International tax law and international taxation implementations in Turkey – part3

The provisions of the law are referred to in this article are based on the United Nations Model Double Taxation Convention between Developed and Developing Countries Updated Version 2017.

We articulated the OECD Model Tax Convention in our last article. In this article, we will explain the United Nations Model Double Taxation Convention between Developed and Developing Countries.

Since the OECD Model is insufficient in agreements signed between developed and developing countries, the United Nations Model, which is regulated as an alternative to protect the interests of developing countries, focuses on the taxation of the source country.

It is the reconciliation of the principle of source and the principle of residence. The UN Model prioritizes the principle of the source but does not recognize that the country of origin has exclusive taxation powers. The model tends to soften the strict principle of the OECD Model for the residence principle. According to the principles prevailing in the UN Model, the agreements should balance the sacrifices imposed on the treasury with the benefits obtained from the agreement simultaneously taking into account the legal and economic conditions of the States parties. Since the capital flow between developing countries and developed countries is one-way, that is, from developed countries to developing countries, when these countries are parties to a tax agreement based on the OECD Model, all the benefits of the agreement arise in favor of the developed country. For this reason, the UN Model tried to eliminate this imbalance by emphasizing the taxation of the country where the income was born.

The UN Model is based primarily on the OECD Model. The reason why this model is referenced is not only because it is the most recent text, but also because it is an accumulation of all experience in double taxation. Despite the basic approach difference between the two Models, there are similarities at many points.

UN Tax Convention Model consists of 7 sections and 30 articles. In the appendix of the model, there is a Model Commentary for each article that provides various explanations or comments. The Model Commentary also includes comments and reservations from various countries. The UN Tax Convention Model has the same systematic structure as the OECD Model. The topics addressed by the articles are the same as the OECD Model in terms of titles. Article 29 of the OECD Model is not included in the convention model.

The different points of the UN Tax Convention Model

The definition of the workplace concept has been expanded in a way that increases the right of the source country to exercise taxation power compared with the OECD Model.

Article 10 on taxation of dividends reflects the OECD Model. However, the upper limits have been made flexible to increase the withholding rates of the source country on these revenues. In the OECD Model, while the participation rate of the source state for the implementation of a 5% tax rate was 25%, it was reduced to 10% in the UN Model. In these cases, the maximum tax rate to be applied is not determined in the text of the article and is left to the will of the contracting states to be determined in bilateral negotiations. In the OECD Model, the 15% tax rate for all other cases is left to be determined in bilateral meetings.

Although the UN Model accepts that the interest arising in a contracting state and paid to the other contracting state resident is taxed by both states, it left the maximum tax rate to be applied in the source state to the will of the contracting states. However, in the OECD Model, this rate is determined as 10% and it is included in the article.

Unlike the OECD Model, the UN Model has divided the right to exercise taxation power for royalties between the two states. According to the model, the royalties will be taxed in the state where the person who obtained them is a resident. However, these revenues may also be taxed limitedly in the source state. The maximum tax rate to be applied in the source state is left to bilateral negotiations.

Selective options for international transportation gains are provided.

We discussed the UN Tax Convention Model in this part of the research paper. We will explain Turkey’s tax treaties with other countries in the next chapter.

Legal Intern Tuba Kızılkaya
Güneş & Güneş Law Firm

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