In a recent article, I wrote about the link between double tax treaties and the ability to attract foreign direct investment. The reasons why countries sign tax treaties varies – the elimination of double taxation provides certainty to taxpayers, and therefore to investors when looking at various jurisdictions where to invest in. Tax treaties also provide a rubber stamp to a particular country which could also result in an increase in foreign direct investment.
The process of signing a tax treaty is extremely lengthy. After a country decides which treaty partners it would like to have, a series of negotiations begin between the two countries before eventually ratifying the treaty. This process could take years and once you multiply this period by the number of treaties which a country wants to sign, it results in an extremely lengthy process, the fruits of which will only be reaped in decades.
Unilateral tax relief provisions provide taxpayers with relief from double taxation, even in the absence of a tax treaty. Countries have introduced such provisions in their domestic tax legislation in order to provide taxpayers with identical tax relief in the same way that a tax treaty would, without the reciprocity provided by the respective party in the case of a ratified tax treaty.
Whilst a jurisdiction might not be too keen in providing relief to taxpayers resident in, or income arising in, another country which doesn’t provide the same reciprocal relief, there are a number of benefits of doings so. Firstly, in view of the fact that, elimination of double taxation provides peace of mind for taxpayers, having unilateral tax relief provisions in place will attract more investment to the country, as investors will not be concerned with any issues of double taxation irrespective of whether a treaty is in force or otherwise.
Furthermore, the introduction of unilateral relief provisions within a country’s domestic legislation, does not require the years, and sometimes decades, which are needed to negotiate a number of treaties with various countries, but provides this benefit instantly without requiring other countries’ consent or ratification in the other countries’ parliament.
As mentioned above, and also in my article published in April titled ‘The relationship between Double Tax Treaties and Foreign Direct Investment’, double taxation treaties do not simply provide relief from double taxation but provide a number of other benefits. These include combatting tax avoidance and evasion, exchange of information provisions, elimination of discrimination and providing dispute resolution mechanisms, amongst others. The introduction of unilateral relief provisions should not be seen as an alternative to negotiating and ratifying tax treaties with a number of other jurisdictions but should be seen as a solution which goes hand in hand with this, by providing taxpayers with immediate elimination from double taxation irrespective of the country in which the income arises, or the taxpayer is resident.
The writer is a co-founding partner at Seed, a research-driven internationally focussed, advisory firm based out of Malta, Europe.
nicky@seedconsultancy.com | www.seedconsultancy.com