Dealing with difficult international tax questions

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The following is a system you can use to approach the essay-type questions in Part A of the Principles of International Taxation exam. It is demonstrated based on a hypothetical question.

“Explain how climate change will transform the OECD model tax convention (“MTC”) by 2060.”

You are doing the exam and chose this question. But where to begin? 

A mind map? Keyword on the middle of a page and big branches around it, smaller branches around them, and even more details around them. It is

• great for organising thoughts;
• flexible: you can add new branches anytime, so nothing gets forgotten; and
• you can rank ideas, should you run out of time (which is likely to happen).

But where to begin? Fortunately, you have a system that works for most questions, covers most important issues, and enables you to relax a little (because you have a system). So let us start.

Branch 1: Explain how you understand the question, make headers, explain assumptions

Understanding the question: Climate change is so bad, and affects the global economy so much, that we need to change the MTC. How?

Headers: (type them in Exam4 now, so you do not forget them): What is climate change? What is the MTC? What are the expected changes? How will they address the issues?

Assumptions: Climate change leads to mass migrations, seasonal flooding, ubiquitous carbon taxes and green energy incentives, and (late addition – see below) runaway inflation.

Branch 2: Go through the MTC by article – this gives you 30 sub-branches already

Art. 1 – “Persons who are residents”. Maybe dual residence might become the norm due to seasonal migration.

Art. 2 – “Taxes covered”. Will carbon taxes and green energy incentives be included? Also, will they be considered in Article 23 for double tax relief?

Art. 3 – Definitions. New definitions for “carbon taxes”, “green incentives” and maybe “climate change” and “climate change related taxes”?

...

Art. 24 – Non-discrimination. Will mass migrations give new importance to art. 24 and its reference to “nationals of a Contracting State”. Will dual citizenship become the norm and will we need a similar paragraph to art. 4’2?

Next branch: Review the BEPS action plans, one by one

Action 1: Digital economy – The influence of Pillars 1 and 2 is already evident: STTR, the Amount A Multilateral Convention overriding the MTC-based bilateral conventions, and mandatory arbitration. Will a world in crisis necessitate the reallocation of revenues? Will the MTC accommodate digital source taxes if Pillar 1 fails. Will the MTC adopt UN articles 12a and 12b?

Action 2: Hybrids – Will new hybrid structures arise in the form of hybrid residence? Will there be tax arbitrage between traditional income taxes and carbon taxes/green incentives? Will we have a BEPS Action 2.2 and new variations of Article 1’2?

Action 3: CFCs – If dual residence becomes the norm, e.g. through moving board members, will both countries of residence levy CFC taxes? How will double tax be relieved? Will there be treaty rules for spill over income, or fixed allocation keys?

Action 4: Interest deductions – Assume companies are forced to move their residence, or at least their operations, for part of the year. How will interest be allocated? Will the MTC have to accommodate triangular negotiations between the debtor’s two states of residence and the creditor’s residence state. What if one of the debtor residence states is also the creditor’s. Will Article 24 still apply if the debtor is incorporated in the other state?

...

Action 15: MLI – We will need a whole new MLI for all of the above.

Next branch: You are a lobbyist for business – what would you ask for?

...

Penultimate branch: You are a government representative – what would you ask for?

A redistribution of tax revenues to accommodate those hit hardest by climate change. For the MTC this means more source based taxation, probably through more withholding taxes. The Pillar 1 threshold could become Euro 750 million to broaden the base, bearing in mind that Euro 750 million in 2060 may well be Euro 250 million today. (And maybe you should add runaway inflation to the assumptions under the definition of climate change at the top ...)

Final branch: Has this happened before and what were the consequences then?

The financial crisis of 2008 and COVID. Taking COVID, the OECD did a lot regarding permanent establishments, working from anywhere, subsidies, lossmaking companies, and taming and timing the governments’ need for revenue to cover costs. Similar measures/changes to the MTC may be required once again; this time as permanent changes.

Summary

I hope the above is a useful demonstration of a systematic approach one could use when dealing with difficult international tax questions. To recap:

1. Explain how you understand the question, break it into headers, and explain your assumptions.
2. Go through the MTC article by article regarding the question.
3. Go through the BEPS Action plans one by one regarding the question.
4. Consider the issues under the question as a lobbyist for business.
5. Consider the issues under the question as a government representative.
6. See if the issues raised by the question occurred before, and think what happened then.

We wish everyone the very best with the exams.

If you would like support from our expert tutors, then BetterTax ApS provides a variety of tuition options for the Principles of International Taxation and Transfer Pricing exams. Visit bettertax.info/adit-tax-courses, or contact us at [email protected] or +45 6120 2911 for more information.