Some follow-up on parliamentary scrutiny of the UK-Senegal treaty

As my last post anticipated, the ratification of the UK-Senegal tax treaty was debated in parliament last week. It was great that a debate on the impact of a tax treaty between the UK and a developing country happened at all. Some important issues came up:

  • What is the role of the Department for International Development in the UK’s treaty policy with respect to developing countries? None, on the basis of the reply from the minister, David Gauke.
  • Why is there no cost-benefit or development impact analysis of the UK’s treaties with developing countries? Mr Gauke said that it would not be possible to do this in a meaningful way, although as this post by Francis Weyzig points out, Ireland and the Netherlands have both now published analyses that do consider the effects of their treaties on developing countries.
  • Does the UK government bear any moral responsibility for the outcome of a negotiation with another sovereign state? That is certainly an interesting point for further consideration.

This was a good start in comparison to last year’s discussion of the UK-Zambia treaty, but these topics were still only skated over. The format of these ‘debates’ is always the same: the opposition shadow minister asks some questions, the minister responds from his briefing notes, and then the committee votes ‘yes’. It is near impossible to have a real discussion about substantive matters, such as the UK’s red line on a withholding tax clause for technical service fees (discussed below). This is partly because of the mountain of treaty detail within which substantive issues are hidden, but also because all parliament can do is vote ‘yes’ or ‘no’ after the treaty has been signed.

There are two things the UK could do about this, which other countries have done. First, it could commission a comparative review, along the lines of those that have now been conducted for Ireland and the Netherlands, which highlights the main distinctive features of its treaties with developing countries so that non specialist MPs can engage with them meaningfully. Second, it could publish its treaty negotiating position, as Germany and the US have both done, with an opportunity for public and parliamentary debate on this position in general terms.

Now, some technical discussion. The night before the debate, I bumped into one of the British negotiators, who said he was “not very impressed” with my post on the treaty. The next day, the Labour opposition asked some questions based on input from ActionAid, which followed the same lines as my comments. The minister responded with much the same criticism I’d heard the previous night, so I’m going here to set the record straight on the technical points, insofar as I can from my non-technical background.

Technical service fees

I stated last week that “this treaty does not include a clause permitting Senegal to tax fees for technical services paid to the UK,” but this was imprecise wording. As Mr Gauke pointed out, the treaty does permit such fees to be taxed in Senegal, but with a major restriction. They can only be taxed in Senegal if the British recipient of the fees has a physical presence in Senegal for 183 days in a year. Even then, the fees can only be taxed as net profits, not gross fees as the standalone clause would have allowed for. The whole debate at the UN on this clause begins from the view that a physical presence is increasingly irrelevant in the 21st century economy, and that it is very difficult for developing countries to get an accurate view of a service provider’s net profits.

As the minister continued, “Senegal’s approach to the taxation of services differs from that of the UK,” and this is one area where the UK approach prevailed. This appears to be a red line for the UK now, but it’s worth noting that (on a quick count) Great Britain has nine treaties with sub-Saharan countries that do permit them to tax technical services without a physical presence. Senegal is arguably therefore disadvantaged relative to quite a few of its regional neighbours.

Supervisory activities

As I noted last week, the UK-Senegal treaty doesn’t follow the UN model treaty [pdf] wording on supervisory activities in connection with a building site, which states (my emphasis):

The term “permanent establishment” also encompasses: (a) A building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than six months

I said in my post that this means “supervisory activities associated with a building site in Senegal conducted by a British firm will not be taxable in Senegal,” but as Mr Gauke clarified, the treaty “does allow that” in practice. This is because the commentary to the OECD model tax treaty has been amended to incorporate it. It states in paragraph 5.17:

On-site planning and supervision of the erection of a building are covered by paragraph 3. States wishing to modify the text of the paragraph to provide expressly for that result are free to do so in their bilateral conventions.

The International Bureau of Fiscal Documentation (IBFD), in a commentary on the differences between the UN and OECD models, seems to concur that there is no longer any substantive difference between the two on this point:

According to the UN Model, supervisory activities are covered by this provision, irrespective of whether they are performed by the main contractor or subcontractor. The OECD Model does not include these activities in the text of the construction clause. According to the OECD Commentary, supervisory activities were, until 2003, explicitly subsumed under the construction clause provided the work was performed by the main contractor itself. Supervisory activities performed by a subcontractor were not, however, considered to be covered by this provision. This difference between the OECD and UN Models disappeared due to the changes to the OECD Commentary in 2003. The supervisory activities of a subcontractor were then also considered to be covered by the provision.

But the difference does seem to be important to many countries. They prefer to take the UN option of explicitly providing for the taxation of supervisory activities, rather than leaving it to a clarification in the commentary on page 101 of the 496-page model treaty. Turning to the reservations and observations published alongside the OECD model, twenty countries, including six OECD members, have made an official note along the lines that they reserve the right to have the supervisory activities wording included in their treaties. They are: Australia, Korea, Slovenia, Slovak Republic, Mexico, Portugal, Albania, the Democratic Republic of the Congo, Hong Kong, Serbia, Argentina, Malaysia, the People’s Republic of China, Singapore, South Africa, Thailand, Vietnam, India, and Indonesia. There is also the following anomalous note:

Bulgaria does not adhere to the interpretation, given in paragraph 17 of the Commentary on Article 5, and is of the opinion that supervision of a building site or a construction project, where carried on by another person, are not covered by paragraph 3 of the Article, if not expressly provided for.

Royalties for TV and radio broadcasts

I also pointed out that the treaty was unusual in not including a reference to TV and radio broadcasts in its definition of royalties. The UN model states (my emphasis):

The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting,

Again, I said that this meant such payments could not be taxed by Senegal. The minister responded that, “the OECD commentary on the provision makes clear that cinematographic films include material for TV broadcast.” It does indeed state at paragraph 12.10 that:

Rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in cinemas or on the television.

But this is a little more restrictive than the UN wording, as there is no mention of radio. Of course, this may be splitting hairs, especially as only Argentina and Vietnam have observations in the OECD model on this point. But this time the IBFD discussion seems to support the view that there is a substantive difference here:

As the OECD Model does not include, in the definition of the term “royalties”, payments made as a consideration for the use of, or the right to use, films or tapes used for radio or television broadcasting, the UN Model deviates in this respect from the OECD Model.
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