come up, sometimes it is complex to determine if the tax is covered by the conventions, especially, if the new tax does not have the total configuration of a tax on income. Therefore, it is relevant to review, on a case by case basis, the facts and circumstances of a new tax and its perception and recognition within the rules of the state where it was introduced.32
2.3.5. General remarks
The rules discussed above are set by the OECD MC and also adopted by the UN. However, in practice, some countries will adapt these rules to align them with their domestic laws to provide clarity instead of having a risk of interpretation by leaving the generic definition.
A large number of countries do prefer to completely disregard that general definition by including just the list of taxes covered or in a different way, stating that taxes covered are the ones included in their Income Tax Act. The listing could also exclude the word “in particular” and turning this list to an exhaustive one. Conversely, some countries keep the general definition without including a specific list of taxes. As a result, although OECD provides general guidelines, when analysing any existing or new tax, an in-depth evaluation of the tax treaty and domestic law should be performed in order to conclude if the tax treaties cover those levies. The answer, in many cases, is not straightforward.
2.4. Interrelation between article 2 and domestic tax laws
As explained, the purpose of the article 2 is to widen as much as possible the field of application of the Convention, while ensuring harmonisation with the domestic laws of the states. In other words, the application of article 2 will also depend on how the state defines taxes on income, and in case of new taxes, how the state understands the similarity for tax treaty purposes.
29 Brandstetter (n 13) s 2.5.
30 ibid 2.5. This author reference Webster’s Third New International Dictionary that defines “similar” as “having
characteristics in common” and being “alike in substance or essentials”.
31 Article 2(4) of the OECD Model Convention: The competent authorities of the Contracting States shall notify
each other of any significant changes that have been made in their taxation laws.
32 ‘Irs-Irbs | Internal Revenue Service - Part I. Rulings and Decisions Under the Internal Revenue Code of 1986’
(2002) <https://www.irs.gov/pub/irs-irbs/irb02-15.pdf> accessed 23 April 2020. (…) if identical or substantially similar taxes are imposed (…) it is appropriate to give effect to the intent of the Contracting States, and allow the treaty to continue to apply (…). There is no definitive test for whether a tax is substantially similar to a covered tax; rather, the outcome rests on the facts and circumstances of each particular case”.
Countries such as France and the UK interpret article 2 in a certain way, which has been reflected in their current practice. As a matter of example, the tax treaty practices of these countries will be explained since those countries have introduced new taxes recently, and this will help this analysis concerning the scope of article 2.
2.4.1. France
Concerning the corporate income tax (CIT), article 205 of the Frech Tax Code defines it as a tax established in the profits and on the income realised by companies and other legal persons33.
Accordingly, taxes on the same nature would be a social contribution on CIT or the exceptional contribution on CIT without leaving aside the income tax on individuals. Also, identical taxes will the ones related to capital gains34. In fact, France usually includes all these taxes in most of the tax treaties
signed35.
The treaties will cover a tax if it qualifies as a tax on income following that definition in the French Tax Code, but also, those taxes that are equal or substantially similar to them, i.e. that share the same nature.36 According to the French report in the latest IFA Congress37 and with some compelling case
law38, the tax base and the object are the relevant elements to evaluate in order to determine if two
levies share the same nature and therefore when a tax can be covered by the tax treaties.
Regarding article 2 in the treaties signed by France, they mostly attach to the OECD interpretation. Where the treaty includes paragraphs 1 and 2 with a general definition39, the list in paragraph 3 is just
illustrative.40 However, in some cases41, the treaties just contain a list of taxes extending the application
to the same or substantially similar taxes. Therefore the taxes covered are only the ones expressly listed or the similar or substantially similar taxes that can be created or modifying previous taxes.
2.4.2. United Kingdom (UK)
As in many countries, there is not a straightforward definition of income, so the general doctrine is followed42. However, concerning income tax, it is seen as a tax that falls within any of the categories: (i)
the Income Tax (Earnings and Pensions) Act 2003, (ii) the Income Tax (Trading and Other Income) Act 2005; and (iii) the Income Tax Act 2007 and the Taxes Act 1988.43 Only the taxes referenced there can
be included in a double tax treaty to be signed by the UK. Those taxes are income tax, corporation tax, capital gains tax, and any taxes imposed by the law of the territory that are of a similar character to taxes previously mentioned.
