Lee Sheppard: Don't sign OECD model tax treaties!

Update: June 3. We now know that Sheppard wrote an article for Tax Analysts entitled How Can Vulnerable Countries Cope With Tax Avoidance? (p410) It covers the issues below more thoroughly, and contains much that is interesting and not covered in the blog below.

We have just come across this video of a presentation in Norway by Lee Sheppard, contributing editor at Tax Notes International, and one of the U.S.' best known tax experts. Provided by Publish What You Pay Norway, it is fascinating, and in this blog we have transcribed a chunk of her speech, explaining why the OECD has caused so much damage in the arena of international tax.

She introduces her talk, promisingly, like this:

"I am going to talk about what the existing international consensus is, and how the countries that you people represent can defend yourselves against the structural problems."

First, a few short highlights, either in quotes or in our summary of the quotes. The full text of this section from her presentation is pasted below. The emphasis is obviously ours.

    •    "Don’t sign OECD model treaties, don’t sign U.N. model treaties!"[From her Tax Analysts piece: "By signing an OECD model treaty, a signatory accepts separate company accounting (which enables shell corporations), arm’s-length transfer pricing (a battle of the experts), and permanent establishment (a limitation on tax jurisdiction over companies doing business). The OECD model treaty — the accepted international standard — is the ultimate source of the problems."]

    •    For multinationals, "there are countries for which there is extraction, and countries where there are customers, and these are all countries from which income has got to be stripped. And the rubric that allows this is the international consensus. It is the whole treaty network. The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals". . . The international consensus is "basically a load of nonsense that protects multinationals." When you sign onto the international consensus, you sign on to a bunch of deleterious consequences.

    •    "When you sign an OECD model treaty, you say there is no withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign that?

    •    The OECD primarily protects the interests of the United States and the United Kingdom. Even Germany doesn't get a look in.

    •    "South America does not sign OECD model treaties. Because a treaty is a contract. They read the document. They don’t like the terms."

    •    When you sign an OECD model treaty you also sign onto a concept called Permanent Establishment. "It is a rather nonsensical concept that says, ‘well, if you, multinational, are operating in a country and making money in a country, but you have any presence that is short of, oh, a full automobile assembly plant, then you are not taxable in that country at the level of the owner of this plant. This thing has a little circle drawn around it, and it cannot be taxed in a normal way. That is a pillar of that treaty. . . . you do not want to sign a document that has got that in it.


    •    Do not sign tax treaties with tax havens. The United States by and large does not sign treaties with tax havens, though there is a group of "enablers" such as Ireland, the Netherlands, Switzerland which escape the net. "These are members of European organisations in good standing . .  but they also do a full-on business as conduits of money out of the market countries: that is all of your countries."

    •    The U.S. has treaties with Switzerland, the Netherlands, Luxembourg, all these European enablers – because our businesses want to strip income out of Europe. I don’t know why Europe doesn’t get peeved at us.

    •    "The US does a lot of business with Brazil. The US has no tax treaty with Brazil. You can do business with a country without a tax treaty. You don’t need one. You do need a bilateral investment treaty."


    •    "So what do you do if you have a treaty with the enablers? You want switch-over clauses. . . .  if the other party of the treaty doesn’t tax it, then the first party – in this case Norway – gets to tax it. And the OECD model has, in the draft, a switch-over clause that you can just pop into the document."

Full transcript of this section is below. The rest of the talk is interesting too. This section starts at about 3:20 into the presentation. She occasionally refers to a

diagram: it's here: click to enlarge.

"Don’t sign OECD model treaties, don’t sign U.N. model treaties!

The OECD does not have the interests of small and medium-sized vulnerable countries – and notice that I am not talking about developing and developed countries. As far as these multinationals and their advisers are concerned there is no differentiation: there is only countries for which there is extraction and countries where there are customers, and these are all countries from which income has got to be stripped. And the rubric that allows this is the international consensus. It is the whole treaty network. The treaties protect multinationals primarily. That’s all they were ever for: to make life comfortable for multinationals.

Secondarily, the OECD protects the interests of the United States and the United Kingdom. Germany is the biggest economy in Europe: it doesn’t really even qualify to be listened to at the OECD. There are things that Germany wants to address – this commission arrangement here (on the diagram) – they are not going to get them. They are not a constitutent. If they are not a constituent, is Norway a constituent?

Back to the treaty part: it’s almost an advantage being small: you want to enact specific defensive laws to address the problems that you know you have. If you problems with the pricing of minerals going out of your country, or you have problems with ships being towed out into the ocean and sold, I can write you a two sentence statute that says ‘if you have an oil rig that is licenced to operate in Norwegian waters continuously, and it is sold while under contract, then the sale took place in Norway, no matter where the actual sale took place. That is not a hard statute to draft. You can draft protective stuff and get it in their law and they can’t argue with it. Right now, in some of these situations the treaties are protecting them, and the countries that are harmed are not protecting themselves.

Those of you who are from mineral exporting countries, for heavens’ sakes, the agreements that you sign: this is the point of maximum leverage over the multinational company extracting the minerals: they want the minerals, you have them, you can put the conditions and the tax conditions in the agreements. 6:50 As I understand it, I am told that both sides of the North Sea: both the United Kingdom and Norway signed Production Sharing Agreements (PSAs) – you haven’t been able to get a PSA from Saudi Arabia for 50 years. The country owns the minerals, the multinational just paid to take them out, and then it buys them from the country at the world price, which is a very easy thing to find.

