Tax treaties

OECD Releases Reports relating to claims for Treaty Benefits by Portfolio Investors


12 January 2009. The Informal Consultative Group on the Taxation of Collective Investment Vehicles and Procedures for Tax Relief for Cross-Border Investors (ICG) has prepared for the consideration of the OECD’s Committee on Fiscal Affairs (CFA) two reports which were released today. The ICG includes representatives from the financial industry as well as representatives of the tax administrations of some OECD member countries. It was established in 2006 by the CFA to consider legal questions and administrative barriers that affect the ability of collective investment vehicles (CIVs) and other portfolio investors to effectively claim the benefits of tax treaties.  The legal issues relate primarily to the treaty entitlement of the CIVs themselves and of their investors. Even where there is no question regarding treaty entitlement, however, there may be very important compliance and administrative difficulties in ensuring that the benefits of tax treaties are effectively granted (including the possibility of claiming benefits with respect to a very large number of investors in a CIV).

The ICG’s first Report, on the “Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles”, includes a comprehensive set of recommendations with respect to the legal and policy issues relating specifically to CIVs (i.e. the extent to which either the vehicles or their investors are entitled to treaty benefits).  The Report analyses the technical questions of whether a CIV should be considered a “person”, a “resident of a Contracting State” and the “beneficial owner” of the income it receives under treaties that, like the OECD Model Tax Convention (Model Convention), do not include a specific provision dealing with CIVs (i.e. the vast majority of existing treaties).  Further, the Report includes proposed changes to the Commentary on the Model Convention to reflect the conclusions of the ICG with respect to these issues.

With respect to existing treaties, the ICG members agreed that, if a CIV is not entitled to claim benefits in its own right, its investors should in principle be able to claim treaty benefits.  Because administrative difficulties in many cases prevent individual claims by investors, the ICG also recommends that countries adopt procedures to allow a CIV to make the claim on behalf of investors including, where necessary, through the conclusion of mutual agreements.

With respect to future treaties, the ICG recommends that Contracting States address directly the treatment of CIVs to provide certainty to CIVs, investors and intermediaries.  It recommends additions to the Commentary on Article 1 of the Model Convention regarding proposed provisions as options for countries to consider in their future treaty negotiations.  The favoured approach would treat a CIV as a resident of a Contracting State and the beneficial owner of its income, rather than adopting a full look-through approach.


The ICG’s second Report, on “Possible Improvements to Procedures for Tax Relief for Cross-Border Investors”, discusses the procedural problems in claiming treaty benefits faced by portfolio investors more generally and makes a number of recommendations on “best practices” regarding procedures for making and granting claims for treaty benefits for intermediated structures.  The objective of the work on best practices is two-fold:  (i) to develop systems that are as efficient as possible, in order to minimise administrative costs and allocate the costs to the appropriate parties; and (ii) to identify solutions that might address the need for tax administrations to ensure proper compliance with tax obligations, from the perspective of both source and residence countries.

The Report recommends that countries develop systems for claiming treaty benefits that allow authorised intermediaries to make claims on behalf of the investors on a “pooled” basis. One of the major benefits of such a system, variations on which have been adopted by a few countries over the past decade, is that information regarding the beneficial owner of the income is maintained by the intermediary at the bottom of the chain, rather than being passed up the chain of intermediaries.

Although a country may be willing to provide benefits on the basis of pooled information, it may want to maintain the ability to confirm that benefits that have been provided were in fact appropriate.  For that reason, and in order to encourage compliance in the residence State, the ICG also recommends that those financial institutions that wish to make use of the “pooled” treaty claim system be required to report directly to source countries (i.e. not through the chain of intermediaries) investor-specific information regarding the beneficial owners of the income.

The views expressed in these reports are those of the ICG and should not be attributed to the OECD or any of its member states.  The CFA will be deciding whether to refer these reports to one or more subsidiary bodies for further consideration. Given the recommendations included in the reports, however, the CFA has decided to invite comments from all interested parties before further consideration of the reports. Interested parties are therefore invited to send their comments on these Reports before 6 March 2009. Comments should be sent electronically (in Word format only) to:  Please note that, unless otherwise requested at the time of submission, comments submitted to the OECD in response to this invitation may be posted on the OECD website.