handbook-tb

Neutralizing effects of hybrid mismatch arrangementsonly two ways to address source-State tax erosion: increase the scopeand rate of withholding taxes or deny a deduction.To prevent tax base erosion, source States might seek full anduniform withholding tax on all outbound payments that do not resultin an equal inflow of resources into the country. 121 The rates should besufficient not to discourage local provision of the service paid for. Thiscan be a problem particularly with the provision of services, where manycountries lack substantial withholding taxes. Services are commonlyprovided by foreigners into a source State through tax havens. The lackof taxation often means that foreigners can undercut the provision ofequivalent services by a domestic provider. The same is true with respectto rent payments for the use of mobile assets. In a globalized world, asource State cannot presume that there will be appropriate taxation inthe residence State. It is often fair to (and perhaps a source State should)presume that incoming resources will be provided through a tax havenor equivalent (such as a hybrid mismatch arrangement).Tax treaties are particularly inflexible instruments that giveaway source-State taxing rights, sometimes unwittingly. A numberof developing countries with substantial natural resources have concludedtax treaties that can be exploited to erode the country’s taxbase in ways that were not envisaged when the treaties were concluded.This can create tax administration resistance to applying such treaties,especially when local service providers are discriminated against. With121Michael Lennard, Chief, International Tax Cooperation Unit, Financingfor Development Office (FfDO), United Nations Department of Economicand Social Affairs, has been reported as saying that “[o]ne of the things thatis important for developing countries, but that is not in the OECD ActionPlan, as such, is the preservation of withholding taxes generally… I thinkthat one of the outcomes of BEPS will be developing countries will be moreand more recognizing the importance of preserving their withholding taxes,and not giving them away too readily in treaties.” See David D. Stewart, “LennardDistinguishes U.N. and OECD Approaches to BEPS, Previews FutureWork,” (2014) Vol. 95, No. 3 Worldwide Tax Daily. The second part of theOECD report on the impact of BEPS in low-income countries does not makea recommendation to that effect (nor does the first part of its report) andonly mentions withholding tax once. See OECD, Part 2 of a Report to G20Development Working Group on the Impact of BEPS in Low Income Countries(Paris: OECD, 2014).247