33 Code général des impôts - Article 205.
34 Benjamin Briguaud and Benoit Delaunay, ‘The Notion of Tax and the Elimination of Double Taxation or Double
Non-Taxation: France’ (International Fiscal Association 2016) 341.
35 ibid 1.2.2. 36 ibid 1.1.5,1.1.7.
37 Briguaud and Delaunay (n 34).
38 Lufthansa (the taxpayer) v Ministre de l’Economie, des Finances et de l’Industrie (the tax authorities) [2014]
Conseil d’État (Supreme Administrative Court) 368935. Case Law IBFD; Directeur general des finances publiques v SCI Domaine de Flotin [2013] Tribunal des Conflits C3917. These cases are further analysed in sections 4.1.3.2 and 4.1.1.1, respectively.
39 For instance, tax treaty Canada-France (1975), treaty Belgium-France (1964), and the latest treaty
France-Luxembourg (2018), that also includes a reference to withholding taxes.
40 The treaty between Belgium and France has a variation from the model by not including the word “in particular”
when listing the existent taxes. In this case, it can be interpreted that the list is exhaustive.
41 For example, in the double tax treaty France-United States (1994 and amended through 2009), and the tax
treaty France-United Kingdom (2008).
42 Peita Menon and Prabhu Narasimhan, ‘The Notion of Tax and the Elimination of Double Taxation or Double
Non-Taxation: United Kingdom’ (International Fiscal Association 2016) 861.
In order to identify identical or substantially similar taxes covered by the treaties, there is limited judicial guidance on the interpretation of those words.44 However, there is one acceptable case where the Court
of Appeal of England and Wales provide their decision by looking primarily at the taxable base of income tax in comparison with the tax payable under the CFC legislation.45
Finally, concerning tax treaties signed by the UK, they include variations of the article 2, (i) with a general definition of taxes covered and an illustrative list (following the OECD MC)46 and (ii) with just a list of
taxes covered, in both cases, with the possibility to extend treaty benefits to similar taxes. In this latter case, taxes covered are only those listed and any other identical or substantially similar.47 The lastest
treaties provide the adoption of the wording proposed by the OECD.48
3. Digital services tax proposals
During the last two decades, the way to perform business has evolved in an unimaginable manner. Governments around the world, in particular in the European Union, started to press for a change in the rules of the International Tax System. BEPS Project documents widely described this concern, and in particular, Action 1 – Addressing the Tax Challenges of the Digital Economy, went through the current taxation rules and the issues that appear when these traditional rules are applied to new digital operations. These operations are mainly characterised by using information and communication technology to provide services not only within the jurisdiction where they are established but also to many states around the world, with little or no physical presence in that other state.
The relevant factor for the taxation of cross-border transactions is the physical presence in the source state. Therefore, if companies are using different technologies to provide services to users in another state, those companies will be taxed, in most of the cases, only in their residence state49. Governments
consider this situation is not in line with fair taxation rules since the objective is to ensure that profits are taxed in the state where the economic activities take place and where the value is generated. This is what is called a “value creation principle”50.
Governments are arguing that this value creation takes place in the state where the users are located if they have active participation in the development of such digital service. A clear example is the case of Airbnb, whose platform acts as an intermediary for thousands of users aim to rent their homes to people looking for accommodations. Airbnb facilitates the connection between both parties whose participation is essential for the execution of the business model; thus, those users contribute to the value creation of this company.
Like this company, many other companies and MNE have been exploiting this way to do business, making more strong the claim from different states for a new definition of a nexus between the jurisdiction
44 ibid 868–869.
45 Bricom Holdings Ltd v Commissioners of Inland Revenue [1997] Court of Appeal of England and Wales N/A.
Case Law IBFD.
46 For instance, tax treaty United Kingdom - United States (2001), United Kingdom - Luxembourg (1967), United
Kingdom - Australia (2003). Basically most of the cases, treaties include Income tax, corporate income tax and capital gains tax, with some variations regarding petroleum and development land tax (not longer in force).
