handbook-tb

Peter A. Harrisappropriately selected withholding tax rates, a country can encourageforeign service providers to establish a taxable presence in their jurisdiction(for example, a PE) so that local expenses can be deducted, thatis to say, taxation on a net basis.The OECD Action 2 — 2014 Deliverable and OECD PublicDiscussion Draft on BEPS Action 2 — Domestic Issues make littlereference to withholding tax in their examples and none in theirrecommendations. It seems that the OECD is not able or willing toreconsider the provisions in its Model Convention that facilitate taxbase erosion and profit shifting, at least not directly in the context ofhybrid mismatch arrangements. 122 While the United Nations ModelConvention provides greater scope for protecting source-State taxingrights, care still needs to be taken in concluding tax treaties. If a country’srepresentatives are not fully aware of the potential consequencesof concluding a tax treaty, the safe option is not to do so. 123The second way to prevent source-State tax base erosion is toquarantine foreign expenses. This is the natural consequence of therule option noted in section 4.2 above for calculating foreign sourceincome separately from domestic source income. If a payment madeby a resident of a State has no source in that State and the State cantherefore not impose withholding tax, then the resident should bepermitted to deduct only that expense in calculating foreign sourceincome. 124 This option will protect the State of the investor in somehybrid mismatch arrangements as much as the State of the payer. Asdemonstrated in annex II, many of the examples in the OECD Public122See OECD, Part 2 of a Report to G20 Development Working Group onthe Impact of BEPS in Low Income Countries, supra note 121 paragraph 12,which focuses on “denial of deductions in the payer state and/or forcing theinclusion in the payee state.”123Treaties that involve coordination of tax administration do not erodesource-country taxing rights and do not fall into this category, for example,the 2011 multilateral Convention on Mutual Administrative Assistance inTax Matters.124For the reasons discussed in OECD Public Discussion Draft on BEPSAction 2 — Domestic Issues, supra note 2, paragraph 24, and OECD Action2 — 2014 Deliverable, supra note 2, paragraph 144, the better view is that sucha rule does not breach Article 24 (4) of tax treaties.248