Tax Treaty Models - Past, Present, and a Suggested Future

Abstract

Nations rely on taxes to fund their activities and services. Because each nation’s tax revenue is predominantly generated from domestic sources, the right to tax is clearly of domestic origin. However, the current state of trade relations involves multinational and foreign corporations, as well as aspects of international law. As a result, two critical questions are which of the parties in an international transaction should be taxed, and of course, how should they be taxed? One of the main purposes of the international tax field is to allow and incentivize individuals and corporations to conduct business with other countries. These cross-border transactions involve more than one country and therefore, more than one tax regime. To avoid situations of double taxation and even those of non-taxation, nations develop, negotiate, and ultimately sign tax treaties. Once this process is concluded, the two signatory nations agree on how to allocate taxes for “different types of income.” There are two basic and fundamental international tax bases: the territorial (source) base, which capital exporter nations negotiate for in treaties, and the resident base, negotiated for by capital importers. A nation first needs to understand its best tax policy to obtain and optimize a treaty. Second, it must understand how to implement this policy. To do so, those drafting this policy must know the other nation’s needs and be familiar with every tax treaty model and current tax treaties. This paper will focus mostly on the United States’ tax treaties, and the evolution that the United States has experienced while transforming from a capital exporter to a country that imports as much as it exports. This will then be compared to an analysis of China’s tax policy as well as the tax policies of a few Latin American countries to determine whether there is a need for change in the United States.

Keywords: Tax, Tax Treaty, Tax Treaties, International Tax, U.S. Model, OECD Model, U.N. Model, Tax Policy, Developing Countries, Developed Countries

JEL Classification: K34, K3, K30, K00