When a business or person who resides in one nation—the “Residence State”—earns revenue from another nation—the “Source State,” international taxes becomes relevant.
International taxation is not governed by a single law or convention. The following sources form the basis of international taxation:
1. Domestic Tax Law
The nature of income, residency status, tax rates, etc. needs to be studied to determine the tax laws of both the source state and the Residence State. For example, in Nigeria, the concept of residence determines the extent to which the income of a person is liable to tax in a jurisdiction.
2. Bilateral Conventions
Bilateral Convention is an international agreement, especially one dealing with a specific matter, involving two or both sides, factions, or the like. Numerous countries have signed bilateral conventions or agreement on tax. These are the most crucial documents governing the taxation when a taxpayer is resident of one of these countries and derives income from the other.
Over 16 countries have double taxation avoidance agreements with Nigeria, while more than 2,500 similar agreements have been signed between nations worldwide.
On January 1, 1988, the Double Taxation Agreement with UK went into effect. Nigeria implemented it on January 1, 1989, and the UK implemented it on: For Corporation Tax, April 1, 1988 and for income tax and capital gains tax, April 6, 1988.
The OECD model convention and the UN model convention are the two model treaty conventions that are typically used as the foundation, while the OECD model convention is increasingly being adopted. There are many other models, including the US model, the Andean model, etc., that are adopted by other nations.
Similar provisions are found in both the UN and OECD models; the only difference is that the OECD model convention, which is followed by developing countries, typically adopts residence-based taxation and is seen as more advantageous by developed countries. Due to the fact that there are two parties to the agreement, years of talks in which each nation tried to further its own interests resulted in the final convention that was eventually ratified.
On its model convention, OECD publishes in-depth opinions. The OECD model is becoming more significant in negotiations for new treaties since authorities from all around the world increasingly rely on these commentaries to make decisions on tax-related matters.
3. Multilateral Conventions
The passage of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) is one of the most significant and innovative developments in recent years.
There have been numerous instances of huge MNEs regularly moving their tax bases and earnings around in the age of digital commerce. Nations all over the world have realized the importance of enhancing their mutual cooperation on a number of matters pertaining to the realm of taxation. 15 action points were outlined in the Base Erosion and Profit Shifting framework. These are typically carried out in accordance with the national laws and bilateral agreements of the countries. However, it became clear that it might take decades to alter the over 2,500 bilateral agreements.
As a result, the first multilateral agreement, which was signed and immediately affects the bilateral accords, was signed. Both signatories to a treaty must concur on how much the MLI provisions would alter the bilateral agreement for it to go into force.
4. Vienna Convention on the Law of Treaties (VCLT)
The most significant international treaty that establishes the guidelines for the interpretation of all treaties, including bilateral and multilateral tax treaties, is the Vienna treaty on Treaty Law. The international law governing the interpretation of conventions, treaties, etc. is represented in articles 31 to 33. Even if a nation has not ratified or signed the VCLT, it is nonetheless valid for treaty interpretation.
For further information or inquiries, you can reach us at taxservices@kcp.com.ng or info@kcp.com.ng. You can also visit our website at www.kcp.com.ng. Stay tuned!