Why not to sign OECD treaties? Professor Christian was talking about the norms: the international consensus. This is basically a load of nonsense that protects multinationals. When you sign onto the international consensus, you sign on to a bunch of consequences that have very deleterious effects on what we call a Source Country: that is, a market country. This is Norway and all the countries that are represented in this room: right here, where the limited risk distributor and the customer are. When you sign an OECD model treaty, you say there is no withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign that?   8:30

India, South America, withhold. South America does not sign OECD model treaties. Because a treaty is a contract. They read the document. They don’t like the terms.

You sign on to respecting all these little boxes as real, live corporations that decide their own actions and are separate economic actors: and as we know these are not separate economic actors. On a balance sheet these things don’t exist and the transactions between them don’t exist. You sign onto not only recognising the transactions between them – you sign on to recognising and respecting the self-serving contracts that the multinationals’ lawyers wrote to explain those flows, out of your country, of cash on which there is no withholding.

You also sign onto a concept called Permanent Establishment, and this is one that the Indians are fighting to the wall. Next time you have one of these conferences, invite people from the Indian and Chinese goverments. They have signed a bunch of these treaties and they are fighting this stuff: they are fighting for their own interpretation of this stuff, fighting the Permanent Establishment concept. It is a rather nonsensical concept that says, ‘well, if you multinational are oprating in a country and making money in a country, but you have any presence that is short of, oh, a full automobile assembly plant, you are not taxable in that country at the level of the owner of this plant. This thing has a little circle drawn around it, and it cannot be taxed in a normal way. That is a pillar of that treaty. The treaty allows companies to go in through the internet and sell services to everyone in that country, and not pay tax. That is ridiculous. That is what Permanent Establishment has come to mean: you do not want to sign a document that has got that in it.

11:19

What do you do if you have these treaties? Norway has an awful lot of them. The European Commission the other day made some interesting suggestions. A multinational not paying tax anywhere, including in most of Europe, has gotten so bad that even the guys in charge of borderless Europe are starting to notice this, and say ‘you shouldn’t sign treaties with tax havens.’ You shouldn’t. The United States by and large does not sign treaties with tax havens.  That is how the US blacklists people: if you don’t have a treaty with the US that means it blacklists you. But they have a kind of narrow definition of tax havens: one of the definitions was that it’s a small jurisdiction, and you have to be small to be a tax haven. Because if you have real responsibilities to people and schools and so on, you kind of have to have taxes to finance that kind of stuff. It also offers special deals to non-residents. That’s like Gibraltar: that’s a very narrow definition.  You don’t want to sign treaties with. But also, the other ones you don’t want to sign treaties with are the international enablers: the Netherlands, Switzerland, Ireland, these are members of European organisations in good standing: they are low tax jurisdictions, they have real tax systems, they tax their own people – but they also do a full-on business as conduits of money out of the market countries: that is all of your countries.

When your people are consuming goods and services from big multinationals: all those American products and entertainment that you want to keep your children away from: you are a market country. These are the conduits they use to get the income out of your country after your child has whined and pulled on your leg and you went and bought that product you didn’t want to buy. You don’t really want treaties with them – but these conduits have treaties with everybody, because you can’t run yourself as a holding country without treaties.

You are beginning to see how treaties enable all this.

South America: Brazil is a huge country. The US does a lot of business with Brazil. The US has no tax treaty with Brazil. You can do business with a country without a tax treaty. You don’t need one. You do need a bilateral investment treaty, which says that there has to be arbitration if there is a dispute, you need the rule of law, but you don’t need a tax treaty.

15:00

So what do you do if you have a treaty with the enablers?

You want switch-over clauses. This country, Norway, signed a treaty with Ireland in 2000. It is clear that Ireland is one of the enablers. These rulings will defend the multinational’s position in competent authority negotiations: that is a treaty negotiations between the two affected countries. That is part of the services they sell. There is nothing for them to defend if you have a switch-over clause. The Norway-Ireland treaty, I don’t think has a switch-over clause. Here is what that means. Norway is an exemption jurisdiciton: that means foreign active income is exempt from taxation in Norway. Well, if the income is shifted to Ireland, and Ireland doesn’t tax it – then guess what? Ain’t nobody taxes it. A switch-over clause says that if the other party of the treaty doesn’t tax it, then the first party – in this case Norway – gets to tax it. And the OECD model has, in the draft, a switch-over clause that you can just pop into the document.

But your businesses will whine.

-    You have to have a treaty with Switzerland.
-    Why?
-    We need it for business!
-    What business?
-    Well, tax evasion, OK advoidance. We need it for tax planning.

And that argument carries, in the United States. The US has treaties with Switzerland, the Netherlands, Luxembourg, all these European enablers – because our businesses want to strip income out of Europe. I don’t know why Europe doesn’t get peeved at us for having this policy.

You have got to have switch-over clauses."

End of section.

This took up about 17 minutes: the rest of the 38 minute presentation contains much that is of interest.

This will be stored permanently on our Tax Treaties webpage.