@prefix vivo: . @prefix edm: . @prefix ns0: . @prefix dcterms: . @prefix dc: . @prefix skos: . vivo:departmentOrSchool "Law, Peter A. Allard School of"@en ; edm:dataProvider "DSpace"@en ; ns0:degreeCampus "UBCV"@en ; dcterms:creator "Lee, Emily Hsiang-hui"@en ; dcterms:issued "2009-06-11T19:13:37Z"@en, "1998"@en ; vivo:relatedDegree "Master of Laws - LLM"@en ; ns0:degreeGrantor "University of British Columbia"@en ; dcterms:description """Canada and Taiwan have not entered into a tax treaty. Consequently, because each jurisdiction uses different connecting factors, that is 'residence' in Canada and 'income source' in Taiwan, double taxation may occur for individuals subject to tax in both jurisdictions. With the increasing number of Taiwanese immigrants to and investors in Canada, double taxation is becoming a significant problem. A treaty is probably the most efficient mechanism to resolve the double taxation problem. However, the political issue is how can a nation (Canada) enter into a treaty with a jurisdiction (Taiwan) that it does not recognize as a nation state? Despite facing the same problem, on May 29, 1996 Australia signed a tax agreement with Taiwan concerning the avoidance of double taxation and the prevention of tax evasion. The Australia-Taiwan Tax Agreement is unique because it was signed by two private sector organizations rather than by the respective governments. Using the same mechanism, New Zealand and Vietnam have signed tax agreements with Taiwan as well. This thesis analyses the likelihood of Canada entering into a tax treaty with Taiwan. In so doing, it considers how double taxation arises, reviews the foreign reporting rules and argues that a tax treaty between Canada and Taiwan is desirable. The conclusion is that, theoretically and pragmatically, a tax treaty (or agreement) between Canada and Taiwan is possible and needed in order to relieve punitive double taxation and to facilitate bilateral economic and trading relations between the two jurisdictions."""@en ; edm:aggregatedCHO "https://circle.library.ubc.ca/rest/handle/2429/8973?expand=metadata"@en ; dcterms:extent "10357011 bytes"@en ; dc:format "application/pdf"@en ; skos:note "\" C A N ' T B E NAILED TWICE\": AVOIDING D O U B L E T A X A T I O N B Y C A N A D A A N D T A I W A N by E M I L Y HSIANG-HUI L E E L L . B . , National Taiwan University, 1993 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF M A S T E R OF LAWS in THE F A C U L T Y OF G R A D U A T E STUDIES (Faculty of Law - Graduate Law Program) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA December 1998 © Emily Hsiang-Hui Lee, 1998 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, 1 agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of F&cul'bj oj f a,u> The University of British Columbia Vancouver, Canada Date fee., , rf]ecause a treaty is an agreement which is binding in international law, a treaty can only be made by an entity having international legal personality'.2 A self-governing entity in domestic affairs does not necessarily have international personality to enter into treaties. For example, '[i]n 1867 the various colonies of the British Empire, although many of them (including those of British North America) were self-governing in domestic affairs, lacked the capacities to enter into treaties'.3 Taiwan is not internationally recognized as a nation state. Instead, it is generally recognized as a province of China. Canada is internationally recognized as a nation state. The possibility of having a treaty between Canada and Taiwan to facilitate the substantial relations, in terms of the trading, historical and cultural connections between the two jurisdictions, is discussed in the context of the political 1 Wallace R. M M , International Law, 2nd ed. (London: Sweet & Maxwell, 1992) at 219 - 220. 2 Hogg P. W., Constitutional Law of Canada, vol. 1, 3rd ed. (Toronto: Carswell, 1992) at 11-2. 3 Ibid. In this regard, ' [t]he Empire spoke with one voice, and the voice was that of the imperial government in Great Britain. The common law accorded to die Crown (the exclusive branch of government in Great Britain) full power to conduct foreign affairs, including the making of treaties, for the entire Empire. ... As the Empire became die Commonwealth, and as its members acquired international personality in their own right, the treaty-making powers of the British government were gradually distributed to the independent members of the Commonwealth'. 104 dilemma of how can a nation state enter into a treaty with a jurisdiction that is not internationally recognized as a nation state. Some additional issues include the question of, even if the signing of a tax treaty between Canada and Taiwan is possible, what model treaty would the hypothetical treaty follow, and why? How would Canada and Taiwan negotiate to get their tax benefits? A related issue, how Canada can possibly bring the hypothetical treaty into effect, will also be discussed. 2.2 Benefits of Tax Treaties As explained in chapter one, this thesis will only focus on discussion of individual income tax. With respect to individual tax, the benefits of tax treaties are that by employing the 'tie-breaker rules'4 only one of the contracting states has the authority to tax an individual on the same income. Double taxation thus can be avoided. Specifically speaking, through application of the 'tie-breaker rules', the conflict of different connecting factors, used to determine the connections of an individual to the contracting states in a treaty, can be resolved. Therefore, a treaty is generally regarded as the most efficient mechanism to solve the double taxation problem. 2.3 Tie-breaker Rules to Determine Residency 4 For the definition and function of the 'tie-breaker rules', see: section 2.3 of this chapter. 105 Residency and the 'tie-breaker rules' are separate issues, but are related to each other. For the purpose of avoiding double taxation, a treaty is used to determine which state has the authority to tax an individual. The mechanism, however, is the utilization of the tie-breaker rules to determine an individual's residency. The residence issue has been discussed in chapter two of this thesis. Tie-breaker rules are used in a treaty to determine which state has the authority to tax an individual, according to his/her residence connection with that state, and, double taxation can be avoided. The question of whether a person is a resident of a state for tax purposes is to be determined by the domestic laws of that state.5 The 'residence' article is one of the most important provisions in a tax treaty, as it determines who can claim the benefit of a treaty. It also affects the operation of other articles in a treaty which allocate income according to the residence of the taxpayer. For example, 'business profit can be taxed only by the state of the taxpayer's residence (except for the profit of a permanent establishment), and reduced withholding tax rates only apply to residents of the other treaty country'.6 The importance and various functions of the concept of residence are recognized in three cases: (a) in determining a convention's personal scope of application; (b) in solving cases where double taxation arises in consequence of double residence; (c) in solving cases where double taxation arises as a consequence of taxation in the 5 Krishna V. et al., Canada's Tax Treaties], (Toronto and Vancouver: Butterworths, 1981, 1981-1997), at 1632, 2054. See also: IFA International Fiscal Association Canadian Branch, Special Seminar on Analysis of Canada's Tax Conventions and Comparison to the OECD Model Double Taxation Convention (Toronto: Richard De Boo Limited, 1979) at 49 - 54. 6 Krishna V . et al., Canada's Tax Treaties I (Toronto and Vancouver: Butterworths, 1981, 1981-1997), at 1632, 2054. 106 State of residence and in the State of source or situs.7 The contracting states could impose tax upon individuals based on similar criteria which happen to be satisfied in respect of a particular individual for both states. For example, liability for Canadian income tax is based on residence and if a contracting state imposed liability for its income tax upon the same basis, it is possible for an individual to be a resident of both Canada and the other state, both for purposes of each of their income tax laws and for purposes of the article regarding residence in international tax treaties. The second way in which such a case of dual residence could arise and would result in double taxation would involve two different contracting states which'impose liability to tax based on different criteria. In Taiwan, individual income tax is imposed on the individual's income earned or gained in Taiwan (domestic source income). In Canada, the individual is subject to tax on his/her worldwide income as long as he/she is regarded as resident in Canada. In this situation, if a Taiwanese who immigrates to or does business in Canada and is regarded as resident in Canada has Taiwan-source income, the individual is subject to double tax based on the different criteria in income tax laws of Canada and Taiwan. Therefore, with a view to avoiding double tax levied on Taiwanese investors in and immigrants to Canada, the first task seems to be 'how to determine the \"residence\" of the taxpayer?' 2.3.1 The function and purpose of the tie-breaker rules 7 Ibid. 107 Commentators suggest that model treaties for the avoidance of double taxation do not normally concern themselves with the domestic laws of the contracting states referring to the conditions of residence.8 However, interpretation of treaties still hinges on the local laws of the two contracting states in a bilateral treaty. Two typical cases of conflict occur: (1) between two residences, (2) between residence and source or situs9 (as in the case between Canada and Taiwan). In order to solve the conflict and avoid double taxation, three model treaties, namely, (i) the Organization for Economic Co-operation and Development Model Convention (hereinafter referred to as 'OECD Model'), (ii) the United Nations Model Double Taxation Convention Between Developed and Developing Countries (hereinafter referred to as 'U.N. Model'), and (iii) the United States Model Tax Convention (hereinafter referred to as 'U.S. Model'), provide 'tie-breaker rules'. Article 4 of the three model treaties, relates to 'the case where, under the provisions of paragraph 1, an individual is a resident of both Contracting States',10 in other words, to the situation where tie-breaker rules would apply. About the function of the tie-breaker rules, the commentary in the OECD Model states: '[T]o solve this conflict special rules must be established which give the attachment to one State a preference over the attachment to the other State. As far as possible, the preference criterion must be of such a nature that there can be no question but that the person concerned will satisfy it in one 8 Ibid. 9 Ibid, at 1632. 10Ibid, at 1633. 108 State only, and at the same time it must reflect such an attachment that it is felt to be natural that the right to tax devolves upon that particular State'.11 It can be concluded that the purpose of employing the tie-breaker rules is to determine which contracting state has the authority to tax the individual to avoid double taxation. 2.3.2 What are the 'Tie-breaker Rules'? As mentioned above, the determination of residence for treaty purposes looks first to a person's liability to tax as a resident under the respective taxation laws of the contracting states. However, if a person is a resident in both contracting states under their respective taxation laws, then the OECD, U.S. and U.N. model treaties, proceed , where possible, to assign a single state of residence to such a person, for purposes of the model treaty, through the use of tie-breaker rules. But, what are the tie-breaker rules? They are the 'preference criteria' set out in paragraph 2 of Article 4 in the model treaties, to be applied to determine a single state of residence to avoid double taxation when an individual is a resident of both contracting states. As the preceding criteria defining 'residence' in paragraph 1 of Article 4, do not always provide a clear-cut determination of residence, additional tie-breaker rules are required. Specifically, the tie-breaker rules are as the follows: (1) Permanent home \"Ibid. 109 The first test is based on where the individual has a permanent home. 'Home' suggests a greater degree of attachment to a place than mere residence. Whether accommodation is 'available' to the individual is a question of fact, and 'ownership' is irrelevant.12 The home must be 'permanent'. This means that the individual has arranged to have the dwelling available to him/her at all times continuously, and not occasionally for specific purposes of short duration.13 If that test is inconclusive because the individual has a permanent home available to him/her in both States, then, he/she will be considered to have residence in the contracting state where his/her personal and economic relations are closest.14 (2) The closest personal and economic relations This is understood as the centre of vital interests. Regard will be had to his/her family and social relations, his/her occupations, his/her political, cultural or other activities, his/her place of business, the place from which he/she administers his/her property, etc.15 The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. For example, if a person who has a permanent home in one state sets up a second in the other state while retaining the first, the fact that he/she retains the first in the environment 12 Ibid at 1633-2. It states that '[a]s regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room)'. 13 Ibid. For example: travel for pleasure, business travel, educational travel, attending a course at a school, etc. 14 Ibid, at 1633-2. 15 Ibid, at 1633-2. 110 where he/she has always lived, where he/she has worked, and where he/she has his/her family and possessions, can, together with other elements, be used to demonstrate that he/she has retained his/her centre of vital interests in the first place. 1 6 (3) Habitual abode If the test of (2) is also inconclusive, or i f he/she does not have a permanent home available to him/her in either state, he/she wil l be treated as a resident o f the contracting state where he/she maintains an habitual abode. 1 7 'Habitual' connotes regular and repeated use over a period of time, although no specific period is laid down in Article 4 (2). A s the O E C D Commentary states: In stipulating that in the two situations which it contemplates preference is given to the Contracting State where the individual has an habitual abode, Subparagraph (b) does not specify over what length of time the comparison must be made. The comparison must cover a sufficient length of time for it to be possible to determine whether the residence in each of the two states is habitual and to determine also the intervals at which the stays take place. 1 8 In other words, the issue of whether an individual has an habitual abode in a treaty country is relative, and is largely based on a comparison of length and frequency of visits to each place. I f he/she has an habitual abode in both States or in neither of them, then the next test is citizenship or nationality. 16 Ibid. 17 Ibid. 18 Ibid, at 1633-3. (Commentary 19 on the OECD Model). I l l (4) Citizenship or nationality He/she will be treated as a resident of his/her contracting state of citizenship (in the U.S. Model) ,or of nationality (in both the OECD Model and the U.N. Model). (5) The competent authorities If he/she is a citizen (in the U.S. Model) or national (in the OECD Model and the U.N. Model) of both states or of neither of them, the matter will be decided by the competent authorities of the contracting states by mutual agreement. The rule at this stage is the same in the three treaties. 