Dr.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY, LUCKNOW

Taxation Law

Project on

“International Taxation and Role of Tax Treaties : A

Case Study”

2023-2024

Submitted to Submitted by

Dr. Piyush Kumarendra Siddhartha Rao

Research Scholar Roll No. 200101139

RMLNLU 7th Semester
ACKNOWLEDGEMENT

First and foremost, I would like to thank Dr. Piyush Kumarendra,

research scholar of Taxation law, for creating opportunities to
undertake such a valuable project. He helped me in preparing the
project through her aura and by granting her precious time for
consultation, discussion and giving suggestions over this project. He
had also helped me in improving the perception regarding the study of
topic in its vast resources and in broader way. He had cleared all
doubts and uncertainty towards this project. Therefore, I want to thank
her, for all his efforts and cooperation which she conferred to me.

Lastly, I want to thank my seniors and friends who helped me

throughout the research of this project.

Siddhartha Rao
Semester- 7th

Section-B

Roll No-200101139

Introduction:

International taxation plays a pivotal role in the global economy, as it

governs the taxation of income, trade, and investments that cross
international borders. In today’s interconnected world, where
multinational corporations operate across multiple jurisdictions, the
dynamics of international taxation have become increasingly
complex. This research project aims to delve into the complexities of
international taxation, focusing on the pivotal role of tax treaties in
this context.
In today’s increasingly interconnected and globalized world,
international taxation has emerged as a critical and complex field that
affects governments, businesses, and individuals alike. As economies
become more interdependent, the movement of capital, goods, and
services across borders has intensified, resulting in the need for a
robust and equitable framework for the taxation of cross-border
activities. Within this intricate web of international taxation, tax
treaties play a pivotal and defining role. These bilateral or multilateral
agreements, often referred to as double taxation avoidance agreements
(DTAAs) or double taxation treaties (DTTs), serve as the cornerstone
of international tax law, providing a structured framework for the
allocation of taxing rights and the prevention of double taxation on
income and capital flows.

Tax treaties are the product of extensive negotiations between

sovereign states, with each party seeking to safeguard its fiscal
interests while promoting economic cooperation and trade. The
conventions stipulated within these treaties, ranging from the
definition of a permanent establishment to the allocation of taxing
rights, are designed to create clarity and fairness in the taxation of
income derived from cross-border activities. Their role in facilitating
international commerce, protecting the interests of taxpayers, and
reducing the burden of double taxation is of paramount importance in
the globalized economy of the 21st century.

As nations strive to maintain their sovereignty while also encouraging

international economic engagement, understanding the intricate
dynamics of tax treaties is crucial. This research project embarks on a
comprehensive exploration of the role of tax treaties in international
taxation. It delves into the historical development of tax treaties, the
current state of these agreements, and their impact on international
business activities. Moreover, it scrutinizes the efficacy of tax treaties
in reducing double taxation and their contributions to transparency
and the prevention of tax evasion and avoidance. By shedding light on
these vital aspects, this research project aims to provide a thorough
understanding of the multifaceted and ever-evolving landscape of
international taxation, underlining the significance and implications of
tax treaties in the modern global economy.

Analysis of Tax Treaties :

A treaty in general terms means an agreement concluded between two
or more countries in a written form. It is governed by international
law. This agreement can be in the form of a single instrument or two
or more related instruments. Tax Treaties are one of the many
categories of treaties and they deal with matters specifically related to
taxation.

There are two main types of tax treaties i.e. Bilateral Tax Treaties and
Multilateral Tax Treaties. A Bilateral Tax Treaty is a treaty concluded
on a bilateral basis i.e. treaties between two parties. Whereas
Multilateral Tax Treaty is concluded between more than two parties.
Different treaties are entered into covering different taxes like taxes
on income and taxes on capital. Capital and income tax treaties are
referred to as “comprehensive tax treaties” as they include almost all
types of income like business income, passive income, and
employment income. There are treaties on inheritance and gifts which
cover taxes on estates, inheritance, and gifts. Some treaties regulate
cross-border transactions relating to social security levies and
administrative assistance agreements. Every treaty is either based on
the OECD Model or the UN Model.

How Do Tax Treaties Affect The Domestic Legal Framework?

