Indices of Treaty Abuse and the Various Fiscal Regimes for Regulating Onshore and Offshore Energy Sectors

Abstract

Under international law, a state is permitted to tax foreign transactions as long as there is sufficient nexus between the tax payers and the taxing state, which gives the taxing state the right to tax the income of either the individual or legal entity on the basis of source or residency principles.[1]  Under the source principle, a state has the right to tax any income that is derivable from any activity of a taxpayer within its territorial scope, irrespective of whether the earner of the income has any other connection with the state (e.g., is a resident of that country).[2] On the other hand, the principle of residency permits a state to tax the world wide income of any person that has a substantial connection to that taxing jurisdiction and hence qualifies as a resident under the laws of that state. Therefore, a state having a complete sovereignty to create a tax system, may adjust these principles to its needs o reduce double taxation and combine them under a consideration of its economic and political realities.[3]

As a consequence of these principles, more than one state can have concurrent jurisdiction over the same income creating an overlap, which leads to double taxation. This overlap generates an excessive tax burden on the taxpayer which may globally inhibit the free exchange of goods and services, thereby having a negative effect on the development of international capital flows.

In order for countries to avoid the problem of double taxation, most developed countries enter into a bilateral or rarely multilateral treaty,[4] generally referred to as DTR convention (Double Taxation Relief Convention) or DTT (double taxation treaties).[5] Double tax convention (DTC) can also be seen as double tax treaties, as it embodies the double tax reliefs of the both countries that are parties to the treaty.[6]

In most cases, some persons try to abuse the provisions of these treaties by circumventing the limitations provided by that treaty. Example of such situations are treaty shopping, splitting of contracts, Hiring-out of labor, Avoidance of Dividend Characterization, Dividend Transfer Transactions, Transaction that circumvents the Application of Article 13 (14) of OECD, tiebreaker Rule For Treaty Residence, Permanent Establishment situated in third countries.[7]

This work is a review of how countries treaty network is abused, the negative effects of treaty abuse and recommendations of how treaty abuse can be cubed. It will also consider the different fiscal regulations which a country can adopt for the purpose of regulating its offshore and onshore energy sectors.

[1] Simosne M. Haug," The United States Policy of Stringent Anti-Treaty Shopping Provisions: A Comparative Analysis'', (Vanderbilt Journal of Transnational Law Vol. 29, 1996) P.195-199, available @>Hein Online http://heinone.org>accessed 20th April, 2017.

[2]   Ibid.

[3]  Ibid.

[4]  There are more than 2500 double taxation Treaties worldwide and UK has the largest of Treaties, covering over 100 countries. The UK seeks to encourage and maintain an international consensus on cross-border economic activities and to promote international trade. To this end, UK plays an important role in the Organisation for Economic Co-operation and development. (OECD), available on line @>http://www.hmrc.gov.uk/taxtreaties/dta.htm>accessed 2oth April, 2017.

[5]  Angharad Miller &Lynne Oats," Principles of International Taxation'', (3rd Ed, Bloomsbury Professionals, 2011) p.78.

[6]  Idid.

[7] Organisation for Economic Co-operation and Development (OECD), BEPS ACTION 6, "Preventing the granting of Treaty Benefits in Inappropriate Circumstances'', (2014) available @>http://www.oecd.org/ctp/treaties/ treaty- abuse-discussion-draft-march-2014.pdf>accessed 20th April, 2017.