Limits to Tax Planning

S. 13 1. Introduction

Countries consider taxes an essential manifestation of their sovereignty. Economic power is often superior to political power and nowadays in a “globalized world” over 3,000 bilateral treaties are in force, limiting the national right to levy taxes.

The League of Nationsand the Organization for Economic Cooperation and Development (OECD) try to promote treaties to avoid double direct taxation by issuing models, commentaries as well as reports on specific international tax issues. However, many countries started to implement domestic provisions to reduce double taxation at the beginning of the 1900s.

The declared intention of the Model Tax Convention on Income and Capital issued by the OECD is to “[…] clarify, standardise, and confirm the fiscal situation of taxpayers who are engaged in commercial, industrial, financial or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation […]”.

A tax treaty applies to resident persons and allocates taxing rights between the contracting states without saying anything about the application and the kind of tax. Double taxation can be eliminated throu...