Tax Treaty Treatment of Royalty Payments from Low-Income Countries: A Comparison of Canada and Australia's Policies
| Author | Kim Brooks |
| Pages | 139-178 |
139
Chapter 8
Tax Treaty Treatment of Royalty
Payments from Low-Income Countries:
A Comparison of Canada and
Australia’s Policies*
kim brooks**
A. TAX TREATIES AS A POLICY INSTRUMENT FOR THE PROMOTION OF
TRADE AND INVESTMENT, AND FOR REVENUE ALLOCATION
1) Giving with One Hand, Taking with the Other
One of the most urgent problems facing the world is the huge divide in ma-
terial l iving standards, and in every other indicia of human development,
between high-income and low-income countries. Of the 177 countries
tracked in the United Nations Development Programme’s Human Develop-
ment Report 2005, only 57 were categorized as high human development
* This paper is a repr int of K. Brooks, “Tax Treaty Treatment of Royalty Pay ments from Low-
Income Countries: A Compar ison of Canada and Austral ia’s Policies” (2007) 5(2) eJournal of
Tax Research 169.
** I am partic ularly grateful to the fac ulty and staff at Ata x, the taxation school of t he Faculty
of Law at the University of New So uth Wales, for the opportunit y to spend a month in Aus-
tralia as t he Abe Greenbaum visiting researc h fellow. This paper was writ ten in part while I
was in residence at Atax on t hat fellowship. The research for t his article was made pos sible
in part by a Hampton Res earch Grant provided by the Universit y of British Columbia. I
am indebted to Amy Ch apman, Matthew Swanson, and Morgan Troke for thei r excellent
research assista nce, and to a range of people who made helpful com ments throughout the
writing of t his paper, including par ticipants in the 2006 Cr itical Tax Theory workshop at
Mercer University School of L aw, faculty members at the Saint Lou is University School of
Law, an anonymous Austra lian reviewer, and Art hur Cockfield. T his paper is dedicated to
the memory of Abe Greenbau m, a consummate tax teacher, whose pat ience, clarity and
insight, attent ion to detail, and obvious gr asp of both the detail and u nderlying policy of tax
law are missed.
140 kim brooks
and they had average GDP per capita in (PPP) US dollars of $25,665; the 88
countries the progra m labelled as medium human development countries
had an average GDP per capita of $4,474; and 32 low human development
countries had an average GDP per capita of only $1,046.1 These disparities
in living conditions are intolerable.
At one point, orthodox economic theory was interpreted as suggesting
that the level of incomes in rich and poor countries would converge. Invest-
ment would flow from rich countr ies, where capital is in abundant supply
and thus returns low, to poor countries, where capital is in short supply and
thus retur ns much higher. The brutal facts behind the ongoing economic
crises in Africa and the continued stagnation in much of Latin America and
parts of Asia have rendered this theory unsustainable.2
A number of well-known development economists have recently called
for urgent and drastic act ion to deal with the crises in world poverty and
inequality. Jeffrey Sachs, known for his work as economic advisor to gov-
ernments around the world and director of Columbia University’s Earth
Institute, has published a plan calling for roughly $150 billion in additional
foreign aid a year. He contends that properly disbursed, this amount could
bring an end to mass destit ution (such as the 1.1 billion ext remely poor liv-
ing on less than $1 a day) within 20 years.3 Branco Milanovic, an economist
with the Carnegie Endowment for International Peace and the World Bank,
in a book in which he scrupulously documents t he increasing income in-
equalities between countries, ca lls for global redistribution t hrough taxes
that would be levied on the world’s rich by an international, authorized
bod y.4 As an indication of the immediac y with which people now view the
problem of global inequality, both of these somewhat tech nical books have
become best sellers over the past year.
By comparison to these bold schemes for reducing global inequality, the
proposal made in this paper is modest, but not necessarily i nsignificant in
1 United Nat ions, Human Development R eport 2005 (New York: United Nations, 20 05) at Table
14 [UNDR].
2 For a recent collection of papers on globa lization, law, and development representin g a
range of views on the b est approach to ensure globaliz ation promotes the development of all
countries, see t he symposium in (2004) 26 Mich. J. Int’ l L. See also N. Birdsall, D. Rod rik,
& A. Subramania n, “How to Help Poor Countries” (2005) 84 Foreign Af fairs 136 (arguing
that wealthy count ries should provide developing cou ntries with the abilit y to design their
own economic policies, a nd that developed countries c an support developing countr ies
achieve that end by of fering increased aid wit h fewer onerous reporting rest rictions, reduc-
ing trade inequ ities, financing new developme nt-friendly technologies, and op ening up
labour markets).
3 J. Sachs, T he End of Poverty: Ec onomic Possibilities for O ur Time (New York: Penguin, 2005).
4 B. Milanovic, Worlds Apar t: Measuring Inter national and Global In equality (Princeton : Princ-
eton University Press, 20 05).
Tax Treaty Treatment of Royal ty Payments from Low -Income Countries 141
the long-run. High-income countries should further t he cause of reducing
global inequality by ensuring that in their tax treaties with low-income coun-
tries they do not usurp needed revenues by reducing low-income countries’
ability to collect tax on income with a source in the low-income country. In
this paper, this argument is made in the specific context of t he ta xation of
royalty payments, which present one of the most extreme examples of high-
income countries u nfairly confiscating revenues that appropriately belong
to their low-income treaty partners.
The Organisation for Economic Co-operation and Development (OECD)
model t ax treaty, which most hi gh-income countries in the world closely
follow in negotiating their own tax treaties, provides that to avoid double
taxation, source countr ies (invariably low-income countries) should reduce
their rate of withholding tax on royalty payments to zero.5 Thus, low-income
countries that enter into tax treaties modelled on t he OECD model conven-
tion are unable to levy a tax on royalt y payments that have a source in their
jurisdiction. In many cases, as is argued in more detail below, this simply
results in a net transfer of revenue from the low-income country’s treasur y
to the treasury of the high-income country.
Low-income countries are, of course, desperate for revenues to provide
basic health care and education for their populations and to construct mod-
ern tra nsportation and communication systems to increase the productiv-
ity of their workers. It seems incongr uous, some might even say immoral,
for high-income countries to, on the one hand, admit the moral case and
the pragmatic need for providing aid to low-income count ries, but, on the
other hand, to enter into tax treaties w ith them that deny them the ability
to collect revenue from income earned in their jurisdictions that normative
principles of i nternational ta x suggest they have a right to tax. In making
the general case for source taxation of royalty payments, I examine and
compare the Canadian and Australian tax t reaty p olicies to see to what ex-
tent those countries have followed the OECD model convention in negotiat-
ing with low-income countries.
The suggestion t hat high-income countries should use t heir tax systems
and, in particular, ta x treaties, to assist low-income countries, is not novel.6
5 Organi zation for Economic Co-operation and D evelopment, Model Tax Convention on
Income and on Capit al: Condensed Version (Pa ris: OECD, July 2005) Article 1 4 [OECD model
convention].
6 Most f undamentally, determin ing whether a partic ular stream of income should be ta xed
at its source or in the countr y of the taxpayer’s residence is simply a que stion about tax
fairness — how should the tax revenues be fairly share d? As noted by R. Bird and S. Wilkie,
“the source-residence que stion is, essentially, ‘who gets how much t ax?’.” See R. Bird & S.
Wilkie, “Source - vs. Residence-based Taxation in t he European Union: The Wrong Ques-
tion?” in S. Cnossen, e d., Taxing Capital Income in the E uropean Union: Issues and Opt ions
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