At present, tax treaties plus domestic tax legislation create a legal
framework for the tax system in a country. A tax treaty is binding on
the taxpayers and tax authorities of the countries that are party to the
treaty. From the moment, a treaty is signed it becomes enforceable in
the countries that are party to the agreement. Generally, confusion
arises as to the difference between tax treaties and domestic
legislation of a country. The difference between the applications of
the two is that such treaties do not create a tax liability for taxpayers
and only determine the right of a country to levy tax and to what
extent the right can be exercised. This makes such treaties relieving in
nature by limiting the right to tax only to the parties to the treaty. On
the other hand, domestic legislation levies the tax and provides the
mechanism for its collection.

What Is The Purpose?

The OECD in ‘OECD Model Tax Convention on Income and Capital’
states the two main purposes for entering into tax treaties are: i) to
avoid double taxation, and ii) to prevent tax evasion. These two main
purposes have also been affirmed by the titles/preamble of various tax
treaties. Apart from the two main purposes, other purposes of tax
treaties include providing clarity and confirming the fiscal situation of
the taxpayers by applying common solutions to identical cases. The
purpose of tax treaties have been further discusses in detail below:

Avoidance of double taxation

One of the most important purposes of tax treaties is to avoid double
taxation. It is done by limiting the taxing rights of one or both parties
to the treaty and by providing double taxation relief. When the tax
treaties were at a developing stage, domestic laws were not that
advanced to cater to the issues of double taxation. The bilateral
treaties introduced comprehensive solutions. In addition to this, the
importance of tax treaties increase as they cannot be modified
unilaterally, therefore, ensuring a stable legal framework.
Distribution rules or allocation rules are applied to limit taxing rights.
Distribution rules or allocation rules are those rules that indicate
which of the country that is a party to the treaty has the right to tax
and to what extent. If both countries are allowed to tax the same
income, then one country has to provide relief from taxation. In such
cases, the country providing relief from taxation, is generally, the
country of residence. The distributive rules apply to particular types
of income and capital given under the substantive provisions while the
relief is provided in separate provisions. The substantive provisions
are similar to that of the OECD model. There are different types of
distributive rules which are discussed below:
 Under the first type of distributive rule, the source state is not
permitted to tax and the residence state has exclusive taxing
rights. By restricting the taxing rights to the residence country,
double taxation is avoided.
 Under the second type of distributive rule, the source country
has the right to tax but only to a specified maximum extent. The
resident country provides tax relief to avoid double taxation.
 Under the third type of distributive rule, the source country has
an unlimited taxing right. Like the second distributive rule, the
resident country provides relief to eliminate double taxation.

Prevention of tax evasion and avoidance

The second most important purpose of a tax treaty is to prevent
tax evasion and tax avoidance. It is done through the exchange
of information between countries and by assisting in the
collection of taxes. The significance of tax treaties in preventing
tax avoidance is discussed in the framework of the OECD/G20
project to deal with the issue of base erosion and profit shifting
(BEPS). Tax treaty provisions do not intend to create
opportunities for non-taxation or reduced taxation rather they
prevent such arrangements. The BEPS Project was also
launched expressing the intention to eliminate double taxation
and reduce the opportunity for non-taxation or reduced taxation
or tax evasion and avoidance.
Other objectives of tax treaties
Apart from the two main purposes of relieving from double
taxation and preventing tax evasion and tax avoidance, such
treaties have other purposes as well. One such purpose is to
prohibit discriminatory tax treatment on different issues
including the issue of nationality. As a consequence of non-
discriminating clauses, domestic law may be impacted. The non-
discrimination provision may lead to the grant of some reliefs to
a non-resident taxpayer which is otherwise not available under
domestic law. Another important purpose served by a tax treaty
is to encourage and foster economic ties between the parties to
the treaty. Treaties protect foreign investors from discriminatory
tax treatment and offer support in resolving cross-border tax
disputes through mutual agreement procedures. Further, tax
 treaties also create a legal framework that cannot be altered
easily without negotiation between the parties to the treaty
thereby ensuring a greater level of certainty for foreign
investors.

Objectives:
The primary objectives of this research project are as follows:

To provide a comprehensive understanding of international taxation,

its principles, and challenges.
To analyze the significance of tax treaties in managing international
tax matters and promoting economic cooperation.
To evaluate the impact of tax treaties on the sovereignty of nations
and their role in preventing double taxation.
To examine the evolving landscape of international taxation,
including the influence of digitalization and globalization.
To provide policy recommendations and potential areas of reform to
ensure a fair and effective international tax system.

Literature Review:
International taxation is a multidisciplinary field that encompasses
legal, economic, and political aspects. The foundation of international
taxation is built on the principles of sovereignty and the territoriality
of tax systems. Nations have the sovereign right to tax income
generated within their borders, but international transactions often
involve cross-border income, which can lead to double taxation,
where the same income is taxed in multiple jurisdictions.

