4.32 Double Non-Taxation

Primary Reference to Article 19

Double non-taxation is the opposite of double taxation to some degree. It manifests in various ways such as:

  • Income is earned in one country (A) by a taxpayer resident in another country (B). Each country gives the other the right to tax the income. Country B might have a territorial tax system while country A grants an exemption from tax under its treaty with country B there being no permanent establishment.
  • A corporation in country C is owned by a parent corporation in country D. The parent holds preferred shares in the subsidiary. Dividends are paid. Country C views the preferred shares as debt and the dividends as a payment of interest, allowing a tax deduction. Country D grants an exemption for the dividend income.

Whether these are examples of clever tax planning or tax avoidance will depend on one's point of view. Is this appropriate in tax policy terms? It depends again on how double non-taxation is achieved. In the examples above many would have less sympathy for the second one. The OECD in its BEPS project is studying the problem of hybrid mismatches of which this is an illustration with a view to eliminating them. But two things are very clear namely; double non-taxation is not tax evasion and may not even be tax avoidance when viewed from each country's perspective, and it arises due to the specific tax laws and interpretations of those countries.  The operation of one country's tax law should not, in principle, be affected by the operation of another's. (It is noted though that some countries (e.g. Germany) are now taxing income if nobody else does.)

Moreover, if a proper allocation of taxing powers between jurisdictions has occurred, a deliberate decision by one of the countries concerned not to exercise its taxing powers in respect of income allocated to it (or to exercise those powers in a concessional way) is a valid exercise of the sovereign right to tax and should not be defeated by another jurisdiction unilaterally asserting taxing rights over that income.

Our view is that double non-taxation does not need to be part of a Taxpayer Charter. A taxpayer must pay the correct amount of tax. If that is legitimately nil, and the result is not appropriate, the response should be to change the tax laws to achieve a result which is appropriate. But it is not for the taxpayer to pay more than is required; it is for the legislators to "get it right".