2.3.3 Use of the tie-breaker rules In order to understand the mechanism of the tie-breaker rules, it is necessary to appreciate why they are applied in a specific order. The order of the tie-breaker rules is based on the degree of 'closeness' of the individual to the contracting states. In the sequence, once a criterion is adequate to solve the conflict, the subsequent criteria need no longer be considered. For instance, the Commentary of the OECD Model states: The Article gives preference to the Contracting State in which the individual has a permanent home available to him. This criterion will frequently be sufficient enough to solve the conflict, e.g. where the individual has a permanent home in one Contracting State and has only made a stay of some length in the other Contracting 19 Ibid, at 1633, 1633-2. 112 The intent of the mechanism of tie-breaker rules is to avoid double taxation by determining the single 'residence'. It is considered that the residence is that place where the individual owns or possesses a home. This home must be permanent and the individual must have arranged and retained it for his/her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him/her at all times continuously, and not occasionally for reasons of, for example, travel for pleasure, business travel, education travel,.... etc. If the individual has a permanent home in both contracting states, paragraph 2 (of each model treaty) gives preference to the state in which the individual has his/her centre of vital interests. In cases where the residence cannot be determined by reference to this rule, paragraph 2 provides, as subsidiary criteria, first habitual abode, and then nationality (in the OECD Model and the U.N. Model) or citizenship (in the U.S. Model). If this is still not adequate, the question shall be solved by mutual agreement between the states concerned according to the procedure laid down in Article 25 of each model treaty. 3. Political Dilemma — Recognition Status Issues 3.1 Problem of Taiwan 113 Even though a treaty is the most efficient mechanism by which to solve double taxation problems, nonetheless, the political dilemma that arises is how can a nation enter into a treaty with a jurisdiction that it does not recognize as a country (in this case, Taiwan)? Put plainly, the political dilemma is caused by the general non-recognition of Taiwan as a nation state by most countries in the world. 'A Briefing Book', provided by the Canadian Trade Office, states that: '[fjollowing the communist victory on the Chinese mainland in 1949, ... The People's Republic of China continues to regard Taiwan as a province of the mainland and pursues an eventual reunification. ... Only 29, mostly small, Central American, Caribbean and African nations, plus the Vatican, have diplomatic relations with Taiwan. South Africa's decision to switch recognition to the PRC at the end of 1997 was a setback. [Moreover,] Taiwan is rejected from rejoining the United Nations (since 1971)'. The PRC's unwillingness to renounce the use of force has contributed to Taiwan's political and economic instability in recent years and has also resulted in a \"go-slow\" policy for Taiwanese investment in mainland China'.20 3.2 Non-recognition Non-recognition is the converse of recognition. 'Recognition has been described as: \"The free act by which one or more States acknowledge the existence on a definite territory of a human society politically organized, independent of any other existing State, and capable of observing the obligations of international law, and by which they manifest 2 0 Canadian Trade Office in Taipei (\"CTOT\"), Taiwan -A Briefing Book (Taipei: Canadian Trade Office in Taipei, 1998) at 5. 114 therefore their intention to consider it a member of the international Community\". This description distinguishes two elements in an act of recognition. It confirms first that the claimant to recognition must satisfy the legal criteria21 for statehood. It goes on to explain that the recognizing state is publicly expressing its decision to respect the claimant as an independent sovereign equal'22 There is a distinction between the recognition accorded to a state and the recognition accorded to a government. The Canadian Practice of Recognition of States (1972) says that '[in a letter dated July 23, 1971, written by the Secretary of State for External Affairs, as] far as recognition of states is concerned, the Canadian Government must first be satisfied that any entity claiming statehood meets the basic requirements of international law, that is, an independent government wielding effective authority over a definite territory. When these conditions appear to be fulfilled, the timing of recognition is determined in accordance with Canadian national interests, given the political and economic consequences of recognition. Once granted, state recognition survives changes in governments, unless it is explicitly withdrawn'.23 On the other hand, Canada has generally ceased the practice of recognizing foreign governments. 'Subsequently on 2 1 The criteria for recognition of states are that 'States will generally accord recognition to an entity if the latter satisfies the requirements spelt out in the Montevideo Convention — defined territory; permanent population; independent government; capacity to engage in relations with other international persons. If the governmental regime appears effective and stable, then recognition will be accorded'. See supra note 1 at 79. 2 2 Kindred H. M., ed., International Law Chiefly as Interpreted and Applied in Canada, 5th ed. (Toronto: Emond Montgomery Publications Limited, 1993) at 248. 2 3 See: Canadian Practice of Recognition of States (1972), 10 Can. Y.B. Int. L. at 308-9. See also supra note 22 at 250-251. 115 November 9, 1988, the Secretary of State for External Affairs announced that Canada would no longer continue the practice of recognizing foreign governments but would follow the so-called Extrada doctrine of recognizing only new or altered states. In making this change in policy, Canada has fallen into line with the approach of the United States, Britain, France and many other countries, which either explicitly or tacitly follow the same practice'.24 Recognition is of importance as 'it is concerned with status, that is, the status of the entity in question (i) on the international scene and (ii) within the municipal legal system of the recognizing state'.25 The effect of recognition/non-recognition at the international level is that under international law the effect of recognition is that the state or government that is recognized thereby acquires not only the respect of the recognizing state for all the rights and privileges but also the duties associated with its new found authority. The principal measure of this status is admittance to the full range of international processes for the protection of a state's rights and duties. Thus, the recognized state or government can then enter into diplomatic relations with other states by exchanging representatives and may conclude treaties with them. Non-recognition, with its consequent absence of diplomatic relations, may limit an unrecognized regime in pressing its rights, or other states in asserting its responsibilities, under international law. However, non-recognition does not necessarily affect the existence of such rights and Ibid, at 252 - 253. See supra note 1 at 76. 116 duties. In other words, 'non-recognition does not give an entity \"carte blanche\" to act as it wishes. For example, in 1957 compensation was demanded by the British from the unrecognized Taiwan government for damage done by Taiwan forces to British vessels. An unrecognized entity has responsibilities which the international community requires it to discharge'.27 On the other hand, the effect of non-recognition at the municipal law level is, for example, in the United Kingdom practice, the converse of the consequences of recognition. 'An unrecognized state or government does not have locus standi in the British courts; does not enjoy immunity from the jurisdiction of the British courts; its legislative and administrative measures will be denied effect by British courts'.28 3.3 Alternatives In response to its political dilemma, Taiwan has successfully developed its pragmatic diplomatic foreign policy. '[Tjaiwan has achieved success in presenting itself as a newly industrialized economy; this assisted it in joining multilateral organizations like APEC (it participates as Chinese Taipei). Its major economic role has meant that most nations maintain strong unofficial ties. Chinese Taipei has applied for membership in the World Trade Organization (WTO) as a separate customs territory, [an application that] Canada supports'.29 As for Taiwan's pragmatic foreign policy, a report indicates that '[T]aiwan's 2 6 See supra note 23 at 257. 2 7 See supra note 1 at 78, 84. 28 Ibid, at 84 -85. 2 9 See supra note 20 at 5. 117 formal title, the Republic of China, implies sovereignty over Mainland China (the People's Republic of China - PRC). Taiwan has officially renounced claims to sovereignty over the mainland, but supports a one-China policy and eventual reunification - when democratic and economic conditions on the mainland permit. At present Taiwan has full diplomatic relations with 29 countries and the Vatican. Taiwan's desire for an international identity is its foremost foreign policy, which it pursues with an active \"pragmatic diplomacy\". Excluded from the United Nations since 1971, when \"China's\" seat switched to the PRC, Taiwan now campaigns for its readmittance to the United Nations using a \"dual recognition\" formula, which would involve a shared \"China\" seat. The PRC actively opposes this. Taiwan is lobbying hard to receive bilateral assurances or observer status in lieu of official participation in various multilateral organizations. It unilaterally applies many international standards, seeking to be a responsible international player. Taiwan has achieved a measure of success in presenting itself as a newly industrialized economic entity, a characterization that assisted in joining APEC and the ADB (Asian Development Bank). Its application for WTO membership as a developed customs territory is supported by most Contracting Parties, including Canada, if there are satisfactory commitments to open its economy. Once this process is complete, Taiwan will pursue participation in the OECD'.30 Despite most countries' non-recognition of Taiwan, Taiwan has made a great effort in representing itself as an entity with strong economic power in the international arena. Ibid, at 11. 118 'Taiwan is one of Asia's economic dragons, enjoying an average 8.6 % growth for three decades. Taiwan has transformed itself into the world's 19th largest economy with annual per capita income of US $14,200 (PPP) in 1996'.31 Taiwan's leadership has made a significant economic policy shift, which is committed to industrial and infrastructure upgrading and to enhancing Taiwan's investment climate. To this end, the leadership plans on establishing Taiwan as a credible Asia-Pacific regional operations center (APROC) in six key sectors: machinery, offshore shipping, air, telecommunications, finance, and media.32 Moreover, regarding the potential of Taiwan's market, a report also states that: '[Tjaiwan's economy represents substantial trade opportunities for foreign firms with commitment and good connections. Taiwan boasts one of the world's fastest growing economies, with low inflation, steady growth and US$ 84 billion in foreign currency reserves, the fourth largest in the world. Over the next few years, Taiwan has allocated billions of dollars to a range of domestic priorities including infrastructure, transportation, telecommunications, electronics, information technology, machinery, environment, aerospace, health care, chemicals, and advanced materials projects. Programs over the next decade include C$ [Canadian Dollars] 200 billion in infrastructure construction, C$ 12 billion in telecommunications and C$ 15 billion in environmental protection measures-all to be implemented fully by 2005'.33 Ibid, at 4. Ibid, at 12. Ibid, at 4. 119 Due to the factual economic power of Taiwan, '[m]ost members of the international community, Canada included, do not formally recognize Taiwan as a sovereign state, but all maintain strong unofficial ties at the personal and trade/investment level with this economy'.34 For example: (1) Australia-Taiwan economic/trading relations: According to Australia's 1995 House of Representatives Official Hansard, [T]aiwan was Australia's fifth most important trading partner in Asia and is surpassed only by Japan, South Korea, China and Singapore. Overall, Taiwan provided our [Australia's] sixth largest export market in 1995 with something like $3.3 billion worth of Australian exports finding their way to Taipei. Although the trade balance between our two countries [Australia and Taiwan] is in our [Australia's] favour at the moment, it is not a one-way street. Imports from Taiwan were worth about $2.6 billion in 1995. ... In all areas our [Australia and Taiwan's] links continue to strengthen and to grow. Tourism from Taiwan has grown rapidly since 1990. Air links between our two countries—first opened in 1991—increased some 47 per cent to March 1993. Student numbers from Taiwan increased by over 100 per cent between 1990 and 1995 when it became the seventh largest source market for students visiting Australia.35 The above information was provided by one member of the House of Representatives in Australia to favour the signing of a tax agreement between Australia and Taiwan. It can be concluded that, from the numbers provided above, Australia and Taiwan's bilateral economic relations are strong and steadily growing. (2) New Zealand - Taiwan economic/trading relations: \"Ibid, at 4. 3 5 House of Representatives Official Hansard (in Australia), \"Parliamentary Debates\", (No. 7, 1996 20, 21, 22 August 1996) at 3365 (by Mrs. Crosio). This is the comment made by Mrs. Crosio, on the Australia-Taiwan Tax Agreement. 120 Taiwan is one of New Zealand's major foreign trade partners, as well as one of its main sources of foreign investment, together with the United States, Australia, and the U.K..3 6 According to New Zealand Official Yearbook(s), Taiwan is one of the top ten countries for exports and imports in New Zealand.37 The figures indicate that in recent years, from 1991 to 1996, the value of exports (from New Zealand to Taiwan) and imports (from Taiwan to New Zealand) are as follows38. ($ N.Z. million) 1991 1992 1993 | 1994 1995 1996 Exports 315.7 430.8 486.7 ! 507.3 632.3 571.6 Imports 384.7 428.6 483.1 j 518.1 566.6 525.3 It is also stated in the New Zealand Official Yearbook 1997 that '[t]he Taiwanese market for New Zealand products is of continuing importance and exports of foodstuffs in particular are expected to increase. ... New Zealand's comparative advantage in building products lies principally in wood, where ... Taiwan [is] already a major buyer. ... [With respect to non-food consumer products, including apparel and sporting goods,] [A]s purchasing power and affluence increase in Taiwan ... [this] country will represent an 3 6 See: The Economist Intelligence Unit (EIU), Investing, Licensing & Trading (in New Zealand) (New York: The Economist Intelligence Unit, 1998) at 7, 37. It says that 'the New Zealand economy is highly dependent on foreign trade ... Trade with Australia has increased significantly ... The other significant trade development is the emergence of Asian countries, particularly Japan, South Korea, Taiwan, China and Hong Kong as major trading partners'. 3 7 See: Statistics New Zealand, New Zealand Official Yearbook 1997, 100th ed. (Wellington: GP Publications, 1997) at 565. 3 8 See: Statistics New Zealand, New Zealand Official Yearbook 1995, 98th ed. (Auckland: Statistics New Zealand, 1995) at 557, 558. See also supra note 37 at 563, 565. 121 emerging consumer market for New Zealand'. It can be concluded that Taiwan has been a major trading partner with New Zealand, particularly in the Pacific Rim. The two-way flow of business activities between New Zealand and Taiwan shows great potential in their growing bilateral economic relations. (3) Vietnam - Taiwan economic/trading relations: According to a recent report, Taiwan has been the number two foreign investor in Vietnam for the last ten years.40 Specifically, direct Taiwan investment in Vietnam had reached U.S.