Model Conventions

Developed Countries
The OECD Model Convention (OECD-MC) is primarily based on the principle of residence taxation, with the result that the country of the investor holds many of the taxing rights. It is based on the idea that income taxes on world-wide income should be paid in the country of residence, as this is the country that typically provides public services to the taxpayer. The model and its commentary do not bind the member states of the OECD but most of the worldwide bilateral tax treaties are based on it. National supreme and constitutional courts also take their focus on OECD commentary when interpretation is needed for court decisions.

It should be mentioned that the OECD methods to avoid double taxation only deal with the elimination of international juridical double taxation. The OECD-MC contains the tax exemption method as well as the tax credit method. Neither CIN is regulated satisfactorily because of Art. 23A (2) nor CEN is met because the state of residence does not have any tax jurisdiction for all types of income.

On the other hand, the United States Model Income Tax Convention (US-MC), also based on worldwide income, expresses the tax credit method only. The USA does not only grant an ordinary tax credit, but also an indirect tax credit in case a US company owns at least 10 percent of the voting stock of the foreign resident dividend paying company. CEN is not achieved because of the specific rules of the limitations of the foreign tax credit.

Emerging Countries
The OECD model is frequently cited as a reference point for other tax treaties, such as the developed ASEAN Model Convention (ASEAN-MC). The OECD mix with less sales tax and more income tax has the dual benefit that the adverse distributional impact of the sales taxes is not so great and that the redistribute nature of personal income taxes can partly offset it.

In Latin America the Andean Pact Model is a tax treaty for countries using the territorial principle and thus an application of CIN. In the Cartagena Agreement under the Decision 40, the standard to avoid double taxation between Bolivia, Colombia, Venezuela, Ecuador and Peru, also called the Andes Model, is focused on the taxing rights in the source state. It differentiates between an agreement between member countries and a standard between member countries and other states outside the sub-region.

Developing Countries
The United Nations Model Double Taxation Convention (UN-MC) represents a manual for the negotiation of bilateral tax treaties between developed and developing countries with the possibility to choose between the tax exemption method and the tax credit method for avoiding double taxation. Under the UN-MC the source state or capital-importing country has more taxing rights than under the OECD-MC. For example, it allows higher withholding taxes for passive income in the state of source. In coherence to the source-based taxation the UN-MC does not contribute to neutrality and efficiency.
In many treaties with developing countries the developed country grants a tax matching credit or tax sparing credit to support capital import and consequently economic growth.

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