International tax law and international taxation implementations in Turkey – part2

OECD Model Tax Convention

The provisions of the law referred to in this research paper are based on the OECD Model Tax Convention on Income and Capital: Condensed Version 2017.

In our last research paper, we explained the measures to prevent double taxation at the national level. In this article, we will continue with the international methods and in particular the OECD Model Tax Convention (Model Tax Convention on Income and Capital).

International Methods

Another method used in the prevention of international double taxation is that states make a tax treaty. Even though national methods do not always provide sufficient results in preventing and eliminating double taxation, bilateral international agreements are the most important step taken to prevent double taxation. Since the tax treaty is an "agreement" concluded between the states, it falls directly into the subject of international law. Treaties, which are the main source of international law, are defined as follows: Treaty is a legal process between persons whom international law grants this authority, to establish a legal relationship, to change or eliminate a legal relationship established. The tax treaty is a legal process between the two states to prevent and eliminate international double taxation resulting from the conflict of taxation powers used on the same income. Contract-side states mutually restrict taxation powers in terms of certain revenues and cease to exercise taxation powers in favor of the other state.

The first type of tax treaties is inclusive agreements. Such agreements are agreements that cover all situations related to one or more taxes, and which cover the prevention of double taxation from all kinds of income and wealth. Inclusive agreements also include provisions such as exchange of information, administrative assistance and the prevention of international tax evasion. The second type of tax treaties is limited agreements. These are agreements on certain elements of income. In this case, it is aimed to prevent double taxation on a certain part of the income but not all. Limited agreements are agreements that have been concluded, in particular, to prevent double taxation on the earnings of transport agencies. Another example of limited agreements is agreements on diplomatic and consular services.

Tax Agreement Models have been created to form the basis of bilateral agreements concluded between the states and to ensure the integrity of legislation and implementation. Model agreements are not binding. Model agreements are advisory and mainly guiding and enlightening. Tax agreements determine which of the states party to the agreement will be taxed.

OECD Model Tax Convention

The OECD Model is based on the principle of residence. The use of taxation power in the model is predominantly on the state to which the taxpayer resides. The principle of source country is accepted when the taxpayer receives income from his real estate in a state or continues his activities in a state through a workplace.

If both states that have signed a tax treaty per the OECD Model are developed countries, there is no problem. The feature of developed countries is both being a capital exporter and an importer of labor. Its economic policies are based on the promotion of foreign investment and attracting cheap labor to their countries. The interests of developed countries are around the taxation of revenues from capital directed to foreign investment. States reserve the right to tax the income of the capital they exported only by giving up taxing the income of the capital they are mutually importing. Economically, tax treaties based on the OECD Model do not disrupt the balance between developed countries however if one of the parties to the agreement is a developing country, it cannot keep the balance and the balance deteriorates against the developing country. The OECD Model is therefore criticized for being one-sided.

In the appendix of the Model, there is a Model Commentary for each article that provides various explanations or definitions. The Commentary constitutes a guiding text in the implementation and interpretation of tax agreements and especially in the resolution of disputes. In the Model Commentary, there are "comments statements" and "reservations" issued by various countries. All member states participating in the creation of the OECD Model agree on the main objectives and main provisions of the model, while some countries have made reservations to several articles. Thus, these countries maintained their freedom in their meetings with other member countries based on the principle of reciprocity. In the comment's statements, a state declares that it does not agree with the interpretation of the articles of the agreement, but this does not mean that they find the text inappropriate. A country that gives a comment statement shows how they will apply that provision.

The general content of the provisions in the OECD Model is as follows:

Article 1 states that the agreement will apply to residents in one or both states that are parties to the agreement.

In Article 2, taxes that are within the scope of the agreement are determined. The taxes in question are taxes on income and wealth.

Article 3 defines the concepts frequently used in the agreement such as "person", "company", "a contracting state enterprise" and "competent authority". In cases where no definitions are given in the agreement, it is stipulated that national definitions will be valid.