$ 1.53 billion as of the end of 1993, making Taiwan the top foreign investor in that country in 1993.41 Two-way trade between Taiwan and Vietnam exceeded U.S.$ 600 million in 1993, with Taiwan enjoying a trade surplus of U.S.$ 350 million.42 In the same year (1993), Taiwan's large investment, up to nearly U.S.$ 1.2 billion, has been poured into some 70 projects in Vietnam.43 Taiwanese investors have played an important role in the Vietnamese economy. '[U]p to January, 1993, the Vietnamese government has approved 113 applications by Taiwan investors for investments worth over U.S.$ 1.53 39 See supra note 37 at 566. 4 0 See: The Economist Intelligence Unit (EIU), Investing, Licensing & Trading (in Vietnam) (New York: The Economist Intelligence Unit, 1998) at 14. This report states that '[t]he top ten foreign investors in Vietnam over the past ten years are, in rank order, Singapore, Taiwan, Hong Kong, Japan, South Korea, France, Malaysia, the United States, Thailand and the British Virgin Islands'. 4 1 \"Vietnam: Taiwan to Sign Four Economic Agreements Latter This Year\" Reuter Textline BBC Monitor Service: Far East (4 April, 1994). (Abstracted From Lexis). 4 2 Ibid. 4 3 Dung N., \"Vietnam: Taiwan's IECF to Provide Soft Loans\" Reuter Textline Vietnam Investment Review (10 May, 1993). (Abstracted From Lexis). 122 billion, making Taiwan the top foreign investors in Vietnam'.44 Taiwan is also a supporter for Vietnam to boost its economy. According to the news released in May, 1993, 'Taiwan's International Economic Cooperation Fund (IECF) will supply Vietnam with U.S.$ 15 million in soft loans for the development of small and medium-sized enterprises, said then Director-General of the Taipei Economic and Cultural Office in Ho Chi Minh City. ... [Besides,] another aid package worth U.S.$ 30 million is soon to be signed between Vietnam and Taiwan's IECF'.45 To facilitate the business activities of Taiwanese investors in Vietnam, Taiwan since 1992 has established two Economic and Cultural Offices in Vietnam, one in Ho Chi Minh City and one in Hanoi.46 As a result, the first round of negotiations between Taiwan and Vietnam on a tax agreement, in order to avoid double taxation and to exchange tax information, was initiated in Aug. 1993.47 In addition, some other economic agreements, a labour accord, a trade agreement and a temporary import accord, were also under discussion to further boost bilateral economic cooperation and commercial exchanges.48 As then Economic Affairs Minister P. K. Ching said: '[t]o avoid double taxation on our investors in Vietnam, we hope to sign a tax exemption agreement with Hanoi as soon as possible. ... On the other hand, Vietnam is 4 4 See supra note 41. 4 5 See supra note 43. 4 6 Ibid. 4 7 \"Taiwan: ROC, Vietnam Starting Talks on Tax Agreement\" Reuter Textline China Economic News Service (17 August, 1993). It is noted that '[aside] from avoiding troublesome duplication of taxation for enterprises in the two nations, MOF [Ministry of Foreign Affairs of Taiwan] officials said the bilateral pact is expected to help divert Taiwan investments from the Chinese mainland, uplift relations with Vietnam, acquire more correct information in fighting against drug smuggling from Vietnam, and collect data concerning shipments of Chinese mainland products to Taiwan via Vietnam'. 4 8 See supra note 41. 123 eager to sign a labour accord with Taiwan so that its citizens will be able to enter Taiwan's labour market'.49 It can be reasonably concluded that the reasons for negotiating these agreements are based on the bilateral economic and trading relations between Taiwan and Vietnam. Even though this thesis is intended to focus on the discussion of avoiding double taxation on individual income, the analysis of the issue is inextricably linked to corporate income. In my view, this linkage is because the economic and trading relations between two countries are the key to making the governments of contracting states take seriously the issue of whether to have a tax treaty (agreement) or not. With respect to the avoidance of double taxation and the prevention of fiscal evasion, three countries have already signed tax agreements with Taiwan. Australia and Taiwan, on May 29, 1996, signed an 'Agreement' (hereinafter referred to as 'Australia-Taiwan Tax Agreement') through two private50 sector organizations, namely, 'The Taipei Economic and Cultural Office' and 'The Australian Commerce And Industry Office'.51 New Zealand and Taiwan, on Professor Rick Krever, in his comment on the Australia-Taiwan Tax Agreement, has noted that 'the double tax treaty is actually an agreement between two \"private\" sector organizations: the Australian Commerce and Industry Office established by the Australian Chamber of Commerce in Taipei, and the Taipei Economic and Cultural Office in Canberra'. See infra note 138 at 102. However, some people may question whether or not the Australian Chamber of Commerce should be described as a private sector organization, as it may have some relationship to the government, and they prefer it to be described as a semi-governmental organization. In this thesis, the Australian Chamber of Commerce is considered to be a private sector organization, as are the New Zealand Commerce and Industry Office, and the Vietnam Economic and Cultural Office in Taipei described in footnotes 52 and 53. 5 1 The full name of the agreement titled: 'AGREEMENT BETWEEN THE TAIPEI ECONOMIC AND CULTURAL OFFICE AND THE AUSTRALIAN COMMERCE AND INDUSTRY OFFICE CONCERNING THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME'. 124 November 11, 1996, also signed an 'Agreement' through two private sector organizations, namely, 'The Taipei Economic and Cultural Office in New Zealand' and 'The New Zealand Commerce and Industry Office'.52 Vietnam and Taiwan, on April 6, 1998, also signed an 'Agreement', through two private sector organizations, for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.53 These tax agreements were all signed on the basis of the economic ties the countries have with Taiwan and have nothing to do with political recognition. It can be concluded that these tax agreements which were signed by two private sector organizations are the alternatives to the formal tax treaties, which can only be concluded between countries having international personalities. 3.4 Canada and Taiwan Should Have a Treaty / an Agreement In the light of the three previously signed tax agreements, Canada could also have a tax agreement with Taiwan, signed by two private sector organizations ~ The Canadian Trade Office in Taipei and The Taipei Economic and Cultural Office in Canada. Despite 5 2 The full name of the agreement tided: 'AGREEMENT BETWEEN THE TAIPEI ECONOMIC AND CULTURAL OFFICE IN NEW ZEALAND AND THE NEW ZEALAND COMMERCE AND INDUSTRY OFFICE FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME'. 5 3 The full name of the agreement tided: 'AGREEMENT BETWEEN THE VIETNAM ECONOMIC AND CULTURAL OFFICE IN TAIPEI AND THE TAIPEI ECONOMIC AND CULTURAL OFFICE IN HANOI FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME'. The tax agreement was signed on April 6, 1998 in Hanoi, Vietnam, by the Taipei Economic and Cultural Office in Vietnam (represented by Director-General Hu Chia-chi) and the Vietnam Economic and Cultural Office in Taipei (represented by Mr. Dang Dinh Luu). The tax agreement has been in effect since May 6, 1998. For details, see: the Official Financial Report (Tsai Chung Bu Gung Bau, in Chinese) by the Ministry of Finance of Taiwan, vol. 36, in June, 1998. 125 Canada's non-recognition of Taiwan, the signing of an agreement between Canada and Taiwan is still possible, mainly due to the strong economic power of Taiwan in the international arena, and the trading relations that Taiwan keeps with Canada.54 The Briefing Book has noted that: Canada ceased diplomatic recognition of the 'Republic of China' (Taiwan) in 1970. While Canada has observed a 'one-China' policy (formally recognizing only the People's Republic of China), extensive economic, trade and people-to-people contacts continue on an unofficial basis. Since 1992, senior-level visits from both sides have reinforced Canada's flourishing presence in Taiwan. Canada-Taiwan trade has grown steadily, reaching close to CAD$ 4.6 billion in 1996. Taiwan's surplus is approximately CADS 800 million, reflecting a number of barriers to [Canada's] exports. Canada's people-to-people links with Taiwan are growing with substantial increases in tourism, education, and immigration. Visitor visa issuance to Taiwanese continues to grow ~ over 100,000 in 1995 and up another 18 % in 1997 to reach 140,000. Taiwanese tourists added over CAD$ 200 million to the Canadian economy in 1997, and they spend on average more money per trip than tourists from any other nation except Japan. In addition, over 6,000 Taiwanese students currently studying in Canada inject some CADS 180 million into the Canadian economy annually'.55 Some statistics are provided with respect to Canada's major exports to and imports from Taiwan, which is indicative of the bilateral economic relations between Canada and Taiwan. '[M]ajor Canadian exports [are]: [o]rganic chemicals; electrical equipment; gold, forestry products (pulp, wood, paper); transportation equipment; boiler machinery; raw hides and skins, aircraft, coal, nickel. Major Canadian imports [are]: [ m a c h i n e r y ; 5 4 'Taiwan is Canada's 9th largest trading partner; Canada is Taiwan's 13th largest market'. See supra note 20 at 12. \"Ibid. 126 mechanical and electrical equipment; iron and steel articles; vehicles parts and accessories; toys; furniture; machine tools; plastic articles, textiles and clothing, base metal articles'.56 The economic ties that Canadian companies, individuals and officials have kept with Taiwan are illustrated as the follows. '[1] Trading partners for the future: Taiwan is Canada's ninth largest trading partner and the fourth largest in Asia, with bilateral trade totaling C$4.5 billion in 1996. Canada is also one of Taiwan's largest export markets. Given the complimentary trade and investment objectives, bilateral trade is expected to continue to grow well into the next century. [2] Soaring aerospace sales: Canada's Bombardier Aerospace is now Taiwan's third largest supplier of commercial aircraft, with 14 de Havilland Dash-8's sold to Great China Air over the last two years. Bell Helicopter also recently sold four Bell 412 helicopters and two Bell 430 helicopters to Daily Air Corp. [3] Keeping Taiwan connected: cellular telephones and beepers are quickly becoming commonplace in Taiwan society, and Canada's Northern Telecom is ensuring that the growing demand for service is met. Nortel has won contracts to build 788 of the 890 GSM base-stations planned for Taiwan and its DCS 1800 digital communications system equipment is being used to add 1 million telephone lines to Taiwan's existing cellular network. [4] Ensuring a greener tomorrow: with Taiwan's tough new environmental regulations coming into effect, a myriad opportunities are opening up for Canada's green technology providers. Some like Canada's Perma are making Taiwan a safer place with the latest in hazardous waste incineration technology, while others like Aqua Guard Spill Response Ltd. are helping keep Taiwan's harbours clean. [5] Taiwan on the move: the Taipei City Government is helping to clean up the environment with the recent commitment to purchase 60 environmentally-friendly CNG buses from Canada's Orion Bus Industries. Taiwan also imports over C$ 100 million worth of Canadian manufactured cars annually. [6] Providing world-class innovation: when looking for leading-edge technology, Taiwan looks to Canada. Arcanco, which devised Toronto's Skydome Stadium, is designing the roof to Taipei's Domed Stadium. Vessels in distess off the Taiwan coast are now brought to safety with the help of CAL Corporation's advanced black box technology. [7] Opening financial markets: drawn by Taiwan's increasing affluence and commitment to financial liberalization, five Canadian banks, one trust company and two insurance companies are actively carving a niche for themselves in the Taiwan Ibid, at 6. 127 market. [8] Investing in Canada: developments in Canada's agri-food, hi-tech and life science sectors are attracting Taiwan's ample investment dollars. Taiwan's Central Investment Holding has committed to invest C$ 5 million into Montreal's MDS life sciences fund. Yuan Yi Agricultural and Livestock Enterprise Co.'s investment in a new hog processing facility in Lethbridge is expected to inject over C$ 850 million into Alberta's economy annually. [9] Winning Taiwan's hearts, and stomachs: as consumers become increasingly health-conscious, more Taiwanese families are buying pure and natural Canadian food products, such as Canadian beef, seafood, canola oil, bottled water, maple syrup, Yogen Fruz yogurt, St. Cinnamon's buns, Clearly Canadian, wine, beer and Seagram's whiskey. Canada exported over C$ 155 million worth of agricultural products to Taiwan in 1996. [10] Jumping across the pond: fourteen direct, non-stop flights per week help ferry the increasing number of businesspeople and tourists traveling between Canada and Taiwan. Between 1991 and 1996, the volume of Taiwanese travelers to Canada jumped by 227%. This rise continued in 1997 with Canada greeting over 140,000 Taiwanese visitors. CTOT [Canadian Trade Office in Taipei] breaks records every day as Canada's highest visitor visa issuance office in the world. Dramatic growth in outbound travel from Taiwan resulted in over 130,000 Taiwanese visiting Canada in 1996, a 25 % increase over 1995. The Taiwanese travel market is Canada's fourth largest source of Asian tourists. Taiwanese also rank high relative to other countries in terms of average expenditures at nearly CDN $ 2,000 per person per trip. In 1996, Taiwanese tourists annually contributed over CDN $ 200 million to the Canadian economy. [11] Living in the best place on earth: attracted by a better quality of life, over 14,700 new Taiwanese immigrants arrived in Canada in 1996, the majority of whom injected thousands of dollars into the economy as investor-class immigrants. [12] Getting a head start: drawn by world-class programs and a multi-cultural environment, more and more Taiwanese students are applying to study in Canada. In 1996, CTOT issued over 3,000 student visas and promoted Canadian schools through successful education fairs islandwide. The 1997 CTOT-organized Canadian Studies Conference attracted academics from around the globe to discuss Canada and its role in Asia-Pacific. [13] Setting trends in fashion: Canadian fashions have hit the streets to Taiwan. Canadian designer Simon Chang has enchanted audiences at fashion shows across Taiwan and his designs are now carried exclusively by Far Eastern Department Stores. For quality casual wear, Taiwanese shop at one of five Roots outlets around Taiwan. Today's hip young women wear makeup by Toronto-based MAC Cosmetics. [14] Introducing a slice of Canadiana: musical artists as Alanis Morrisette and Quebec pianist Steven Barrakat played to packed audiences in Taiwan in 1997. The market for film in Taiwan is also very significant, second only to Japan in East Asia. A number of Canadian film producers including Alliance, Malofilm and NFB have all sold products in Taiwan. The first Canadian Film Week in Taipei, organized by the CTOT, attracted 8,000 viewers and generated 50 media reports. CTOT's annual Canadian film festival 128 draws large crowds and has resulted in the sale of commercial rights to three Canadian movies - Double Happiness, Margaret's Museum, and Thirty-two Short Films about Glenn Gould. [15] Cooperating on international issues: Canadian and Taiwanese officials engage on a range of important bilateral issues, as well as work together as members of effective multilateral organizations such as APEC and the Asian Development Bank. [16] Exchange of senior-level visits: in recognition of Taiwan's valuable role as a trading partner, Canada's Ministers of Transport, International Trade, Natural Resources, Industry and Revenue have all visited Taiwan in the past four years, together with four Provincial Premiers. Taiwan's Vice Premier and Minister of Finance, Environment, Health, and Mainland Affairs visited Canada in 1995-6, while senior government representatives and business delegations attended the seven APEC Ministerial meetings in Canada in 1997'.57 With these statistics and facts, it can be concluded that the economic and trading ties between Canada and Taiwan are getting closer. The two jurisdictions would be better off having a tax treaty or agreement to facilitate their bilateral economic relations and prevent punitive double taxation. Moreover, the signing of an agreement with Taiwan is not a novel concept to Canada. Taiwan said it had signed a formal air agreement (dated October 22, 1990) with Canada, to facilitate their bilateral commercial relations after Canada severed diplomatic ties with Taiwan and switched its recognition to the People's Republic of China.58 However, due to Canada's non-recognition of Taiwan, Canada did not refer to it as a formal air 57 Ibid, at 8 - 9, 19. 