I’ve just been reading through the 2010 update to the OECD model tax treaty [pdf] and in particular the different positions set out by non-OECD countries. This is where countries can put on record their objections to the model treaty, so that potential treaty partners know what they’re getting themselves into. I think the difference of language used by Brazil, China and India is quite illustrative of their approach to diplomacy in international tax.
Article 7 deals with the attribution to a country of taxable profits made by a permanent establishment (i.e. branch) of a foreign company. It was given an overhaul in the 2010 update, under which the permanent establishment will be treated similarly to a subsidiary, with transfer pricing payments likely to reduce its taxable profits in the country where it’s established. Developing countries don’t like this, because in general it will reduce their share of a multinational’s tax base.
Compare how Brazil, India and China express this in the positions section. Brazil is matter-of-fact, India “does not agree”, while China “understands and respects”:
Argentina, Brazil, Indonesia, Latvia, Malaysia, Romania, Serbia, South Africa, Thailand and Hong Kong, China reserve the right to use the previous version of Article 7, i.e. the version that was included in the Model Tax Convention immediately before the 2010 Update, subject to their positions on that previous version (see annex below).
India reserves the right to use the previous version of Article 7, i.e. the version that was included in the Model Tax Convention immediately before the 2010 update, subject to its positions on that previous version (see annex below). It does not agree with the approach to the attribution of profits to permanent establishments in general that is reflected in the revised Article, in its Commentary and in the consequential changes to the Commentary on other Articles […]
Whilst the People’s Republic of China understands and respects the separate and independent enterprise principle underlying the new version of Article 7, due to its tax administration capacity it reserves the right to adopt the previous version of the Article and, in some cases, to resort to simpler methods for calculating the profits attributable to a permanent establishment.