Is international tax like open source software?

Adapted from some comments I made on an academic paper (unpublished, so I can’t link).

What has international tax got to do with “open source” software? Well, maybe nothing, but let’s run with it for a minute.

Under open source, the code underlying a software package is made public under a special licence that allows a community of developers to make their own changes to it. Common examples include the Firefox web browser, Google’s Android operating system for mobile phones, and the Linux operating system on which Android is based.

Open source software sometimes experiences a ‘fork’, i.e. a conscious decision by its developers to take the code as it was at a snapshot in time, and to begin developing it independently. One blog post looks at ten forks and suggests that,

common causes of forks are disagreements (sometimes purely ideological) and personality clashes, though more practical reasons are also common.

The Android operating system provides us with a recent example of a fork with a commercial motivation. Android is made available by Google as open source software, which allows mobile phone developers to tailor it to their particular models. In these cases, the developers generally update their customised versions whenever a new version of Android is released. But Amazon did something different when it launched its Kindle Fire tablet: it produced what some commentators described as a fork, meaning that it used the Android code from a snapshot in time, but took control of its future development. One observer notes:

As time goes on and Google continues to develop Android in one direction while Amazon continues to take the Kindle Fire down its own unique path, the two platforms will be less and less alike

Er, I thought you were writing about tax?

Here’s the analogy. The OECD model tax treaty can be considered as the “core code”, and the  original 1980 UN model as a ‘fork’ based on the OECD model. Like a ‘forked’ piece of software, the UN model does not automatically incorporate changes to its OECD equivalent, although many are adopted in practice if they are deemed to be improvements.  The commentary to the new UN model contains a lot of copy and paste from the OECD model, but from different years depending on whether particular changes have been adopted or not.

What makes this analogy interesting for me is that it captures the fact that the divergence can happen on either side: by the UN deciding to make  a change, or by the OECD deciding to make a change that is not accepted by the UN. Under the current UN tax committee, whose term runs from 2009-2013, there have some been significant divergences between the United Nations and OECD models.  The UN secretariat distributed a document last week that, among other things, summarises the key differences. Two of the major divergences are indeed examples of the OECD model evolving in a different direction from the UN, rather than the other way round.

The first is the rejection by the UN of the new Article 7 in the 2010 OECD model. The new version allows companies to receive a reduction in the tax liability of a ‘permanent establishment’ (let’s call it a branch) for any payments that the branch made to its head office. That would generally mean a shift in the taxing rights over a multinational from the developing country in which it has a branch to the developed country in which it has an HQ, which is why the UN model doesn’t incorporate it.

The second is the divergence of dispute resolution provisions. Under the OECD model since 2008, if a taxpayer feels it has been taxed twice on the same income  by two different countries, it can oblige them to go into arbitration. Not only does arbitration entail significant legal fees, but under the OECD model treaty, the countries must use ‘baseball arbitration’ – so-named because it is used by the US baseball league in pay negotiations – under which the arbitrator can only choose between the two positions, rather than finding a compromise position. This would be an expensive risk that developing countries would be reluctant to take, so under the UN model, taxpayers can’t force countries into arbitration.

In contrast, last week the UN committee initated its own divergence, by deciding to create a new article allowing developing countries to tax technical service fees in a wider range of circumstances than either model currently permits.

So there you go. Does it work as an analogy?

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