5 8 Taiwan announced in 1990 that it had signed a formal air agreement with Canada to pave the way for the first direct flights between Taipei and Vancouver commencing in December, 1990. It has been reported by the Canada-based The Globe and Mail that '[the then] Vice Communications Minister Ma Cheng-fang said under the agreement, Taiwan's flag-carrier China Airlines and Calgary-based Canadian Airlines International Ltd. will jointly operate the direct flights during the initial period starting Dec. 5. Taiwan severed diplomatic ties with Canada in 1970 after Ottawa switched its recognition to Beijing. But trade between Taiwan and Canada has flourished since totaling $2.75 billion in 1989 according to Taiwanese figures'. See: \"Canadian Airlines\" The Globe and Mail (16 November, 1990) B8. 129 agreement concluded with Taiwan, instead, putting it in an informal way as a 'Memorandum of Understanding'.59 Regardless of what it is called, it enables Canadian Airlines International Ltd. to fly directly from Vancouver to Taiwan, and vice versa. Likewise, Taiwan's flag-carrier China Airlines can fly directly from Taipei to Vancouver, and vice versa. Following the 'agreement' dated October 22, 1990, Canada and Taiwan signed another 'Memorandum of Understanding'60 on July 10, 1995 with respect to reciprocal tax exemption on certain taxes on air transport enterprises by Canada and Taiwan. The purpose of signing this Memorandum of Understanding is to provide reciprocal relief from taxation to air transport enterprises resident on Taiwan and in Canada. It is noted in the preface of the Memorandum that 'The Department of North American Affairs, Ministry of Foreign Affairs, Taipei, and the Canadian Trade Office in Taipei, [n]oting that the 5 9 The full name of the Memorandum of Understanding is: 'MEMORANDUM ON AIR SERVICE BETWEEN THE CANADIAN TRADE OFFICE IN TAIPEI AND THE DEPARTMENT OF NORTH AMERICAN AFFAIRS OF THE MINISTRY OF FOREIGN AFFAIRS OF TAIWAN'. (Dated: October 22, 1990). The Memorandum of Understanding was renewed and signed again recently in 1997. The full name of the updated Memorandum of Understanding is: 'SUPPLEMENTARY CONFIDENTIAL MEMORANDUM ON AIR SERVICE BETWEEN THE CANADIAN TRADE OFFICE IN TAIPEI AND THE MINISTRY OF TRANSPORTATION AND COMMUNICATIONS IN TAIPEI'. (Dated: March 19, 1997). This information is provided by the Agreements, Tariffs and Enforcement Directorate Canadian Transportation Agency. It is interesting to see why Taiwan said the first Memorandum of Understanding, from Taiwan's perspective, was a formal air agreement, because it was signed by the Taiwanese government. However, it is quite understandable that Canada referred it as a Memorandum, as from Canada's perspective, it was only signed by the Canadian Trade Office in Taipei (\"CTOT\"), a non-governmental representative office in Taipei from Canada. 6 0 The full name of the Memorandum of Understanding is: 'MEMORANDUM OF UNDERSTANDING CONCERNING RECIPROCAL EXEMPTION WITH RESPECT TO CERTAIN TAXES ON AIR TRANSPORT ENTERPRISES BETWEEN THE CANADIAN TRADE OFFICE IN TAIPEI AND THE DEPARTMENT OF NORTH AMERICAN AFFAIRS OF THE MINISTRY OF FOREIGN AFFAIRS, TAIPEI'. This information is also provided by the Agreements, Tariffs and Enforcement Directorate Canadian Transportation Agency. 130 responsible authorities on Taiwan and in Canada intend to provide reciprocal relief from taxation to air transport enterprises resident on Taiwan and in Canada, consistent with the principle of reciprocal benefit, as set out in the Memorandum on Air Services of October 22, 1990; [c]onfirm the following understanding on how the responsible authorities on Taiwan and in Canada will implement the above-noted intention'.61 This Memorandum was also signed between the Taiwanese government and the non-government representative \"CTOT\" from Canada. The existing taxes to which the Memorandum of Understanding (on July 10, 1995) will apply are those as set out in articles 1, 2, 3 and 4 of the Memorandum: Article 1. (a) on Taiwan, the profit seeking enterprise income tax and the business tax; (b) in Canada, the income tax and capital tax imposed under the Act, and the goods and services tax imposed under the Excise Tax Act, R.S.C. 1985, c. E-15. Article 2. This Memorandum of Understanding will also apply to any identical or substantially similar taxes which are imposed after the date of signature of this Memorandum of Understanding in addition to, or in place of, the existing taxes. Therefore, on Taiwan, air transport enterprises resident in Canada will be exempt from tax on the income, profits or revenue derived from international traffic earned on Taiwan. (See: article 3 of this Memorandum of Understanding.) Likewise, in Canada, air transport enterprises resident on Taiwan will be exempt from tax on: (a) the income, profits or revenue derived from international traffic earned in Canada; (b) the capital represented by aircraft operated by such enterprises in 6 1 See: the preface of the Memorandum. This information is provided by the Agreements, Tariffs and Enforcement Directorate Canadian Transportation Agency. 131 international traffic and by personal property used in the business of transporting passengers or goods in international traffic. (See: article 4 of the Memorandum of Understanding.)62 It can reasonably be predicted that, in spite of the political dilemma, Canada would continue to allow the signing of bilateral 'agreements' in an informal way to serve some specific economic purposes. 4. A Precedent — the Australia-Taiwan Tax Agreement With respect to the Australia-Taiwan Tax Agreement, one commentator has noted that Australia-Taiwan tax treaty: pragmatism prevails In May 1996 Australia signed its latest and most unique tax treaty with Taiwan. ... The principal problem, of course, is how can a nation enter into a treaty with a jurisdiction it does not recognize as existing? Under the terms of the 1972 Joint Communique between Australia and the People's Republic of China, Australia recognized the government of the People's Republic as the sole legal government of China and acknowledged the position of the Chinese government that Taiwan is a province of China ... [In order to avoid the political recognition problem,] the double tax treaty is actually an agreement between two \"private\" sector organizations, the Australian Commerce and Industry Office established by the Australian Chamber of Commerce in Taipei, and the Taipei Economic and Cultural Office in Canberra. While the agreement was nominally prepared by two private organizations, it was of course actually negotiated in unofficial capacity by government officials and looks broadly similar to Australia's other double tax treaties.63 6 2 See: articles 1, 2, 3, and 4 of the Memorandum of Understanding. This information is also provided by the Agreements, Tariffs and Enforcement Directorate Canadian Transportation Agency. 6 3 See supra note 20 at 102. 132 Despite the complicated international political and diplomatic issues associated with relations with Taiwan, the reasons for signing the Australia-Taiwan Tax Agreement are, nonetheless, due to the trading relations between Australia and Taiwan, and the economic power that Taiwan has exercised in the world.64 Put plainly, the signing of the Australia-Taiwan Tax Agreement is intended to facilitate the bilateral commercial relations between the two jurisdictions and political issues are deliberately neglected or ignored. Australia and Canada are very similar in that politically they do not recognize Taiwan as a state65, but economically, Canada, like Australia, has a strong and continuing economic relationship with Taiwan. It can be concluded that the Australia-Taiwan Tax Agreement can be a precedent for the potential Canada-Taiwan Tax Agreement. 5. Bringing a Tax Agreement into Effect 6 4 Mrs. Crosio [quoted in the House of Representatives Official Hansard (in Australia)] said that '[f]wo memorandums of understanding have now been signed between the office representing Australian interests in Taiwan, the Australian Commerce and Industry Office, and the Taiwanese authorities. ... Our relationship with Taiwan both economically and diplomatically is strong and the bill [Taxation Laws Amendment (International Tax Agreements) Bill 1996] before the House is indicative of that'. See supra note 35 at 3365. To sum up, the aforesaid bill is used to provide the legal authority for the international taxation agreement between Australia and Taiwan. 6 5 For Australia's non-recognition of Taiwan as a state, see: House of Representative Official Hansard (in Australia), Ibid, at 3366. This report states that: 'Taiwan is not a country and that we are still acknowledging it as part of mainland China'. For Canada's non-recognition of Taiwan as a state, see supra note 20 at 4. This report states that '[m]ost members of the international community, Canada included, do not formally recognize Taiwan as a sovereign state, but all maintain strong unofficial ties at the personal and trade/investment level with this economy'. Specifically, 'Canada ceased diplomatic recognition of the 'Republic of China' (Taiwan) in 1970. While Canada has observed a \"one China policy (formally recognizing only the People's Republic of China), extensive economic, trade and people-to-people contacts continue on an official basis. Since 1992, senior-level visits from both sides have reinforced Canada's flourishing presence in Taiwan'. Ibid, at 5. See also: section 3.2 of this chapter regarding non-recognition. 133 5.1 The Australian Practice Both in Australia and Canada, a treaty is not automatically effective simply because it has been signed by the executives. In Australia, for a treaty to go into effect, the treaty must be passed by the Parliament in a law. In other words, treaties are only valid once incorporated into domestic law. Non-ratified treaties will have no effect. On 18 June 1997, the Federal Attorney-General in Australia introduced into Parliament the Administrative Decisions (Effect of International Instruments) Bill 1997. The Bill responds to the High Court's 7 April 1995 decision in Minister for Immigration and Ethnic Affairs v. Teoh (1995) 183 CLR 273 by providing that, if there are to be changes to procedural or substantive rights in Australian Law resulting from adherence to a treaty, they will result from Parliamentary and not executive action. Therefore, entering into a treaty will not give rise to 'legitimate expectations' in administrative law that the Executive Government and its agencies will act in accordance with the terms of the treaty, where those terms have not yet been incorporated into Australian Law.66 As for the legislative power of Parliament in Australia in implementing treaties, and its legal source, it is noted that: '[i]n Australia, there is no provision in the Constitution which gives to treaties the force of internal law, but s. 51(29) of the Constitution allocates to the federal Parliament the power to make laws \"with respect to ... external affairs\". In a series of 6 6 However, as of September, 1998, the Bill has not yet been passed and enacted into law. See: 1996-97 The Parliament of the Commonwealth of Australia House of Representatives \"Administrative Decisions (Effect of International Instruments) Bill 1997 ~ A Bill for an Act relating to the effect of international instruments on the making of administrative decisions. 134 cases [for example, (1) InR. v. Burgess; ex parte Henry (1936) 55 C.L.R. 608; (2) In Koowarta v. Bjelke-Petersen (1982) 153 C.L.R. 168; (3) In Commonwealth v. Tasmania (Franklin Dam) (1983) 158 C.L.R. 1] the High Court of Australia has decided that the external affairs power includes the power to enact legislation performing treaty obligations'.67 All of Australia's double tax treaties go into the same law, which is called the International Tax Agreements Act 1953 (hereinafter referred to as 'Act 1953').68 Therefore, every time there is a new tax treaty, the new treaty will be added to the schedule of the 1953 Act by legislative amendment.69 As stated above, international law does not distinguish between agreements identified as treaties and other agreements. Besides, the Australia-Taiwan Agreement looks similar to tax treaties Australia signed with other countries, even though it is unique in being signed by two private sector organizations. Therefore, the Parliament of Australia tried to bring the Australia-Taiwan Agreement into effect by debating and passing it as the Taxation Laws Agreement (International Tax Agreement) Bill 39, an amendment to Act 1953. By examining the following statements (quoted in both the House of Representatives' and the Senates' Official Hansards in Australia), it is fair to say that the goal of improving 6 7 See supra note 2 at 11-8. 6 8 The International Tax Agreements Act 1953 was formerly called the Income Tax (International Agreements) Act 1953. 6 9 Personal communication, on September 12, 1998, Professor Rick Krever, Deakin University, Australia. 135 Australia and Taiwan's trade and investment flows led to the conclusion of the Australia-Taiwan Tax Agreement. For example, in the House of Representatives of Australia, Mr. Latham has noted that: The Taxation Laws Amendment (International Tax Agreements) Bill seeks to provide the legal authority for an international taxation agreement between the province of Taiwan and the nation state of Australia which was signed on 29 May 1996. The agreement is along the lines of the 36 other agreements currently in force with other countries. The purpose of concluding such agreement is to improve trade and investment flows by agreeing which nation has the rights to tax certain types of income. In this manner the threat of punitive double taxation is overcome.70 On the other hand, in the Senate of Australia, Senator Bolkus has noted that: The bill seeks to provide the legal authority for an international taxation agreement between the province of Taiwan and the nation state of Australia, an agreement which was signed on 29 May 1996. The agreement is in line with 36 other agreements currently in force with other countries. The purpose of concluding such agreements is to improve trade and investment flows by agreeing which nation has the right to tax certain types of income. In this manner, the threat of punitive double taxation is overcome.71 More specifically, the Australia-Taiwan Tax Agreement is the mechanism to attain the goal of improving their bilateral trade and investment relations. The legal consequence of having the tax agreement is to protect the two-way flow of economic activities from punitive double taxation. In order to avoid additional complex legal procedures to bring the unique Australia-Taiwan Tax Agreement into effect, both Houses allowed the 0 See supra note 35 at 3364. 7 1 Commonwealth of Australia Parliamentary Debates Senate Official Hansard, (Nos 8 and 9, 1996, 9,10,11,12 September and 16,17,18.19 September 1996) at 3387. 