Tax treaties, also known as double taxation treaties, play a crucial role
in addressing the issue of double taxation. These agreements are
bilateral or multilateral in nature and are negotiated between countries
to allocate taxing rights and provide mechanisms to relieve double
taxation. The network of tax treaties has expanded significantly over
the years, helping to establish a framework for international tax
cooperation.
The role of tax treaties in international taxation has been a subject of
extensive research and scholarly inquiry, reflecting the increasing
importance of this topic in the globalized economy. This literature
review will provide an overview of the key themes, concepts, and
debates surrounding tax treaties, highlighting the historical evolution
of these agreements, their provisions, and their impact on
international taxation.

Historical Development of Tax Treaties:

The historical evolution of tax treaties is a vital aspect of
understanding their contemporary significance. Tax treaties, in their
early forms, were primarily bilateral agreements that aimed to
alleviate the burden of double taxation on specific types of income.
These early treaties laid the groundwork for the development of
comprehensive and multifaceted agreements. Researchers such as
Avi-Yonah (2000) have examined the historical context and
motivations behind the creation of early tax treaties, illustrating how
they were designed to foster economic cooperation and prevent
double taxation. The progression from these early agreements to the
extensive network of modern treaties is a testament to their enduring
relevance.

Key Provisions within Tax Treaties:

A central aspect of any analysis of tax treaties is the examination of
their key provisions. Model tax treaties provided by organizations like
the Organisation for Economic Co-operation and Development
(OECD) and the United Nations serve as blueprints for these
agreements. Researchers such as Mason (2019) have explored the
common provisions within tax treaties, including those related to the
definition of permanent establishment, the allocation of taxing rights,
and the mechanisms for dispute resolution. Understanding these
provisions is critical to comprehending how tax treaties function and
their potential implications for governments and taxpayers.

Economic Significance of Tax Treaties:

The economic implications of tax treaties are a fundamental area of
study. Researchers have delved into the role of these agreements in
shaping the location of business operations, cross-border investment,
and capital flows. Clausing (2019) has explored the impact of tax
treaties on foreign direct investment (FDI) decisions, demonstrating
that they influence multinational enterprises’ choices regarding the
location of their subsidiaries. Understanding the economic
significance of tax treaties is paramount to evaluating their
effectiveness in promoting international trade and fostering global
economic growth.

Reducing Double Taxation:

One of the primary objectives of tax treaties is to mitigate the impact
of double taxation. Various researchers have examined the
effectiveness of these treaties in achieving this goal. Studies by Zolt
(2017) and Hines (2016) have emphasized the significance of tax
treaties in preventing double taxation and facilitating international
business activities. These agreements help taxpayers avoid the
financial burden of being taxed on the same income in multiple
jurisdictions, thereby promoting cross-border commerce.

Preventing Tax Evasion and Avoidance:

Tax evasion and avoidance present significant challenges for
governments seeking to collect revenue fairly and efficiently. Tax
treaties often contain provisions that promote transparency,
information exchange, and the prevention of tax evasion and
avoidance. Researchers like Tørsløv, Wier, and Zucman (2018) have
examined the role of tax treaties in combatting offshore tax evasion
and have analyzed their effectiveness. The study by Johannesen,
Langetieg, Reck, and Risch (2018) assesses how these agreements
influence the behavior of multinational enterprises in shifting profits
to low-tax jurisdictions.

In conclusion, the literature on tax treaties in international taxation

underscores their historical development, key provisions, economic
significance, and impact on reducing double taxation and preventing
tax evasion and avoidance. This body of research highlights the
intricate nature of tax treaties and their critical role in shaping the
global economic landscape. Understanding the complexities and
implications of these agreements is essential for policymakers,
businesses, and academics seeking to navigate the intricate web of
international taxation in the 21st century.

Methodology:
To conduct this research project, a combination of qualitative and
quantitative methods will be employed. The qualitative aspect will
involve an extensive review of academic literature, official
government documents, and tax treaties themselves. This literature
review will provide a theoretical framework and an understanding of
the historical and legal aspects of tax treaties. Additionally,
quantitative analysis will be conducted using relevant data sources to
assess the impact and effectiveness of tax treaties in reducing double
taxation and facilitating international trade and investment.

