Tax Treaty Treatment of Royalty Payments from Low-Income Countries: A Comparison of Canada and Australia's Policies

Abstract

The proposal made in this paper is a modest one: that high-income countries should further the cause of reducing global inequality by ensuring that in their tax treaties with low-income countries they do not usurp needed revenues by reducing low-income countries' ability to collect tax on income with a source in the low-income country. This argument is made in the specific context of the taxation of royalty payments, which present one of the most extreme examples of high-income countries unfairly confiscating revenues that appropriately belong to their low-income treaty partners. The Organisation for Economic Co-operation and Development (OECD) model tax treaty, which most high-income countries in the world closely follow in negotiating their own tax treaties, provides that to avoid double taxation, source countries (invariably low-income countries) should reduce their rate of withholding tax on royalty payments to zero. Thus low-income countries that enter into tax treaties modelled on the OECD model convention are unable to levy a tax on royalty payments that have a source in their jurisdiction. In many cases, this simply results in a net transfer of revenue from the low-income country's treasury to the treasury of the high-income country. In making the general case for source taxation of royalty payments, the paper examines and compares Canadian and Australian tax treaty policies to see to what extent those countries have followed the OECD model convention in negotiating with low-income countries.

Keywords: international tax, tax policy, economic justice, developing countries

JEL Classification: H20, H40, I30, O10