136 agreement to go through the same debate and passage procedure, as used in other tax agreements. The Australia-Taiwan agreement thus became a part of the International Tax Agreement Act 1953 and binding. Since the Australia-Taiwan Tax Agreement has become binding, double taxation by the two countries is avoided. However, there arises an interesting question as to 'how does an agreement between two non-governmental bodies become law or a binding treaty on the tax authorities of Australia and Taiwan'. Since the Australia-Taiwan Tax Agreement was passed by the Parliament of Australia, and is part of the law (the International Tax Agreement Act 1953), it is a binding agreement and the original signatories to the agreement became irrelevant. That is to say, once the Australia-Taiwan Tax Agreement is incorporated into a law (the International Tax Agreements Act 1953), it takes effect and it does not matter who signed the agreement originally, in this case, two private sector organizations not governments. By doing so, Australia intelligently evaded the political dilemma of recognizing Taiwan as a nation state, and successfully resolved the technical problem of'how can an agreement between two non-governmental bodies become law or a binding treaty on the tax authorities of Australia and Taiwan'. 5.2 The Canadian Practice 5.2.1 The treaty-making power in Canada 137 In the case of Canada, '[t]he Canadian Parliament plays no necessary role in the making of treaties. The negotiation and conclusion of a treaty is part and parcel of the conduct of international relations, and the conduct of international relations has always been one of the prerogatives of the Crown'.72 The prerogative powers of the Crown, initially reserved for the Queen under s. 9 of the British North America Act (Now the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, all.), are now exercised by the Governor-General.73 Historically, with respect to the treaty-making power in Canada, the assumption in Constitution Act, 1867 (U.K.), 30 & 31 Vict., c.3, reprinted in R.S.C. 1985, App. II, No.5. (hereinafter referred to as Constitution Act, 1867) was that 'the treaty-making power would remain part of the prerogative powers with respect to the conduct of external affairs, which rested with the Sovereign and were exercised on the advice of Her British Ministers'.74 Thus, 'in 1867 and for approximately the next half-century, the treaty-making capacity in respect of Canada was vested exclusively in the Imperial Government. However, in the period 1871-1923, procedures slowly evolved by which Canadian Government representatives at first participated in negotiations leading to an imperial treaty affecting Canada (Washington Treaty of 1871), then later came to sign such agreements as a member of the Empire (Treaty of Versailles, 1919), and finally signed such agreements on behalf of Canada (Halibut Fisheries Treaty, 1923)'.75 'This 72 See supra note 22 at 162. 73 Ibid. 74 Ibid. 75 Ibid. 138 new procedure was confirmed at the Imperial Conference of 1926; Canada and other dominions were henceforth to be able to negotiate and enter into treaties affecting their own interests and ratification was to be effected at the instance of the dominion concerned. The dominions were also accorded the right to establish direct diplomatic relations with foreign powers'.76 As noted above, the prerogative powers of the Crown, initially reserved for the Queen, are now exercised by the Governor-General. The evolution, however, is :'[i]n the colonial period, the extent of the delegation of the prerogative power was limited by the subordinate position occupied by the colony, but it may be assumed that, upon the achievement of independence those prerogative powers remaining in the Crown passed to the Governor-General, and all such prerogatives are implicitly held by the Governor-General even in the absence of specific delegation'.77 In other words, it is reasonable to conclude that 'the powers required by an independent state in fact reside in that state. In addition, the new Letters Patent issued by the Governor-General in 1947 declare: 2. And We do hereby authorize and empower Our Governor-General, with the advice of Our Privy Council for Canada or of any members thereof or individually, as the case requires, to exercise all powers and authorities lawfully belonging to Us in respect of Canada. ... 3. And We do hereby authorize and empower Our Governor-General to keep and use Our Great Seal of Canada for sealing all things whatsoever that may be passed under Our 76 Ibid. Ibid, at 162 - 163. 139 Great Seal of Canada'. 'From the terms of the Letters Patent, read in conjunction with the 1939 provision for a Great Seal for Canada, it may be concluded that the foreign affairs prerogative is now exercised by the Governor-General'.79 To sum up, in Canada, 'the constitutional authority to conclude international agreements is a part of the royal prerogative and, with respect to treaties, is exercised in the name of Canada by the Governor-General, usually on the advice of the Secretary of State for External Affairs. The prerogative powers in respect of foreign affairs and treaty-making devolved upon the Federal executive at the time when Canada became an autonomous member of the British Commonwealth of Nations. In addition, the delegation of the prerogative powers of the Crown in right of Canada to the Governor-General were clearly confirmed by the Letters Patent of 1947'.80 Therefore, the executive branch of government has the power to make treaties without the necessity of parliamentary authority. There is no legal requirement that the Parliament give its approval to either the signing or the ratification of a treaty.81 ™ Ibid, at 164. 8 1 See supra note 2 at 11-4. In practice, however,'[d]espite the absence of any constitutional obligation to obtain parliamentary approval, it has been the practice of Canadian governments to obtain parliamentary approval of the most important treaties in the interval between signing and ratification'. Ibid, at 11-5. The government will lay the treaty before Parliament and move a resolution in each House approving the treaty. The resolution is not in statutory form, and does not receive royal assent. Of all die treaties which Canada ratified between 1946 and 1966 approximately one quarter were submitted to Parliament for approval. However, there is no practice of securing Parliament's approval of treaties which do not require ratification, and these are now the more common kind of treaty. Ibid. See also supra note 22 at 161 - 168 140 5.2.2 The implementing of a treaty in Canada However, the making of a treaty must be distinguished from the implementing of the treaty. ' [T]he implementing of the treaty [refers to] the performance of the treaty obligations. As soon as a treaty is made and in force, the states that are parties to the treaty come under an obligation in international law to implement the treaty'.82 Therefore, '[implementation is the process of giving effect to a treaty within the national legal system. In Canada, the vast majority of treaties have to be implemented by legislation. This requirement is the result of the constitutional separation of powers. Although the executive in exercise of the royal prerogative may conclude a treaty, it cannot make law. That is the responsibility of the legislature. As a result, a treaty made by the federal government will bind Canada as a country, but its provisions do not affect internal law until they have been implemented by legislation'.83 Put plainly, '[t]he implementation of a treaty, if it involves a change in the internal law of Canada, will require a statute enacted by the Parliament of Canada, or the provincial Legislatures, or both'.84 There are many treaties which cannot be implemented without an 8 2 See supra note 2 at 11-5. See also supra note 22 at 168 - 174. 8 3 See supra note 22 at 168. 8 4 See supra note 2 at 11-4. See also supra note 22 at 174 - 175. See also: R. v. Canada Labour Relations Board (1964), 44 D.L.R. (2d) 440 (Man. Q.B.). In this case, Smith J. said that '[i]f the Agreement of May 5, 1955, between Canada and the United States has the effect of taking away these rights and removing these obligations, it necessarily involves a change in the law of the Territories in so far as these parties are concerned. In my view of the authorities, this would require legislative action by the Parliament of Canada. It has not been suggested that any Act of Parliament has been passed embodying the terms of this Agreement or giving them statutory authority. Though the Agreement was tabled in the House of Commons, as today appears to be the practice with almost all international agreements, such 141 alteration in the internal law of Canada, for example, 'treaties between Canada and other states relating to patents, copyrights, taxation of foreigners, extradition, and many other matters, can often be implemented only by the enactment of legislation to alter the internal law of Canada'.85 There are also many treaties which do not require a change in the internal law of the states which are parties. 'This is true of treaties which do not impinge on individual rights, nor contravene existing laws, nor require action outside the executive powers of the government which made the treaty. For example, treaties between Canada and other states relating to defense, foreign aid, the high seas, the air, research, weather stations, diplomatic relations and many other matters, may be able to be implemented simply by the executive action of the Canadian government which made the treaty'.86 Therefore, it can be concluded that, in Canada, with respect to implementing treaties, not all treaties require a statute enacted by the Parliament of Canada (provided that the subjects of a treaty are within the Classes of Subjects enumerated in section 91 of the Constitution Act, 1867) to bring the treaty into effect. However, '[w]hen implementation of a treaty by legislation is necessary, the federal character of Canada again creates difficulties. The Constitution Acts, 1867 have very little to say about international treaties. Section 132 of the Constitution Act, 1867 vested the federal Parliament with powers for performing the Obligations of Canada or of any action cannot have the effect of changing the law affecting these parties, or of making such changes, if any were intended, enforceable in the Courts'. 8 5 See supra note 2 at 11-5. 142 Province thereof as part of the British Empire toward Foreign Countries, arising under Treaties between the Empire and such Foreign Countries'.87 However, since 'Canada achieved independent status and \"Empire treaties\" are no longer concluded, section 132 of the Constitution Acts, 1867 seems to have become a vestige of the past. Furthermore, Parliament has no special jurisdiction under the residuary clause of section 91 of the Constitution Acts, 1867 to implement treaties concerning matters within provincial legislative jurisdiction [which is under section 92 of the Constitution Act, 1867]. As a result, jurisdiction to adopt laws for the purpose of implementing treaties is determined by the ordinary rules governing the division of legislative powers under the constitution. This was the conclusion of the Privy Council in the well-known Labour Conventions Case,88 which continues to cloud the performance of treaty obligations by Canada with the 89 uncertainties . The result of the Labour Convention Case is that, 'according to Lord Atkin, who wrote the Privy Council's opinion, the federal parliament has the power to implement \"Empire treaties\" under s. 132 [of the Constitution Act, 1867, hereinafter referred to the same], but no power to implement Canadian treaties under s. 132'.90 The key to Lord Atkin's reasoning lies in his assertion that 'for the purpose of the federal distribution of powers 8 7 See: section 132 of the Constitution Act, 1867 (U.K.), 30 & 31 Vict, c.3, reprinted in R.S.C. 1985, App. II, No. 5. 8 8 Canada (Attorney General) v. Ontario (Attorney General), [1937] A.C. 326, [1937] 1 D.L.R. 673 (J.C.P.C.) 8 9 See supra note 22 at 169. 9 0 See supra note 2 at 11-12, 11-13. See also supra note 22 at 169 - 170, 171. 143 there is no such thing as treaty legislation as such. This means that legislation implementing a treaty may not be classified as \"in relation to\" the treaty, but must be classified as in relation to the subject matter with which the treaty deals'.91 Therefore, in classifying a statute which was required to implement a Canadian treaty, 'one was supposed to disregard the fact that the purpose of the statute was to implement a treaty and look to the substantive subject matter of the statute. If the statute which was required for implementation of the treaty related to a matter allocated by s. 91 [of the Constitution Act, 1867] to the federal Parliament, then the federal Parliament would have the power to implement the treaty. If, on the other hand, the statue which was required for the implementation of the treaty related to a matter allocated by s. 92 [of the Constitution Act, 1867] to the provincial Legislatures, then the provincial Legislatures would have the power to implement the treaty. For example, it is held in the Labour Conventions Case that disregarding the existence of the treaties (the labour conventions), the statutes related to conditions of employment in industry, a matter within the class of subjects \"property and civil rights in the province\" which was allocated by s. 92(13) [of the Constitution Act, 1867] to the provincial Legislatures. The result was, therefore, that it was the provincial Legislatures, and not the federal Parliament, which had the power to enact legislation of the kind necessary to implement the labour conventions. The federal legislation was accordingly unconstitutional'.92 91 Ibid. 9 2 Ibid. 144 The reasoning in the Labour Conventions Case is open to criticism and has been criticized as an unduly narrow and literal interpretation of s. 132 to refuse to allow it to continue to cover what is essentially the same subject matter (i.e. Canadian treaties) as Empire treaties. One commentator has noted that even if one agrees with the proposition that s. 132 cannot be extended to cover Canadian treaties, Lord Atkin's conclusion is too sweeping and is difficult to defend. 'Section 132, even if no longer literally applicable to modern treaties, shows by its very existence that treaty legislation is a distinct constitutional \"matter\" or \"value\" under the power-distributing provisions of the Constitution, and that it is no part of provincial legislative power. Once it is accepted that a law may be classified as \"in relation to\" a treaty, as s. 132 seems to insist, then, if s. 132 itself does not apply, the law must fall within the opening words of s.91, which allocate to the federal Parliament the residuary power \"to make laws for the peace, order, and good government of Canada\". [And the] argument that legislation to implement a Canadian treaty is within the federal power over the peace, order, and good government of Canada was in fact accepted by the Privy Council in the Radio Reference (1932) A.C. 304, 312, which was decided shortly before the Labour Conventions Case'.93 It can be concluded that this commentator considers s. 132 can be 'strained' or 'tortured' to cover the Canadian treaties. If s. 132 cannot apply, then the legislation to implement a Canadian treaty is absolutely within the federal parliamentary power over the peace, order, and good government of Canada. However, '[t]his does not mean that Canada is always precluded from signing, ratifying or performing treaties upon subjects within the legislative See supra note 2 at 11-12, 11-13. 145 competence of the provinces. The federal government can consult with the provinces before assuming treaty obligations which would require provincial implementation, and if all provinces (or all affected provinces) agree to implement a particular treaty, then Canada can adhere to the treaty'.94 5.3 Sub-conclusion As in Australia, 'Canada's constitutional law, ... does not recognize a treaty as part of the internal (or \"municipal\") law of Canada. Accordingly, a treaty which requires a change in the internal law of Canada, [for example, treaties between Canada and other states relating to taxation of foreigners], can only be implemented by the enactment of a statute which makes the required change in the law'.95 In these cases, 'treaties can often be implemented only by the enactment of legislation to alter the internal law of Canada'.96 'It follows that the courts of Canada (and of other countries with British-derived constitutions) will not give effect to a treaty unless it has been enacted into law by the appropriate legislative body'.97 9 4 Ibid, at 11-14. See also supra note 22 at 168, 170 - 171. 