As I write this, one of the major sticking points in the BREXIT negotiations, is the use of treaties. There appears to be a major difference over whether a treaty agreement would be automatically updated for changes in regulations or whether it is frozen at the point of signature and only covers the regulations at the time the free-trade agreement is ratified.
For devotees of double tax treaties, this is not unfamiliar territory. Tax treaties can either be seen as static, where the interpretation remains the same as when the treaty was ratified; or ambulatory, where the treaty evolves as interpretations change. When looking at double tax treaties, it is important to understand the legal position of the countries that have ratified those treaties.
In the past four and half years I’ve always wondered why negotiators for free trade agreements could not learn from how double tax treaties are created, ratified and enforced.
Double tax treaties are mercifully short with about 32 clauses. Treaties between developed countries generally follow a model set out by the Organisation for Economic Cooperation and Development (OECD). There are additional clauses to protect what each state sees as its vital interests which may be in the form of commentary or indeed country reservations.
Any form of treaty which binds a country does of course erode its sovereignty. But tax treaties rarely cite controversy because the terms are viewed as reciprocal and there is an equivalence of treatment between large and small countries. Secondly, although the OECD advises on the application of double tax treaty and can be asked to appoint a mediator to solve a dispute between two tax authorities, it has never been seen as an organisation which is looking to increase its power and therefore is not seen as a threat to member states.
Perhaps what we need in terms of new international agreements on trade is some equivalent WTO model, which can be adapted for each country to use. Disputes could be resolved through a similar mutual agreement procedure with the WTO potentially appointing an independent chairman to mediate the dispute.
Tax treaties are not without controversy. For example, some development charities believe that they unfairly favour richer countries because taxing rights are generally higher in the state of residence and that is where most wealthy people live. The BEPS process has demonstrated however that a large number of countries can agree on radical changes to taxation in a relatively short period of time, where the facilitator is a truly independent, trusted and nonpartisan organisation such as the OECD.
Perhaps, in future trade negotiators might look to this example
Primondell specialises in international taxation and gives topical seminars on issues such as the development of BEPS, double tax treaties and transfer pricing.