47 Menon and Narasimhan (n 42) 868; Klaus Vogel, Klaus Vogel on Double Taxation Conventions: A Commentary
to the OECD-, UN-, and US Model Conventions for the Avoidance of Double Taxation on Income and Capital (3rd Edition, Kluwer law international 1997) 144,150. For instance, tax treaty United Kingdom-Switzerland (1977), United Kingdom-France (2008)
48 For instance, treaty UK-Albania (2013), UK-Algeria (2015), UK-Armenia (2011).
49 Some countries apply withholding taxes (WHT) to digital services performed by foreign companies regardless
the physical presence or not in the state. For instance, Peru according to article 9 of the Income Tax Act.
where providers are established and where the users or consumers are located51.
Accordingly, the BEPS project allows the countries to look for ways to tackle this problem by introducing into their domestic laws solutions like a new significant economic presence nexus for net-basis taxation based on deemed profit attribution methods, a withholding tax or an equalisation levy52. Meanwhile, the
OECD aims to develop a whole proposal for restructuring the rules with a global consensus. That is why, some proposals have been published like the ones denominated Pillar one (that includes a Unified Approach) and Pillar two, to try to deal with the fairness that governments are claiming regarding those digital services. Until a definitive proposal is presented and a consensus is reached, an interim solution has been designed by the EC and some states around the world.
3.1. Overview from the EC
Since achieving a global consensus about new rules of allocation of taxing rights is taking a long time, the EC came up with an interim proposal involving the introduction of a DST. This proposal was published in March 201853, waiting for the review and opinion from the European Countries. Although
no consensus for its application was reached, other countries have started to draft legislation for the introduction of their DSTs based on this proposal.
In its proposal, the EC aims primarily (i) to protect the integrity of the Single Market ensuring a proper functioning, (ii) to ensure that public finances within the Union are sustainable, avoiding the erosion of each country’s tax bases, and (iv) to fight against aggressive tax planning and eliminate gaps that allow digital companies to avoid taxation in countries where they operate and create value54.
The legal basis for the proposal of this new tax is article 113 of the Treaty on the Functioning of the European Union (TFEU)55. According to this article, it is possible to proceed with a regulation concerning
turnover taxes, excise duties, and other forms of indirect taxation, considering that those measures will help with the functioning of the internal market and avoid distortion of competition.
3.2. Purpose of the DST
As an interim measure, the DST seeks to correct lack of taxation that countries (where users are located) are claiming since currently, the profits involved are being taxed mostly in the countries where the suppliers are residents. The idea was to design a tax with a narrow scope that will be applicable over gross revenues of the largest consumer-facing companies regarding the provision of specific digital services where the user value creation is fundamental56.
The target companies are those that based their business models around user participation, and therefore those companies that have created more value making more significant the gap between where profits are taxes and where value is created.
The fact that the proposal was conceived as a tax over turnover taxes may evidence that, in principle, the EC wanted to keep it outside the scope of the double tax treaties. However, an analysis of the application or not of the DTT will be further performed.
51 ibid 79. 52 ibid 148.
53 EU Commission, ‘März, COM (2018) 148 - Proposal for a Council Directive on the Common System of a Digital
Services Tax on Revenues Resulting from the Provision of Certain Digital Services’.
54 ibid 4. 55 ibid 5. 56 ibid 6.
3.3. Characteristics, functioning, and applicability 3.3.1. Characteristics
The DST was designed with a novel tax base, which is the revenue that certain companies may receive for the provision of specific digital services. A tax imposed on revenues can also send a message that national profit amounts of the big multinationals can no be longer trusted. Both countries like the UK and France have reasons to distrust the reported national profit figures due to all the profit shifting cases around the world and one of the main reasons for the BEPS Project.57
The services defined by the EC are58:
a) Services consisting of the placing on a digital interface of advertising targeted at users of that interface. These include services provided by enterprises like YouTube, Google or Facebook, where users are able to see targeted advertising according to their preferences or data collected from their activities.
b) Services consisting of the transmission of data collected about users, which has been generated from such users' activities on digital interfaces. For instance, services provided by Facebook. c) Services consisting of the making available of multi-sided digital interfaces to users, which may
also be referred to as "intermediation services," which allow users to find other users and to interact with them. Also, services that may facilitate the provision of underlying supplies of goods or services directly between users. An excellent example of these services would be those offered by Airbnb or Uber, where users can complete a sale or service transaction because of the existence of the online platform.
Concerning the companies that will be subject to the DST, the thresholds required to comply qualify as a taxable person are59.
the total amount of worldwide revenues reported by the entity for the latest financial year exceeds EUR 750 Million; and,
the total amount of taxable revenues obtained by the entity within the Union during that financial year exceeds EUR 50 Million.