9 5 See supra note 2 at 11-5. 9 6 Ibid. See also: Macdonald, \"International Treaty Law and the Domestic Law of Canada\" (1975) 2 Dal. L.J. at 307. 9 7 See supra note 2 at 11-6, 11-7. It is noted that 'or, to put the same proposition in another way, the courts will apply the law laid down by statute or common law, even if it is inconsistent with a treaty which is binding upon Canada. In a case where Canada's internal law is not in conformity with a treaty binding upon Canada, then Canada is in breach of its international obligations and may be liable in international law to pay damages or suffer other sanctions, ... The only concession which the Canadian courts have been prepared to make in recognition of Canada's international obligations is to interpret statutes so as to conform as far as possible with international law. But where the language of a statute is clearly and 146 Therefore, if a tax treaty (an agreement) is signed between Canada and Taiwan, in order to bring the treaty into effect, Canada, will also have to follow the procedures that Australia developed to implement the Australia-Taiwan Tax Agreement. In doing so, Canada, can not only successfully avoid the political dilemma of its non-recognition of Taiwan as being a nation state, but can also avoid the double taxation problem. 6. A Hypothetical Treaty Between Canada and Taiwan Having a double taxation agreement between Canada and Taiwan is also suggested by Canadian Trade Office In Taipei. It has been noted that: For Canada, the absence of a Double Taxation Agreement (DTA) and a Foreign Investment Protection Agreement (FIPA) has been raised by Taiwanese and Canadian businesses as impediments to more Taiwanese investment in Canada. These Agreements can help attract investment capital from Taiwan by lowering the non-resident withholding tax from 25% to 10-15 % in treaty countries. Taiwan has DTAs with a number of countries including Australia and New Zealand and investment agreements (FIPA) with the U.S., Malaysia, Argentina, and Indonesia. Australia, New Zealand, Italy and Vietnam are currently negotiating FIPAs. Work is underway in Canada to develop a DTA text.98 For the discussion of which model treaty a hypothetical Canada-Taiwan Tax Agreement would follow, it is worth examining the similarities and differences of three model treaties, namely, the OECD, the U.N., and the U.S. models. unrnistakably inconsistent with a treaty or other rule of international law, then there is no room for interpreting it into conformity with the international rule and the statute must be applied as it stands'. 9 8 See supra note 20 at 21. 147 6. J The Three Model Tax Treaties The 1963 OECD Draft Convention (Model Treaty) is a starting point for resolving double taxation. It has been used to facilitate bilateral negotiation between OECD Member countries and to reach a desirable consistency between their bilateral conventions for the benefit of both taxpayers and national administrations. In addition, the impact of the Draft Convention of 1963 has extended outside the OECD areas. It has been used as a basic document of reference in negotiations between Members, between Member and non-Member countries, between non-Member countries, as well as in the work of other worldwide or regional international organizations in the field of double taxation and related problems.\" In other words, the OECD Model has been widely accepted and used by many countries and has been the most influential model treaty. The U.N. Model was developed to respond to the concern that although existing treaties between industrialized countries sometimes require the country of residence to give up revenue, more often, it is the country of source which gives up revenue.100 Such a pattern may not be equitable in treaties between developing and industrialized countries because income flows are largely from developing to industrialized countries and the revenue 9 9 Ault H. J. , Comparative Income Taxation: A Structural Analysis (Den Hagg: Kluwer Law International, 1997) at 467-468. 1 0 0 See supra note 5 at 2003-2014. 148 sacrifice would be one-sided.101 The U.N. Model represents a compromise between the source principle and the residence principle, and it gives more weight to the source principle than does the OECD Model. The U.N. Model was prepared by the Fiscal and Financial Branch of the Department of International Economic and Social Affairs of the United Nations Secretariat, and it reproduced most of the OECD Model in order to take advantage of the accumulated technical expertise embodied in it. There was no intention to make major changes to the OECD Model.102 That is to say, even though the U.N. Model is intended to protect the developing countries, the U.N. Model basically has followed the OECD Model103. Similarly, the U.S. Model follows the OECD Model as well, but has provided more criteria to resolve the conflict where double taxation arises in consequence of double residence, or as a consequence of taxation in the state of residence and in the state of source or situs.104 6.2 Comparison of the Three Model Treaties with Respect to 'Residence' 6.2.1 Comparison of the OECD Model and the U.S. Model: 101 Ibid. 1 0 2 Ibid, at 2006. 103 Ibid. 1 0 4 See: article 4 of the United States Model Income Tax Convention of September 20, 1996. See also: Diamond W. H. & Diamond D.B., Overseas Press and Consultants, ed., International Tax Treaties of All Nations vol. XL Series B (New York: Oceana Publications, Inc., 1997) at 360-361. 149 In general, for the determination of residence to avoid double taxation, all the models define the term 'resident' as a person who, under the laws of a contracting state, is subject to tax in that state by reason of his/her domicile, residence, place of management, or any other criterion of a similar nature. However, the U.S. Model adds the criterion of 'citizenship' to determine the 'resident' issue. It is important to examine why the U.S. Model has an additional criterion. Firstly, 'citizenship' is the fundamental basis for imposition of U.S. tax , and native born and naturalized U.S. citizens are the same for tax purposes without drawing general distinction. As stated in Section 1 of the United States International Revenue Code: n. Persons and income subject to tax, .... Citizens, generally,.... Sole fact of taxpayer's American citizenship is sufficient basis for imposition of tax by Congress, and no basis exists for drawing general distinction for tax purposes between native born and naturalized citizen of United States, because when latter accepts protection of United States, available to all citizens, he simultaneously accepts same obligations which bind native born citizens.105 Secondly, this criterion is included for the purpose of preventing tax avoidance. Section 877 of the U.S. Internal Revenue Code states: Expatriation to avoid tax. (a) In general. Every nonresident alien individual who at any time after March 8, 1965, and within the 10-year period immediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner provided in subsection (b)....(e) Burden of proof. If the Secretary establishes that it is reasonable to believe that an individual's loss of United States citizenship would, but for this section, result Edwards J.E., Puethmeier J.L. & Heit M.M., United States Code Service, vol. 26 (Lawyers Cooperative Publishing, 1996) at 38. 150 in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual.106 That is to say, if a non-resident alien meets the three elements stipulated in the section, namely, whose loss of citizenship (1) is at any time after March 8, 1965, (2) is still within the 10-year period immediately preceding the close of the taxable year, (3) has for one of its principal purposes the avoidance of taxes (unless proven otherwise, with the burden of proof on the non-resident alien), he/she shall still be taxable regardless of his/her loss of U.S. citizenship. Therefore, the United States will hold expatriated former citizens or long-term residents liable for United States taxes if the presumptive reason for their change of domicile was tax avoidance.107 In many cases, it happens that U.S. citizens move to tax havens such as Bahamas or Bermuda with the principal purpose of tax avoidance. So, for practical purposes, the U.S. government, by employing 'citizenship' as the connecting factor to tax, is able to tax those of its citizens who move to a tax haven. Moreover, treaties make it easier for the U.S. government to enforce former citizens' tax obligation. 6.2.2 Comparison of the OECD Model and the U.N. Model: Ibid, at 584 - 585. See supra note 94 at 351. 151 The U.N. Model utilizes paragraph 1 of article 4 but omits the second sentence of the OECD Model which reads: But this term [resident of a Contracting State] does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.108 According to the commentary of the U.N. Model, the reason is: 'however, that the sentence could have a considerably broader impact. If one of the Contracting States taxed income solely when it arose from domestic sources, and did not tax income from foreign sources, the inclusion of the second sentence in any convention to which it was a party might result in all residents of that country being characterized as non-residents for the purposes of the convention and as a result being deprived of its benefits. The sentence was consequently omitted from the United Nations Model'.109 For example, article 2 of the Taiwan Income Tax Law reads: For any individual having income from sources in the Republic of China, consolidated income tax shall be levied in accordance with this law on his income derived from sources in the Republic of China.110 IU!i Diamond W.H., Diamond D.B., Overseas Press and Consultants, ed., International Tax Treaties Of All Nations vol. XXV Series B (New York: Oceana Publications, Inc., 1992) at 546-547. 1 0 9 See supra note 5 at 2055-2056. n o Industrial Development and Investment Center, Income Tax Law (in Taiwan), trans. Lee & Li Attorneys-at-law (Taipei: Industrial Development and Investment Center, MOE A, 1995) at 1. 152 Taiwan only imposes tax on the individual (who is qualified as a Taiwan resident for tax purposes)111 on his/her income from domestic sources, not on foreign-source income. The potential impact mentioned in the U.N. Commentary would occur in this situation and Taiwan would be deprived of tax benefits. 6.2.3 Comparison of the U.S. Model and the U.N. Model The U.S. Model has more criteria to determine 'the resident of a Contracting State', for example, the criteria of'citizenship' and 'place of incorporation' (in business income tax), compared to the U.N. Model. The U.S. Model adds subparagraphs (a)-(d) in paragraph 1 of article 4 to clarify the concept of residence: (1) Subparagraph (a) provides that 'a person who is liable to tax in a Contracting State only in respect of income from sources within that State will not be treated as a resident of that Contracting State'112 for purpose of the U.S. Model. With respect to this, the U.S. Model follows the OECD Model, which favours the capital exporting nations. 1 1 1 This conclusion comes from comparative analysis of the two paragraphs in article 2 of the Income Tax Law of Taiwan which states that '[1] For any individual having income from sources in the Republic of China, consolidated income tax shall be levied in accordance with this Law on his [her] income derived from sources in the Republic of China. [2] Unless otherwise provided in this Law, in the case of an individual who is a nonresident in the Republic of China but who has derived income from sources in the Republic of China, income tax payable by him [her] on all such income shall be withheld and paid at the respective sources'. In short, the second paragraph is applied to non-resident situations, and the first paragraph to resident's. Ibid. See also: Chang J.D., Income Tax Law (in Taiwan) (Taipei: Wu-nan Publishing Company, 1996) at 29. (In Chinese). 1 1 2 See supra note 94 at 423. 153 (2) Subparagraph (b) provides that 'certain tax-exempt entities such as pension funds and charitable organizations will be regarded as residents regardless of whether they are generally liable for income tax in the State where they are established'.113 The inclusion of this provision is intended to clarify the generally accepted practice of treating an entity that would be liable for tax as a resident under the internal law of a state, except for specific exemptions from tax as a resident of that State for purposes of paragraph 1. (3) Subparagraph (c) specifies that 'a qualified governmental entity is to be treated as a resident of that State'.114 The purpose of including the rule in the U.S. Model is to make this understanding explicit115. (4) Subparagraph (d) addresses 'special problems presented by fiscally transparent entities such as partnerships and certain estates and trusts that are not subject to tax at the entity level'.116 Subparagraph (d) provides that an item of income derived through such fiscally transparent entities will be considered to be derived by a resident of a Contracting State if the resident is treated under the taxation law of the State where he is resident as deriving the item of income. These subparagraphs are not included in the U.N. Model.117 113 Ibid. U4lbid. U5lbid. U6Ibid. 1 1 7 See supra note 94 at 422-426. 154 Aside from that, in paragraph 3, the U.S. Model seeks to settle dual-residence issues for companies. Under paragraph 3, the residence of such a company will be in the Contracting State under the laws of which it is created or organized. Dual residents other than individuals or companies such as trusts or estates are addressed by paragraph 4 of the U.S. Model. If such a person is, under the rules of paragraph 1, resident in both contracting states, the competent authorities shall seek to determine a single state of residence for that person for purpose of the U.S. Model. There are no similar provisions included in the U.N. Model for such situations. 6.3 Comparison of Treatment of Capital in the Three Model Treaties 6.3.1 OECD Model: favours the capital exporting nations Article 4 of the OECD model, with respect to the individual's tax liability in a contracting state, does not include any person who is liable to tax in that state in respect only of income from sources in that state or capital situated therein. That is to say, the country of residence of an investor is often favoured over the country in which the taxpayer has placed his/her investment funds. To put it plainly, the OECD Model favours the capital exporting nations. 6.3.2 U.S. Model: favours the capital exporting nations 155 Basically, article 4 of the U.S. Model reproduces article 4 of the OECD Model. In other words, the U.S. Model also favours the capital exporting nations. 6.3.3 U.N. Model: favours the capital importing nations Article 4 of the U.N. Model basically reproduced the OECD Model but with one substantive change, namely the deletion of the second sentence of paragraph 1 which reads: '[B]ut this term [resident of a Contracting State] does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein'. That is to say, the country of revenue source where the taxpayer has placed his/her investment funds is often favoured over the country of residence of an investor. One commentator has noted that '[Developing countries have not found that the OECD models are suitable to their tax policies, as, from their perspective, the OECD overemphasizes the right to tax in the state of residence and does not give enough room to the state of [revenue] source to impose taxation. This led to the publication by the United Nations of its model treaty in 1984'.118 It can be concluded that the U.N. Model is biased more to the benefit of capital importing nations. 