The time it takes to update tax treaties?
Updating the bilateral tax treaty network has been described as time-consuming. The present empirical study looks into how time-consuming this is and concludes that it takes, on average, 18.58 years.
The global tax treaty network has habitually been based on bilateral tax treaties. Most bilateral tax treaties in force are based on the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD). To introduce new policy directions and modernise rules in the area of international tax law, the OECD undertakes great efforts to amend its Model Tax Convention roughly every 4.5 years. Yet the bilateral nature of the treaty network, in principle, means that updates to the OECD Model are only implemented, and hence reflected in tax treaty law, following a (successful) bilateral renegotiation of each individual tax treaty.
With a tax treaty network of over 3,000 treaties, it is unsurprising that updating such a network on a bilateral basis is ‘highly burdensome’ and, as a result, it would seem safe to assume that such an updating process takes a considerable amount of time. But the question: how long does it take to update the (bilateral) tax treaty network? – has not yet been answered.
Following our empirical study on the tax treaties concluded by the founding OECD member countries (∼ 1,600 tax treaties) and based on the assumption that each tax treaty would have been amended on 31 December 2019, we have concluded that it takes – on average – 18.58 years before a tax treaty concluded by a founding OECD member county is amended – or updated. As regards the Netherlands in particular, the average time before a tax treaty is amended – or updated – is 16.54 years.
The average time between updates of tax treaties concluded by the founding OECD member countries demonstrates that updating the (bilateral) tax treaty network takes much longer than updating the OECD Model Tax Convention (18.58 years versus 4.5 years). The difference in time between updates of, on the one hand, tax treaties and, on the other hand, the OECD Model Tax Convention indicates that the tax treaty network is not well-synchronised with the (most recent) version(s) of the OECD Model Tax Convention, at least to the extent that it concerns the network of the founding OECD member countries.
In light of the enormous effort, especially following the adoption of an ‘ambulatory Model Convention’ in 1991, to regularly update its Model Tax Convention, this difference in time between updates can be regarded as highly unsatisfactory. Such an ambulatory model was adopted to address ‘the new tax issues that arise in connection with the evolution of the global economy’. Following the adoption of the ambulatory model, the time between updates to the OECD Model Tax Convention has decreased from, on average, 14.5 years prior to 1992 to 2.5 years after 1992 (over the period 1992-2017). However, while the time between updates to the OECD Model Tax Convention may have decreased considerably, the present study did not find any indications of a decrease in time as regards amendments to the tax treaty network of the founding OECD member countries. It thus seems that the efforts of the OECD to keep the tax treaty network up-to-date with global developments, by more regularly updating the OECD Model Tax Convention, has not resulted in an increase in the efforts of the founding OECD member countries to update their (bilateral) tax treaty network more regularly.
Taking into account that updating a tax treaty network on a bilateral basis would take, on average, 18.58 years, it seems that in order to keep international tax law abreast of new developments, such as dealing with digitalisation of business, innovative multilateral solutions, such as the Multilateral Instrument, are and will prove to be indispensable.
The in-depth empirical study and its findings can be found in this article