3.3.2. Functioning
The intention of the DST is to be paid in the member state where the users are located. By users, the regulation means the consumers whom the advertisements are reaching; or whose data about their activities on digital interfaces is collected and transmitted, or those who can interact with others in multi-sided digital interfaces for the provision of underlying supplies of goods or services. The location can be identified with the Internet Protocol (IP) or by using other reliable means of geolocation.
In case the services are provided across two or more member states, there should be an allocation of the taxable base (revenues) proportionally, taking into account the drivers the proposal is advising. For
57 Arpan Dahal, Jeff Ferry and Bill Parks, ‘An Alternate Solution for France’s Digital Services Tax’ (Tax Analysts)
9 <https://www.taxnotes.com/tax-notes-today-international/digital-economy/alternate-solution-frances-digital-services-tax/2019/10/30/2b0p3?highlight=dst> accessed 28 April 2020.
58 EU Commission (n 53) 7. These services are also covered in the BEPS Action 1 document (for instance, pages
58 and 62)
instance,60
For advertising placing, the driver would be the number of times the advertisement appears in the users’ devices in a specific period.
For transmission of data collected from user’s activities in the interfaces, the driver would be the number of users from whom data was transmitted in a specific period.
For making available multi-sided digital interfaces, the driver would be the number of users who conclude those transactions in a specific period (irrespective of whether the users are sellers or buyers in the underlying transaction). If no underlying transaction exists, then the driver would be the number of users holding an account in the interface in a specific period.
In any case, the place where the underlying supply of goods or services, or the place from where the payment is performed shall not be taken into account to determine the place of the services. Just the drivers described will delimit that.
The rate across the EU would be 3% over the revenues (net of value-added tax or other similar taxes) allocated to the member state, according to the rules mentioned above. This tax should be paid in each corresponding jurisdiction or, it is also possible to pay the whole amount in only one jurisdiction by applying the simplification mechanism called One-Stop-Shop (OSS)61.
This tax, paid in the jurisdiction where an MNE is resident or in a different member state, should be considered as a cost to be deducted from the corporate income tax base. This mechanism would alleviate the possible double taxation where the same revenues are subject to the corporate income tax and the DST. Members states should allow the deduction regardless of the state where the DST was effectively paid62.
3.4. The EC’s proposal and the unilateral measures
Since the EC’s proposal did not get a consensus, it could not be implemented across the EU. However, some countries, and not only European countries, have started to introduce unilateral measures based on the EC’s proposal. As a matter of example, the proposal of France and the UK are fully described in Annex I.
Both proposals are quite similar to the initial DST. The main deviations between the DST first proposal and those two countries’ unilateral measures are as follows:
Different thresholds for the delimitation of the taxable subjects.
The scope of the services involved (for instance, in the case of the UK, the scope is broader than in the other proposals).
The alternative calculation allowed by the UK that takes into consideration if the company is in a loss position or making profits but with low margins. If the company is in a loss position, no DST is due. But if it is earning low margins, then the calculation of the DST will be the gross margin multiplied by the factor of 0.8. Therefore, the DST results in a lower amount than if it would have been calculated as a percentage of the revenue.
60 ibid 11–12.
61 Commission Implementing Regulation (EU) No 815/2012 2012 (OJ L). The One-Stop-Shop mechanism allows
taxable persons supplying telecommunication services, television and radio broadcasting services and electronically supplied services in B2C schemes in member states other than those where established, to account for the VAT liability in a Member State in which they are identified.
The last point is interesting because, in a way, the UK is considering the ability to pay of the taxpayer, which is a characteristic of taxes on income (please see further development of this item in Chapter 5 of the present work). Aside from those deviations, in general, the main rules and the objectives pursued are the same in all the schemes.
3.5. General remarks
The digital economy has brought to light the necessity to review the current taxation rules and, in the meantime, has spurred governments to come up with unilateral measures that let them recover to a large degree the taxing rights they consider they have been losing due to the outdated rules.
These measures are trying to extend the power of the “destination country” to tax profits that were not allocated to the “correct state” or, presumably, are not being adequately taxed (or sometimes not taxed at all). However, rules like these may trigger a clear risk of double taxation conflicts since governments have created a tax that comes closer to the conception of an indirect tax where treaties can not solve that additional tax burden.