6.4 Hypothetical Canada-Taiwan Tax Treaty (Agreement) — What Model to follow? Ward D. A., \"Canada's Tax Treaties\" (1995) 43 Canadian Tax Journal 1719 at 1720. 156 Relative to Taiwan, Canada is an immigrant-accepting119 and capital importing country120. The continuous flow of capital from Taiwan to Canada has made Taiwan the nation exporting capital to Canada. The business immigration program in Canada, introduced 10 years ago, was designed to realize the economic goals of immigration policy and includes three business classes, composed of entrepreneurs, investors, and the self-employed.121 Under the terms of the investor program, according to Statistics Canada, the 1 1 9 The number of Taiwanese Immigrants: before 1961: 40, 1961-1970: 1320, 1971-1980: 4515, 1981-1990: 11275, 1991-1996: 32140. In addition, up to 1986, the population was 7210, and up to 1991, it was 17770, while up to 1996 the whole population increased up to 49290. The increasing number of Taiwanese immigrants illustrates that more and more Taiwanese emigrants choose Canada as their favoured new home, see: Statistic Canada, Nation Services Edition 1, Census 1996, 1997. (CD ROM). In addition, there are more and more Taiwanese immigrants to Canada: for example, in recent years, the numbers of the Taiwanese Immigrants are: 7411 (in 1994), 7691 (in 1995), and 13165 (in 1996). see: Citizenship and Immigration Canada, \"Immigration - Top Ten Source Countries\", Facts and Figures 1996, at 8. 1 2 0 The capital flows between Canada and Taiwan in the last 7 years, provided by the statistics, are: in 1990, Canadian exports 788 (CND$ million), imports 2,109 (balance: -1320); in 1991, Canadian exports 1,049, imports 2,212 (balance: -1162); in 1992, Canadian exports 953, imports 2,470 (balance: -1517); in 1993, Canadian exports 1,012, imports 2,625 (balance: -1613); in 1994, Canadian exports 1,706, imports 2,780 (balance: -1,074); in 1995, Canadian exports 2,180, imports 2,792 (balance: -612); in 1996, Canadian exports 1,847, imports 2,863 (balance: -1016). See supra note 20 at 6. See also: section 3.4 in this chapter. 1 2 1 Three business immigrant categories, namely, entrepreneurs, investors, and self-employed persons, make up Canada's business immigration program. The definitions of and different criteria for each of the three business immigrant categories are provided in section 6 of the Immigration Act. (1) Entrepreneurs: the entrepreneur category is for those who wish to actively manage a business in Canada. To immigrate as an entrepreneur, a person must be able to demonstrate to immigration officials that he or she intends and has the ability to establish, purchase or make a substantial investment in a business in Canada that will make a significant contribution to the economy. The business must create or continue at least one job in Canada for a Canadian citizen or permanent resident other than the entrepreneur and dependents. The applicant must also intend and have the ability to provide active and ongoing participation in the management of the business. (2) Investors: applicants under the investor program must make an investment through approved offerings. To be eligible as an investor, a person must have a proven track record in business and have accumulated a personal net worth of CND$500,000 or more. Investors have the option of subscribing in any one of three investment levels: (a) Tier I: those provinces (including: Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island, Manitoba, Saskatchewan, Alberta, Yukon and the Northwest Territories) with less than 10% of landed business immigrants, require a minimum investment of CND$250,000 for a minimum holding period of five years; (b) Tier II: those provinces (including: British Columbia, Ontario and Quebec) with 10% or greater of landed business immigrants, require an investor to 157 investors shall invest for five years in small and medium-sized businesses — the minimum investment required is $ 350,000 (Canadian dollars) in B.C., Ontario, and Quebec, and the minimum investment in the other provinces is $ 250,000. Therefore, it can be concluded that, with the minimum investment requirement, Canada, relative to Taiwan, is the capital importing country, and the capital flowing into Canada is increasing. According to the latest immigration overview provided by Citizenship and Immigration Canada, the numbers of principal applicants for business immigration from Taiwan were: 1154 (in 1994), 914 (in 1995), and 1181 (in 1996). The numbers of Taiwanese business immigrants and accompanying dependents in the recent years indicate that Taiwan is the second greatest source country of business immigration.122 With respect to the economic have a net worth of CND$500,000 and make a minimum investment of CND$350,000 for a minimum holding period of five years; and (c) Tier III: in all provinces, there is also a CND$500,000 investment, for a minimum holding period of five years, requiring an investor to have a net worth of CND$700,000, which permits a guarantee by a third party. (3) Self-Employed Persons: a self-employed person is an immigrant who intends and has the ability to establish or purchase a business in Canada that will create employment opportunity for that person, and will make a significant contribution to the economy, or the cultural or artistic life of Canada. Proven ability is shown by applicants who have previous business or cultural experience and sufficient financial resources. See: section 6 of the Immigration Act. See also: Citizenship and Immigration Canada, You asked about... immigration and citizenship (Ottawa: Public Affairs Branch, Citizenship and Immigration Canada, 1997) at 26 - 27. The majority of business immigrants are entrepreneurs and investors. The number of self-employed remains small by comparison. Consequently, the impact of the entrepreneur and investor groups on the Canadian economy is much larger than that of the self-employed. For the details and the statistics from 1986-93, see: Kunin R. & Jones C.L., \"Business Immigration to Canada\" in DeVoretz D.J., ed., Diminishing Returns — The Economics of Canada's Recent Immigration Policy (CD. Howe Institute, Toronto; The Laurier Institution, Vancouver, 1995) at 269, 270. (table 1) (Appendix II). For the statistics from 1994-1996, see: Citizenship and Immigration Canada, \"Immigration by Class\" (1997) Facts and Figures 1996, at 3. (Appendix III) 1 2 2 Statistics on the amount of capital that the Taiwanese immigrants brought in are not available. However, it is also hard to estimate. It is not just a matter of using the minimum investment capital times the number of business immigrants from Taiwan only. The reasons are: (1) some Taiwanese business immigrants, even though they are required to invest the minimum capital in Canada, instead of bringing capital from overseas, may invest by taking a loan from a bank in Canada. In other words, the capital was not actually brought in by them. Nevertheless, in contrast, (2) some Taiwanese immigrants may bring in more capital than the minimum investment requirement. 158 power of Taiwanese immigrants, they not only contribute to the Canadian economy via investment, their job creation and their contribution to aggregate GDP, but also by their daily purchases in the local market.123 One comment on the phenomenon of immigration flow is: The United States and Canada are traditional immigration countries whose present-day cultures reflect their cosmopolitan heritages, and whose accomplishments as societies owe a great deal to immigrants contributions.124 Because of the economic relations between Canada and Taiwan, it could be inferred that: both Canada and Taiwan would prefer to have the treaty follow the OECD Model. The reasons are as follows. 6.4.1 Canada is one of the OECD member countries Canada is one of the OECD member countries and almost all of Canada's existing tax treaties are based on the provisions of one or other of the versions of the OECD Model. Thus, it is very likely that Canada would prefer to have the hypothetical treaty (or agreement) between Canada and Taiwan follow the OECD Model. The main purpose of the OECD Model is to provide a means of uniformly settling the most common problem arising in the field of international judicial double taxation, which is the imposition of identical (or comparable) taxes by two countries on the same taxpayer in respect of the See: Kunin R. & Jones C.L., \"Business Immigration to Canada\" in DeVoretz D.J., ed., Diminishing Returns — The Economics of Canada's Recent Immigration Policy (CD. Howe Institute, Toronto; The Laurier Institution, Vancouver, 1995) at 279, 275. 1 2 4 Ucarer E.M. & Puchala D.J., ed., Immigration Into Western Societies: Problems and policies (London: Pinter, 1997) at 340. 159 same subject matter and for identical time periods. Judicial double taxation arises because most countries exercise jurisdiction to tax on at least two bases: source of income and residence of the taxpayer. OECD member countries are generally expected to conform to the Model Treaty when negotiating bilateral tax treaties. Canada is a member of the OECD and follows the model treaty as closely as possible125. For example, in Canada, treaties are put into force by an implementing act which typically provides that the treaty will prevail over domestic law in the case of conflict. 6.4.2 OECD Model is the most widely-used model treaty International judicial double taxation, and its harmful effects on the exchange of goods and services and movements of capital and persons, was first discussed in the 1963 Draft OECD Convention (i.e.: OECD Model). The existence of the Draft Convention has made it possible to facilitate bilateral negotiation between OECD Member countries and to reach a desirable harmonization between their bilateral conventions for the benefit of both taxpayers and national administrations. In addition, the impact of the Draft Convention of 1963 has extended outside the OECD areas; it has been used as a basic document of reference in negotiations between Member and non-Member countries and even between non-Member countries as well as in the work of other worldwide or regional international organizations in the field of double taxation and related problems.126 Thus, it is more likely that Canada would choose to have the hypothetical treaty follow the OECD Model. 1 2 5 Krishna V., Canadian International Taxation, ed. by Connell D.J., Baker A. & Easson A. (Toronto: Carswell, 1995) at 2-16, 2-17. 1 2 6 See supra note 5 at 1521-1522. 160 Canada signed a treaty in 1980 with the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. The treaty between Canada and South Korea was based on the OECD Model, as are almost all Canada's other existing tax treaties. Since the economic situations of Taiwan and South Korea are very similar: they both are regarded as one of the \"Four Small Asian Dragons\", and, next to Hong Kong and Taiwan, South Korea is the third major source country with respect to business immigration to Canada, it could be inferred that the treaty (or an agreement) between Canada and Taiwan should follow the OECD Model as well.127 Even though Canada might prefer to have the treaty follow the OECD Model, in the comparative analysis, it can also be concluded that Canada would accept that the treaty allow more revenue source based taxation as do the United States and Australia, which are also OECD member countries. For example, in treaties with developing countries, the United States, in the past, has been willing to accept substantially more revenue source based taxation than is foreseen in the model treaty.128 In addition, Australia gives greater emphasis to revenue source taxation than the OECD Model given that it is a substantial net capital importer.129 In this respect, since Canada and Australia are both the immigrant-1 2 7 Fong V., \"Visa-for-dollars plan hits trouble, Fund Failures cost investors millions\", The Financial Post (21, May 1991). With respect to the source countries of business immigrants to Canada, according to the latest statistics provided by Citizenship and Immigration Canada, (from 1994 to 1996), Hong Kong is ranked the top source country, Taiwan is the second source country, and the next one is South Korea. See: Appendix IV, Citizenship and Immigration Canada, \"Business Immigration - Top Ten Source Countries\" (1997) Facts and Figures 1996 at 55. 1 2 8 See supra note 99 at 476-477. 161 accepting and capital importing countries, it could be inferred that Canada would accept that the treaty provide more revenue source based taxation as does Australia.130 The adjustment does not necessarily favour Taiwan. The details will be discussed in paragraph 7. Negotiation. So, even though Canada, in this case, is the capital importing country, and the OECD Model treaty is not biased for Canada's benefit, with respect to the authority to tax provided in Article 4 of the OECD Model, it is still legitimate to infer that Canada would choose to have the treaty follow the OECD Model. 6.4.3 Taiwan would prefer to have the treaty follow the OECD Model Taiwan is generally regarded by the international community as a developed or nearly developed country. Most of the developing countries usually take a different view of tax treaties. For example, some OECD member countries, which are developing countries, accept the first idea, namely, that the country of residence may eliminate double taxation either through a foreign tax credit or through exemptions for foreign source income. They have not, however, generally accepted the second idea, namely, reduction of the revenue source country's jurisdiction to tax. Indeed, some developing countries contend that jurisdiction to tax at revenue source should be exclusive and not shared.131 1 3 1 See supra note 125 at 2-19. 162 To illustrate the reasons why Taiwan would prefer to have the treaty follow the OECD Model, some hypothetical scenarios are presented. (1) Mr. X, a Taiwanese businessman, has 100 units of assets, 75 units are invested in Canada, in order to meet the minimum investment requirement in Canada as a business class immigrant, and 25 units are left in Taiwan. In this case, once Mr. X becomes a business class immigrant and therefore a tax resident in Canada, Canada gets the authority to tax him on the income of the 75 units of assets. Since Taiwan does not impose tax on foreign-source income, for maximum tax return, Taiwan would like to utilize the U.N. Model to collect tax on the revenue generated by the 25 units invested in Taiwan. (2) Ms. Y, on the other hand, is a successful Taiwanese businesswoman, who does not want to leave Taiwan. However, she is quite willing to make investments outside of Taiwan. Of her 200 units of wealth, she has chosen to invest 100 units in Taiwan, and 100 units in Canada. In this situation, Taiwan, for maximum tax return, would like to choose to use the OECD Model which favours the capital exporting nation in order to collect tax on the revenue generated in Canada. Thus, it is more to the advantage of Taiwan to utilize the OECD Model in the treaty with Canada. In the scenario provided above, Taiwan can get a net gain of 75 units of assets to subject to tax, if Taiwan chooses to follow the OECD Model instead of the U.N. Model. 163 [The result comes from the formula: 100 units (from Ms. Y, according to the OECD Model) minus 25 units (from Mr. X according to the U.N. Model.).] (3) In another example, Mr. Z is a business class immigrant to Canada and a tax resident in Canada. He has 175 units in wealth: 75 units he invests in Canada, 35 units he leaves in Taiwan, and 65 units he invests in a third country A, with which Canada has already a tax treaty. Thus, the 100 units investment income would be regarded as producing world-wide income from Canada's perspective. With respect to the 65 units invested in country A, whether Canada or country A has the authority to tax the income depends on the treaty between Canada and country A. Similarly, the tax consequences of the 35 units depends on whether there is a treaty between Canada and Taiwan. If there is no treaty between Canada and Taiwan, due to the different connecting factors in their domestic laws, the income generated from the 35 units may be subjected to double tax.132 To sum up the tax consequences on Mr. X, Ms. Y, and Mr. Z with respect to the tax treaty, if Taiwan chooses to utilize the U.N. Model, Taiwan will have 60 units subject to tax (25 units from Mr. X plus 35 units from Mr. Z), but lose 100 units subject to tax (from Ms. Y). More Taiwan people are like Ms. Y than Mr. X and Mr. Z. Thus, Taiwan, in order to get the maximum tax benefit, will likely insist on having the treaty follow the OECD Model. 