handbook-tb

Peter A. Barnesappear too high compared with the tax revenue derived from ForestCorporation on its domestic loan to Dart. When the corporate incometax in Country A is imposed on the small net interest income of ForestCorporation, the total tax revenue raised may be equivalent to a withholdingtax on cross-border interest of only 1 or 2 per cent, well belowthe withholding tax rate generally imposed on cross-border interest.Summary: One way in which to address the difficulty of determiningan appropriate withholding tax rate on cross-border paymentsof interest is to adopt differential rates, and this is often the approachfollowed in tax treaties. When the lender of a loan is a financial institution,a treaty may impose lower withholding tax rates than whenthe loan is extended by a non-financial institution that may not havesignificant interest expense of its own. The challenge for a developingcountry in considering withholding taxes on interest is to balancethe desire to minimize tax costs from the tax deduction for interestagainst the need to ensure that any withholding tax does not increasecosts (through a gross-up or higher interest rates) or limit the availabilityof needed investment.4. Branch operationsThe discussion above generally assumes that taxpayers are conductingbusiness through separate corporations. In such a case, each corporationkeeps its own books and records, and each corporation is expectedto deal at arm’s length with all related entities.In many cases, multinational operations are conducted throughbranches, not separate corporations. Many of the tax issues relating tobranches are substantially identical to the issues that apply to corporations.Interest expense is one issue where there can be differences.Under Article 7 of most treaties based on the United NationsModel Double Taxation Convention between Developed andDeveloping Countries 3 (United Nations Model Convention) or the3United Nations, Department of Economic and Social Affairs, UnitedNations Model Double Taxation Convention between Developed and DevelopingCountries (New York: United Nations, 2011).182