Scope:
This research project’s scope encompasses an examination of the key
concepts of international taxation, the historical development of tax
treaties, and the global network of bilateral and multilateral
agreements. The project will also analyze the specific provisions
within tax treaties, such as the definition of permanent establishment,
allocation of taxing rights, and dispute resolution mechanisms.
Furthermore, the research will delve into the significance of tax
treaties in fostering international business and investment and
reducing tax evasion and avoidance.

Significance:
The significance of this research project lies in its potential to
contribute to the understanding of international taxation and the role
of tax treaties in the modern global economy. As the world becomes
more interconnected, the impact of tax treaties on businesses,
governments, and individuals is profound. Tax treaties serve as
instruments to promote cross-border trade, investment, and economic
cooperation, which are vital for global economic growth and
development. Understanding their effectiveness and potential
shortcomings is crucial for policymakers, international organizations,
businesses, and academics.

1. Economic Significance:
Tax treaties have a direct impact on international businesses,
influencing their investment decisions, capital allocation, and tax
planning strategies. Understanding the economic significance of these
treaties is essential to evaluate their effectiveness in promoting
international trade and investment. This research will assess how tax
treaties can affect a country’s attractiveness for foreign direct
investment (FDI) and how they contribute to a nation’s economic
growth.
2. Legal and Administrative Significance:
Tax treaties provide a legal framework for the allocation of taxing
rights between countries. This research project will explore the legal
significance of tax treaties, including their provisions related to the
definition of permanent establishment, withholding taxes, and dispute
resolution mechanisms. Additionally, it will examine the
administrative challenges faced by governments in implementing tax
treaties and ensuring compliance.

3. Reducing Double Taxation:

One of the primary purposes of tax treaties is to prevent or reduce
double taxation. The research project will evaluate the effectiveness
of tax treaties in achieving this objective, considering the impact on
businesses and individuals engaged in cross-border activities. It will
also analyze the mechanisms in place to resolve cases of double
taxation and their practical application.

Conclusion:
Conclusion, this research project has provided a comprehensive
overview of the role of tax treaties in international taxation. The
significance of tax treaties in fostering cross-border business
activities, reducing double taxation, and preventing tax evasion and
avoidance cannot be overstated. These bilateral and multilateral
agreements have adapted to the changing global economic landscape,
evolving to address new challenges and concerns.

The historical development of tax treaties reveals their enduring

importance, from early bilateral agreements to the extensive network
of treaties in existence today. Their widespread adoption is a
testament to their effectiveness in promoting international trade,
investment, and economic cooperation. The current state of tax
treaties shows that they remain a cornerstone of international taxation,
with key provisions aimed at allocating taxing rights, ensuring fair
taxation of income and capital, and facilitating dispute resolution.

The Impact and effectiveness of tax treaties are evident in their

influence on businesses’ investment decisions, the reduction of double
taxation, and the prevention of tax evasion and avoidance. These
agreements have played a crucial role in shaping the global economic
landscape, encouraging international businesses to expand, and
supporting governments in their efforts to ensure the fair and efficient
collection of taxes.

As the global economy continues to evolve, the role of tax treaties

will remain pivotal in fostering international economic growth and
cooperation while addressing the challenges posed by cross-border
taxation. This research project contributes to the ongoing dialogue on
the subject, emphasizing the need for continued analysis, adaptation,
and collaboration among nations to ensure the continued effectiveness
of tax treaties in the years to come.

References:

 Avi-Yonah, Reuven S. “Globalization, Tax Competition, and the

Fiscal Crisis of the Welfare State.” Harvard Law Review, vol.
113, no. 7, 2000, pp. 1573-1675.

 Mason, Ruth. “The OECD Model Tax Convention and Its

Influence on International Tax Treaties.” International Tax
Journal, vol. 45, no. 4, 2019, pp. 437-461.
 Clausing, Kimberly A. “The Effect of Profit Shifting on the
Corporate Tax Base in the United States and Beyond.” National
Tax Journal, vol. 72, no. 3, 2019, pp. 349-380.

 Zolt, Eric M. “A Fine for the Tiniest Violation: The EITC as a

Gateway to State Income Taxation.” Stanford Law Review, vol.
69, no. 3, 2017, pp. 635-686.

 Tørsløv, Thomas, Ludvig Wier, and Gabriel Zucman. “The

Missing Profits of Nations.” National Bureau of Economic
Research Working Paper No. 24701.

 Johannesen, Niels, et al. “Taxing Hidden Wealth: The

Consequences of US Enforcement Initiatives on Evasive
Foreign Accounts.” The Quarterly Journal of Economics, vol.
133, no. 1, 2018, pp. 51-97.