In addition, the same rules also defer or exempt the active income of businesses. Consequently, there has been a loss in force with regard to a distinction between those nations with a global tax jurisdiction, and those whose taxation system is territory-oriented (Avi-Yonah 2007).
A network of bilateral tax treaty holds claims about the existence of international tax. The treaty borrows heavily from the U.N. model, as well as that of the Organization for Economic Co-operation and Development (OECD). For a majority of the countries, these treaties enjoy an elevated status relative to the domestic laws. As such, the domestic tax jurisdiction is often constrained. This implies that where international tax matters are concerned, national are usually bound by such treaties to act in specific ways. For example, a country could be constrained from not taxing a foreign trader who does not have a permanent residency.
A majority of the countries today tax their residents in line with their tax legislation, and as they would be taxed had they been in their resident country, the sources of the taxable income not withstanding. Similarly, non-residents of a country are usually taxed on that portion of the income that the government of the country feels that it is a source of the country (Gowthorpe et al 1998). The two practices are commonly integrated internationally, but the problem usually arises when a resident of a country has his/her worldwide income taxed, including that part of the income which could be a source from another country.
As a result, a case of double taxation usually results. With regard to the international law, a case of judicial double taxation is often not deemed illegal. Nevertheless, such a practice usually poses a danger as it negatively affects the movements of persons, goods, and capital among the different countries (Terra & Wattel 2005).
In a bid to try and avoid such a scenario from occurring, a majority of the countries have thus far entered into double taxation bilateral agreements. This move is aimed at helping in the clarification of those contracting countries that legally have a right to double taxation. This means that the other countries will then have to waive their income taxation rights.
Double taxation agreements, UN and the OECD model conventions on taxation
The preparations of bilateral agreements usually employ the UN and OECD models of taxation. The OECD model has a focus towards the developed countries, while the UN model hopes to have an impact on the developing countries. The two model conventions have a lot of similarities, with the only variation being in terms of how the models adapt to the various economic environments (OECD 2001).
Nevertheless, the UN model has not had a significant impact on a majority of the international tax treaties. At the same time, none of the two models forms any part of the international customary law. This is because the two models fail to meet opinion rules, and as such, they cannot be accepted internationally. However, the two models still have a profound interpretive influence in times of taxing rights conflicts, as per the conferment of the double taxation agreements (Avi-Yonah 2007).
Perhaps article 17 of taxation convention model of the OECD would