4. Criteria to distinguish taxes qualifying as income tax under the scope of the
tax treaties
4.1. Detailed analysis of the features and characteristics of the income taxes within the scope of article 2
In order to determine if a new tax falls within the scope of article 2, it is necessary to look first at the tax treaty involved, and identify if article 2 follows the OECD MC including the general definition of the taxes covered and the list of existing taxes at the date of signature of the treaty. In case of a new tax, it should be evaluated by analysing its features and characteristics to verify whether it can be qualified as a tax on income. If no general definition is included in article 2, the new tax should be only compared with the listed taxes included in the same article. As per article 2(4), the Convention shall apply to any identical or substantially similar taxes that are imposed after the date of signature of the treaty in addition to, or in place of existing taxes; therefore, the comparison would be relevant to arrive at a conclusion. Although the second chapter of this thesis was focused on the theoretical interpretation of the article 2, in cases of hybrid taxes with odd designs, the single application of the general foundation could not make clear whether they actually relate to taxes on income. For that reason, as other means of interpretation, some helpful and compelling case law will be reviewed to finally define criteria that can be used to evaluate new taxes coming into play and determine whether they can be treated as covered by the conventions. The cases to be described below will analyse the elements of the new taxes and provide conclusions based on the relevant features and characteristics to consider. Even though the decisions are not binding, the arguments may provide an idea to build criteria to identify taxes falling within the scope of the conventions.
4.1.1. Taxable base 4.1.1.1. General cases
The taxable base is perceived as an essential feature in order to qualify a tax as an income tax. Indeed, several authors have affirmed that the taxable base prevails over other elements as the purpose of the tax, taxable object or taxable subject.63
63 Helminen-Kossila (n 19) s 2.2.6.1.; Cui (n 18) s 5.3.1; Roland Ismer and Christoph Jescheck, ‘The Substantive
Scope of Tax Treaties in a Post-BEPS World: Article 2 OECD MC (Taxes Covered) and the Rise of New Taxes’ (2017) 45 Intertax 387; Briguaud and Delaunay (n 34) 337–338; Frank Dierckx, ‘The Notion of Tax and the
It can be said that, a couple of decades ago, the assumption that the taxable base is the most important feature to take into consideration may have been undoubtedly valid. However, with new taxes like the DST or other taxes imposed using hybrid tax bases, the possibility to readily assess whether a tax can be characterised as income tax by primarily considering this element is complex.64 Nevertheless, to this
day, there are not many cases that involve taxes with odd tax bases, to realise which other element prevails over the rest; therefore, the taxable base is still seen as the most important feature. Also, one may argue that by looking at the taxable base, it is possible to understand the essence of the tax in an objective way.
The case law discussed in the present study demonstrates that different courts around the world follow the same opinion, and it will be possible to recognise in the cases below that in most of them the tax base was the crucial factor. Even if it was not the decisive factor in some situations, it was still examined as part of the judgement. The following cases clearly illustrate those situations where the taxable base was essential to define whether a new tax was a tax on income, or if that tax was equal or substantially similar to a tax already included in the list of tax covered by the treaty involved. It is relevant to mention that this chapter contains relevant facts of the cases and the rulings from the courts involved. Further details from the cases are included in Annex II.
In a recent case in France, the relevance of the taxable base was evident when assessing whether a tax was a tax on income or capital.65 In SCI Domaine de Flotin,66 the Court of Conflicts addressed the
flat-rate tax levied on the transfers of specific land and its qualification or not as a tax covered by the tax treaty involved. This flat-rate tax applied on the transfer of bare land and followed the same rules governing the tax on capital gains. Both taxes applied to the amount equal to the land transfer price less the purchase price. The French Court considered the taxable base and the scope as the relevant criteria to determine the nature of a specific levy, being this rationale helpful when determining whether two taxes are substantially similar for treaty purposes.67 Even though the decision mentioned both, the
taxable base and the scope as the decisive elements, one may argue that the taxable base was slightly more relevant since the Court set the arguments around the similarity of the rules for the determination of the flat-rate tax and the income tax.
The case 34.79668 followed the same rationale where the taxable base was the decisive criterion to
determine if a tax (the Belgium municipal taxes) was substantially similar to the federal income tax. Here, according to the tax treaty involved, frontier workers living in Belgium but working in the Netherlands were subject to the personal income tax only in the Netherlands. Since the Belgium municipal taxes were calculated over the personal income tax (as a percentage of it), then if by the treaty, the workers were not subject to income tax in Belgium, the municipal tax was not applicable either.