In Article 4, the concept of "resident" is stipulated. In terms of the agreement, the term "a contracting state resident" refers to all persons who are taxed based on the legislation of the aforementioned state, based on their residence, headquarters or any other similar qualification.

Article 5 defines the workplace. In terms of the implementation of the agreement, the term workplace refers to a fixed place where the business activity is carried out in whole or in part. In this framework, the administrative center, branch, office, factory, shop, and mines fall within the scope of the workplace.

According to Article 6, the state to use the taxation authority in the taxation of immovable income is the state where the immovable property is located.

In Article 7, the taxation of commercial earnings is regulated. Accordingly, earnings are taxed in the first state unless the entity carries out its activity in the other contracting state party to the agreement through a business in that state. If the business conducts its business through a workplace located in the other state, the portion of earnings attributed to the workplace is taxed by the state where the workplace is located. In other paragraphs of the article, the principles to be followed are determined in the calculation of the earnings of the workplace.

Article 8 regulates the state levies the earnings arising from the sea, inland waterways, and air transportation, where the effective management center of the enterprise is located.

Article 9 is an article related to the taxation of affiliated enterprises. Within the scope of this article, it is possible to readjust the transactions of affiliated companies that are not in line with the precedent.

Article 10 provides regulations on dividends. Accordingly, the state to exercise its taxable authority in the taxation of dividends is the state in which the real beneficiary of these dividends is a resident. However, these dividends may also be taxed by the contracting state where the distribution company is located. If dividends are paid to a company that directly holds at least 25% capital of the company, the maximum tax rate applicable in the source state is 5% of the gross profit share amount. In all other cases, the tax rate to be applied in the source state will not exceed 15%.

Article 11 grants the right to exercise the taxation power in interest to the state where the real beneficiary of the interest is a resident. However, these revenues can also be taxed in the source state in which they are born but not to exceed 10% of their gross amount.

According to Article 12, royalties born in one contracting state and paid to the other contracting state resident can only be taxed in the state in which the beneficiaries reside.

Article 13 concerns capital appreciation gains. Gains arising from the transfer of ownership of movable and immovable property are taxed by the state as a rule, where these goods exist.

Article 14 is the article regulating self-employment earnings but has been canceled. These revenues are regulated under Article 7.

Articles 15 and 21 regulate how the taxation will be applied if people from various professions and operate outside the state where they are a resident and earn income. Topics covered are self-employment earnings, wages, manager wages, earnings of artists and athletes, pensions, public officials, students and revenues that are not explicitly defined in the agreement.

Article 22 concerns wealth.

Article 23 regulates the offset and exception methods. In the exemption method, the state, which has undertaken the elimination of double taxation, does not include the wealth or income paid in the other contracting state as the tax. In the offset method, the deduction of the tax within the country is accepted which is paid in the other contracting state in tax calculation. However, the amount to be deducted cannot exceed the national tax amount corresponding to income and wealth.

Article 24 aims to prevent discrimination among citizens of the country. Accordingly, no state can impose heavier taxes on citizens of other states than it applies to its citizens

Article 25 stipulates how the parties to the agreement resolve the disputes that may arise from the implementation of the agreement. Accordingly, the competent authorities will resolve the problems arising from the agreement through the mutual agreement procedure.

In Article 26, information exchange is organized. Accordingly, the competent authorities will exchange the information necessary for the implementation of the agreement. Information obtained in this way will be kept confidential.

In Article 27, administrative assistance is organized in the collection of the tax.

Article 28 states that the provisions of the agreement will not affect the tax privileges that diplomacy and consular officers enjoy according to both international law rules and special agreement provisions.

Article 29 concerns the extension of the application area of the agreement.

Article 30 contains the regulation regarding the enforcement date of the agreement.

Article 31 determines in which cases the agreement will be repealed.

In this part of our research paper, we explained the OECD Model Tax Convention. In the rest of the research paper, it will be explained that the United Nations Model Double Taxation Convention Between Developed and Developing Countries. Wait for our next post.

Yours sincerely.

Legal Intern Tuba Kızılkaya
Güneş & Güneş Law Firm