Enhancing International Tax Understanding

Insights and Impacts from a Recent Tax Treaty Workshop organised jointly by the UNDP and the South Centre

October 2, 2023

Enhancing International Tax Understanding: Insights and Impacts from a Recent Tax Treaty Workshop organised jointly by the UNDP and the South Centre

The United Nations Development Programme (UNDP), through its Tax for SDGs Initiative, and the South Centre jointly organised a three-day capacity-building workshop held from 3-7 August 2023 on Tax Treaty Negotiation, Tax Treaty Policy Framework and Model Tax Treaty for Sri Lanka for approximately 100 government officials from the Fiscal Policy Department (FPD), Inland Revenue Department (IRD), Ministry of Finance and the Board of Investments, and the Ministry of Investments.

The UNDP ‘Tax for SDGs Initiative’ in collaboration with the South Centre Tax Initiative aims to support developing countries in increasing Domestic Resource Mobilization (DRM) and achieving the Sustainable Development Goals (SDGs). Foreign investment serves as one of the tools as a source of revenue for developing economies. On the tax front, international tax agreements play a pivotal role in shaping cross-border trade, investment, and economic relations. While tax treaties are designed, among other things, to promote cross-border investment, some developing economies have not always reaped the intended benefits. Complex provisions and negotiation power imbalances often result in these countries being unable to fully protect their tax base or secure favourable terms, potentially exacerbating inequalities in the global economic landscape.

In this context, with a heightened commitment to attracting investments while safeguarding the tax base of Sri Lanka, the capacity-building workshop provided a comprehensive platform for understanding the complexities of tax treaties, analyzing the UN and OECD model conventions, formulating country-specific tax policies, and mastering negotiation strategies. More specifically the objectives of the workshop were:

• Development of a Sri Lankan Tax Treaty Policy Framework
• Development of a Sri Lankan Model Tax Treaty
• Capacity Building on Articles of UN and OECD Model Tax Conventions
• Capacity Building on Treaty Negotiation

D. R. S. Hapuarachchi, Commissioner General, Inland Revenue Department of Sri Lanka

At the heart of the workshop were the United Nations (UN) and Organisation for Economic Co-operation and Development (OECD) model conventions, pivotal documents that serve as blueprints for bilateral tax treaties between nations. The workshop aimed to empower participants with an in-depth understanding of these treaty models, unravelling their complexities, implications and nuances. This was achieved through an article-by-article discussion of UN and OECD models, and in this process, emphasis was laid on the UN model as it generally favours source-based taxation and, hence, is more beneficial to developing countries like Sri Lanka.

The workshop’s agenda extended beyond theoretical knowledge, delving into the practical aspects of international tax treaty negotiation. Participants were introduced to the art of crafting country-specific tax treaty policy frameworks by a Member of the UN Tax Committee, Elisangela Rita of Angola. These frameworks are essential to tailor international tax agreements to each nation's unique context, aligning with domestic policy goals and international obligations. By discussing case studies and real-world examples, participants gained insights into the formulation of robust tax policies that are mutually beneficial for all parties involved thereby focusing on the cornerstone of tax policies viz. fairness, prevention of double taxation and double non-taxation.

The programme provided tax administrators with a comprehensive guide to successful negotiation strategies. Negotiating a tax treaty is a delicate process that requires a strategic approach. To impart a practical experience of treaty negotiations, a simulated negotiation exercise was undertaken, allowing participants to apply their theoretical knowledge as gained from the discourses of resource persons in a real-world scenario.

The interaction between tax treaties and bilateral investment treaties (BITs) was another aspect of the workshop. The importance of harmonizing tax treaties and BITs was sensitized, underscoring the need for policy coherence and collaboration among policymakers to ensure a conducive environment for international investment. At the same time, it was emphasised that BITs should not include any provision to decide any matter of tax, which can only be decided under the domain of domestic law and relevant tax treaties.

A session was held that was exclusively dedicated to the review of Sri Lanka’s tax treaty network, to identify the unfavourable treaties which have excessively reduced Sri Lanka’s taxing rights and may require renegotiation. This exercise was also meant to highlight beneficial (source-based) provisions that should be included in a Sri Lankan Model Tax Treaty. This session formed the basis for an ensuing breakout group discussion among the participants to ‘kick-start’ the discussion on Sri Lanka’s Model Tax Treaty.

The participants indulged in this exercise with gusto and their recommendations from the breakout groups were compiled and consolidated. These inputs were then used for a second breakout group discussion where participants identified domestic law changes needed to implement these treaty provisions.

The positive impact made by the workshop was immediately evident from pre-workshop and post-workshop feedback provided by the participants, as summarised hereunder:

Thus, from the above data, it is clear that the workshop had a substantial impact in enhancing the capacity of the officials and succeeded in its overall objectives.

As the workshop drew to a close, the Inland Revenue Department (IRD) took the opportunity to outline a roadmap for formulating a Sri Lanka-specific tax treaty policy framework. This roadmap emphasized policy objectives that would serve as guiding principles for designing a tax treaty policy framework and Model Tax Treaty for Sri Lanka. The Sri Lankan government requested continued support from the UNDP and the South Centre in this regard. By aligning the country's tax treaty policy with its economic aspirations Sri Lanka aims to enhance its participation in international tax agreements that promote its national interests.

The workshop concluded with profuse appreciation for UNDP and South Centre’s support. As could be seen from the evaluation data, the workshop succeeded in its objectives of enhancing the capacity of government officials in the international tax aspects relevant to tax treaties. The Inland Revenue Department requested additional support on international taxation, particularly on transfer pricing.

Going forward, the UNDP and the South Centre will continue to provide support to the Sri Lankan government in the preparation of a tax treaty policy framework and a Model Tax Treaty, as well as in capacity building on transfer pricing. Through these continued interventions under the Tax For SDGs Initiative, the UNDP and the South Centre will continue to support developing countries in mobilising taxes to achieve the Sustainable Development Goals.