How to Design a Regional Tax Treaty and Tax Treaty Policy Framework in a Developing Country

Abstract

region through articles on exchange of information or assistance in the collection of taxes. Depending on its content and the administrative capacity of member countries, however, a regional tax treaty may inadvertently increase base erosion risks for member countries. For example, if a member country (A) has a bilateral tax treaty with a nonmember country (B) that is a no-or low-tax jurisdiction, then residents of B may exploit benefits of the regional tax treaty as if B has a bilateral tax treaty with other member countries of regional treaty (C, D, and so on). Country C, for example, may have a policy not to conclude a bilateral tax treaty with a country like B. Thus, when a regional economic community decides to begin negotiating a regional tax treaty, the member countries should review one another's existing tax treaties and domestic tax laws in the same manner as countries do prior to commencing negotiations of bilateral tax treaties. A regional model tax treaty is an agreement among community members on preferred tax treaty positions to pursue in negotiations of a bilateral tax treaty with noncommunity countries. 9 It may help members reduce differences in bilateral tax treaties between individual members and noncommunity countries. However, a regional model tax treaty in itself does not prohibit members from concluding a bilateral tax treaty with noncommunity members that deviates from the regional model tax treaty. To prevent a member country from concluding a bilateral tax treaty that may undermine the community's effort to coordinate/ harmonize tax systems and increase base erosion risks for member countries, the community needs a regional tax treaty policy framework. 10 Such a framework requires member countries to observe bottom-line (non-negotiable) positions on key source taxing rights in negotiations and prevents members from concluding a bilateral tax treaty with prescribed types of countries. A regional tax treaty policy framework could mitigate negative spillover effects and reduce the risk of erosion 9 The regional tax treaty policy framework should also apply to negotiations of a bilateral tax treaty with other member of regional economic community, and to a regional tax treaty but in this case source country taxing rights such as ceiling rates of withholding taxes on investment income might be reduced. 10 The regional tax treaty policy framework should include a regional model tax treaty.