The municipality in the case at hands tried to impose a new municipal tax applicable to non-residents, in order to collect the tax from those workers that benefited from the treaty. The Council finally conclude that the new tax and the income tax were substantially similar by looking at the calculation of the tax and the determination of the tax base.
Elimination of Double Taxation or Double Non-Taxation: Belgium’ (International Fiscal Association 2016) 181.
64 Tenore (n 20) s 1.
65 The present study is focused on the qualification of taxes on income. However, some case law covers taxes on
capital and the reasoning is also helpful for this thesis. After all, a tax on capital can also be considered substantially similar to a tax on income.
66 Directeur general des finances publiques v SCI Domaine de Flotin (n 38). See Annex II. i. for further details. 67 Briguaud and Delaunay (n 34) 338.
68 Municipality of Lanaken v de Belgische Staat [1990] Raad van State/Conseil d’État (Council of State) 34.796.
This view about the relevance of the tax base is not recent and dates back to many years ago. In a case determined in 1986, the Supreme Administrative Court in Sweden analysed in-depth the temporary tax on profit distributions and whether this tax qualified as an income tax. This case, 5823-1985, is compelling because the Court provided some relevant features and characteristics to look at when assessing a new tax in order to identify if it can be considered as income tax.69 In this case, when
comparing the temporary tax on profit distributions with the regular withholding imposed on dividends paid to shareholders, the Court concluded they were not substantially similar because:
The tax base of the temporary tax was the net amount of distribution of profits to shareholders. The purpose of the tax was to reduce profit distributions by companies in order to bring about
general acceptance of wage restraints in the wage negotiations.
The taxable subjects were different since the tax was imposed on the company distributing dividends and not on the shareholder receiving them.
The tax was temporal.70
The revenue collected was sent to the General Pension Fund and not to the Government’s disposal, as usually happens with the income tax.71
The Court put particular emphasis on the taxable base of both taxes. In the previous instance, the Lower Court had concluded that the temporary tax was similar to the income tax due to the calculation over the profits of the financial year; however, the Supreme Court reversed that argument due to the fact that the calculation was on the net dividend distribution. Aside the subject person, who was also important, the other three arguments could not provide a definitive conclusion if they had been independently evaluated.
A quite similar case took place in South Africa, where the Court confirmed the same judgement as to the court in Sweden. This case, Volkswagen, 72 involved the introduction of a tax imposed in on the
profit distributions with the same characteristics of the Sweden tax regarding the base of calculation. Here, the taxable subject, but, more importantly, the taxable base was relevant to determine whether or not a tax falls within the scope of the tax treaties.73 However, the interesting fact of South Africa tax
system is that the withholding on dividends, covered by the treaties, existed until 1995. In 1993, the tax on profits distributions was introduced as a tax imposed on the company declaring the dividends (not covered by the tax treaties), but later on, this tax was repealed. In 2012, the dividends tax was introduced to be applicable in the same manner as the initial levy (applicable until 1995). By looking at the whole picture, it would have been reasonable to say that in all cases the purpose also remained the same, that was, to tax the dividends distribution, but, by making differentiation in the taxable base, the tax on profits distributions was placed “out of the scope” of the treaties.
Curiously, the purpose of the tax was not weighed, and the whole analysis was focused on the tax base and the tax subject. By changing the tax base and redirecting the responsibility of the tax to the local company, the tax was left out of the treaties sphere. Moreover, if the South African companies have
69 Sweden - S (name not disclosed) v tax authorities [1986] Supreme Administrative Court 5823–1985. Case Law
IBFD. See Annex II. iii for further details.
70 Although this element is not relevant to reach a conclusion. See further case 2465/2018.
71 Brandstetter (n 13) s 3.1.1.7. The fact that a tax is set aside for special purposes (earmarked taxes), does not
preclude the application of the tax treaty.
72 Volkswagen of South Africa (Pty) Ltd v Commissioner for the South African Revenue Service [2008] High Court
of South Africa - Transvaal Division 24201/2007. Case Law IBFD. See Annex II .iv for further details.
73 Johann Hattingh and Craig West, ‘The Notion of Tax and the Elimination of Double Taxation or Double