1 3 2 The connecting factor to subject income to Canadian income tax is \"residence\", however, in Taiwan, it's domestic source of income. With respect to this, the income generated from the 35 units will be subjected to both Canadian and Taiwanese income tax. 164 Since the business status between Canada and Taiwan is almost equal133, it can be concluded that it's not likely that Canada and Taiwan would insist on having the treaty follow the U.N. Model, since U.N. Model is designed to protect the tax benefits of the revenue source countries, which are generally the less developed countries, when they are negotiating a treaty with the developed countries. Most countries tend to be consistent in using a specific model in order to enable the potential treaties be more predictable. In so doing, it also helps achieve uniformity in the treaties signed with all other countries. As most Canadian treaties follow the OECD Model, it could be inferred that Canada will be consistent in having the treaty between Canada and Taiwan follow the OECD Model, even though Canada would lose some tax revenue from the OECD Model. 7. Negotiation Even though it is likely that both Canada and Taiwan would have the hypothetical treaty follow the OECD Model, negotiations of some deviations from the OECD Model are still to be expected. The possible negotiations and their respective concerns and benefits underlying the negotiation will now be discussed. See: section 3.4 in this chapter regarding the economic ties and flows between Canada and Taiwan. 165 As mentioned above, Canada might prefer to have the hypothetical Canada - Taiwan treaty follow the OECD Model. However, Canada might negotiate to adjust the treaty provisions to protect its revenue benefit. Canada might negotiate that the treaty be adjusted toward the U.N. Model, which is biased more to the benefit of capital importing nations in such a way that the tax rights of Canada are elevated.134 A treaty to avoid double taxation is not only for the purpose of determining which Contracting State has the authority to tax but is also to clarify the different treatment of individuals and business entities.135 In the Canada - South Korea treaty, Canada, in order to increase its tax rights, negotiated that the second sentence of Article 4, paragraph 1, of the OECD Model be omitted. This was done because the rest of the article is intended to apply only to persons who are resident in one of the Contracting States (in this case, South-Korea) and are liable in the other state (Canada) only on their income earned or gained from Canadian source. Canada, in order to obtain the authority to tax these people on their Canadian source income, negotiated that the treaty be adjusted more toward the U.N. Model. Moreover, it should not be concluded that the treaty intended to permit 'entities' that are taxable only on source-based income (in Canada) to claim benefits of the treaty as residents.136 Even though the Canada - South Korea treaty was based on the OECD Model, Canada required that the second sentence of Article 4, paragraph 1 of the OECD Model be omitted in order not to let the benefit defined in the treaty be too broad.137 Similarly, Canada might 1 3 4 The reason can be referred back to 6.2.2 Comparison of the OECD Model and the U.N. Model. 135 See supra note 125 at 11-28, 11-29. 1 3 6 Ibid \"'Ibid 166 negotiate to adjust the hypothetical Canada - Taiwan tax treaty from the provisions mentioned above in the OECD Model. One comment on the Australia - Taiwan Treaty signed in May, 1996 says: '[M]ost of Australia's double-tax agreements follow the broad parameters of the OECD treaty. In some treaties with less developed countries, however, Australia has sometimes agreed to some provisions found in the U.N. Model treaty, partly in deference to the interests of those countries and partly because the government hopes the revenue costs of provisions similar to those in the U.N. treaty will be countered by political goodwill gains.'138 Canada is of comparable international status to Australia for the purposes of a tax treaty, in that they are two of the major immigrant-accepting and capital importing countries.139 In the light of this, Canada could be expected to act in the same manner as Australia in its treaties signed with less developed countries to gain some political goodwill. However, Taiwan is a country exporting capital to Canada. To adjust the treaty between Canada and Taiwan more toward the U.N. Model would hot necessarily be to the benefit of Taiwan. The reasons could be explored as follows. Krever, R., \"Australia-Taiwan tax treaty: pragmatism prevails\" , (1997) 71, The Australian Law Journal) at 102. 1 3 9 Canada's and Australia's political traditions are similar. In addition, they both use the common law systems where precedent is a very important influence on the direction of treaties. 167 Generally, capital exporting countries (in this case, Taiwan) favour low (or nil) taxes imposed on interest, royalties or dividends by the revenue source country (in this case, Canada) to maximize the room for taxation by the country in which the recipient of these payments resides. Capital importing countries, on the other hand, generally seek high revenue source country taxation of interest, royalties, and dividends. Similarly, the capital exporting country favours long periods as the basis for finding that an operation constitutes a permanent establishment, while the capital importing country seeks shorter qualifying periods to enable the site country to tax profits from shorter term projects140. According to Appendix V 1 4 1 , in the Australian treaty with Taiwan, 'there are a number of interesting aspects due to negotiations and concessions between the two jurisdictions. Firstly, the period for a construction, installation or assembly project to be treated as a permanent establishment is six months, as prescribed by the U.N. Model and half that required by the OECD Model. It may be that the six-month period was a concession by Taiwan, as it is quite possible that there are more projects operated in Australia by Taiwan companies than vice versa'.142 Secondly, the Australia-Taiwan treaty provides for the 1 4 0 See supra note 138 at 103. 1 4 1 Appendix V is the chart provided by the author of the article \"Australia-Taiwan tax treaty: pragmatism prevails\" mentioned in die previous footnote. The chart compares the provisions of the O E C D Model, the U . N . Model and the Australian treaties with the People's Republic of China and with Taiwan with respect to the five key issues in the text. By analyzing this chart, it can be concluded mat the Australia-Taiwan Tax Agreement basically followed the OECD Model, but was adjusted more toward the U . N . Model. For example, the time required for consultancy to be treated as a permanent establishment (PE), in the Australia-Taiwan Tax Agreement, is 120 days, which is even shorter than that of 180 days under the U . N . Model. On the contrary, under the OECD Model, there is no PE for consultancy services, which is to the benefit of capital exporting countries. 1 4 2 See supra note 138 at 103. 168 provision of consultancy services to be treated as a permanent establishment if the services are provided over a relatively short period of time (120 days) compared to the U.N. Model norm of 183 days, or compared to the OECD Model, which provides no permanent establishment provision for consultancy services at all.143 Thirdly, the Australia- Taiwan treaty provides for higher than normal withholding tax rates with respect to dividends and royalties.144 Generally, the above mentioned concessions were closer to the U.N. Model, and could be understood to provide more benefits to Australia than to Taiwan. Canada and Australia are two of the favoured countries that the Taiwanese would choose to be their new homes. In addition, both Canada and Australia are capital importing countries. Therefore, both the countries are closely related to Taiwan in terms of the cultural, political and economic ties due to the immigration and trading factors. According to the precedent of the Australia-Taiwan treaty, it could reasonably be inferred that the concerns and benefits underlying the existing Australia - Taiwan treaty and the hypothetical Canada - Taiwan treaty should be very much alike. It is fair to predict that the treaty between Canada and Taiwan would be based on the OECD Model but would be adjusted toward the U.N. Model to be more beneficial to Canada. 8. Relative Strength of Canadian and Taiwanese Negotiation Positions 1 4 3 Ibid, at 103. 144 Ibid. 169 Capital flow has had much impact on economic, social, and political arenas in developed and developing countries. Tax consequences of the capital flow between Canada and Taiwan are not currently covered by a treaty. The situation needs to be dealt with at the bilateral level, in discussions and negotiations through foreign policy dialogues aimed at the conclusion of bilateral agreements covering exchange of information, uniformity of tax benefits, trade policy etc. Theoretically, a fair negotiation shall conform to the global standards while being adjusted to the special concerns between two Contracting States. Due to different political concerns and economic benefits, there may also be a conflict. The conflict should be resolved by some degree of compromise and concessions. If more Taiwanese continue to be interested in investing, doing construction, installation or assembly projects, and consulting activities in Canada than vice versa, then the expected concessions will be more likely to benefit Canada than Taiwan. Thus, the investment by individuals from Taiwan will likely be more acceptable and have more access to the Canadian market. Consequently, Canada would be able to use access to the market as a vehicle to negotiate better benefits in the hypothetical treaty between Canada and Taiwan. 9. Conclusion With the signing of the treaty, the double taxation problem could be solved. Those who are honestly fulfilling their obligations could thus get tax credits, and be entitled to the benefits provided in the tax treaty. Due to the exchange of information obligations of both 170 contracting states provided in a treaty, those who want to evade tax by taking advantages of the treaty gap between the two jurisdictions, will understandably be against the treaty. In short, the impact of this treaty is the enforcement of tax obligations between Canada and Taiwan, to achieve the equity principle of taxation. 171 Chapter V CONCLUSION The goal of writing this thesis is to explore the potential of having a tax treaty (or agreement) between Canada and Taiwan to avoid double taxation, given that a treaty is probably the most efficient mechanism to solve the problem. Double taxation should be avoided due to its harmful effects on the movement of capital and persons, the expansion of trade in goods and services, and because it seriously impedes the widening of economic relations.1 Therefore, countries negotiate bilateral tax treaties to prevent double taxation. The focus of this thesis is on individual income tax issues, even though most provisions in a treaty are about corporate income tax. The reason is that I believe individual income tax is more important than it appears to be in tax treaties because in most countries the tax system relies heavily on individual income tax for revenues rather than corporate tax. The thesis starts with discussion of how double taxation of individual income by Canada and Taiwan comes about, in order to identify the root of the double taxation problem. Due to the different connecting factors used by Canada and Taiwan to subject individuals to tax, the two jurisdictions both have the authority to impose tax on an individual on the same income, and thus double taxation occurs. In Taiwan, individual income tax will be imposed on the individual's income earned or gained in Taiwan (domestic source income); 1 Paul R. McDaniel, Colloquium on NAFTA and Tradition: Formulary Taxation in the North American Free Trade Zone, 49 Tax L. Rev. at 699. 172 however, in Canada, the individual will be subject to tax on his/her worldwide income as long as he/she is regarded as resident in Canada.2 Due to the lack of a treaty between Canada and Taiwan, an individual who is subjected to the domestic income tax laws of the two jurisdictions will end up paying tax on the same income in each jurisdiction. Comparative studies are made in chapter two, to distinguish between the two different connecting factors, the income source principle used in Taiwan and the residence principle used in Canada. The income source principle is contained in the Territorial System3, which means that anyone who stays in the territory, regardless of whether he/she holds citizenship of the country or is resident in it, shall be subject to tax.4 On the contrary, the resident principle is contained in the Personal Link System.5 The Personal Link System, with different criteria in determining the personal link, contains both the 'citizenship' (or 'nationality') and the 'residence' connecting factors.6 'Citizenship' is used in the United States (U.S.) to identify the people liable to pay income tax in the U.S.. In this case, whoever holds citizenship of the country shall be subject to tax, regardless of whether 2 For the income source principle used in Taiwan to subject individuals to income tax, see: Article 2 of the income tax law of Taiwan (the Republic of China). See also: Industrial Development and Investment Center, Income Tax Law (in Taiwan), trans. Lee & Li Attorneys-at-law (Taipei: Industrial Development and Investment Center, MOEA, 1995) at 1. For the resident principle used in Canada to subject individuals to income tax, see: subsection 2(1) of the Act. 'Residence' is the principal connecting factor used in Canada. Specifically, income tax liability in Canada is based on residence, in conjunction with source of income. Canadian residents are taxable on their worldwide income, and non-residents on income derived from sources in Canada. For non-Canadian residents' tax liability, see: section 2(3) of the^cr. 3 Wang J.S., Taxation Law (in Taiwan) (Taipei: Wen-sheng Publishing Company, 1996) at 39. (In Chinese). See also: Chang J.D., Income Tax Law (in Taiwan) (Taipei: Wu-nan Publishing Company, 1996) at 20, 29. (In Chinese). 4 Ibid 5 Ibid. 6 Ibid. 173 he/she is a resident in the country.7 Residence is the principal connecting factor which is used for Canadian income tax. The residence connecting factor will subject the individual to tax by determining whether he/she is resident of that country, in accordance with the country's income tax law. The purpose of making the comparative analysis of the Personal Link System and the Territorial System is to get a whole picture of the tax systems in both Canada and in Taiwan, and to enhance understanding of the double taxation problem between the two jurisdictions. The Foreign Reporting Rules highlight the dilemma of Taiwanese immigrants, which is whether to stay in Canada to keep their right to permanent residency, or to leave to avoid Canada's high tax rates and the double taxation problem between Canada and Taiwan. Since the Rules were incorporated in the Act in 1997, they have been affecting many immigrants' decision about whether to stay in Canada or to leave. Under the Act, all Canadian residents are required to disclose specific categories of offshore properties — both tangible and intangible property must be declared, including shares in a non-resident corporation, interests in a non-resident trust or partnership, and indebtedness owned by a non-resident person, if their respective original costs exceeded CND$100,000.8 Canadian 7 See: section 1 of the United States International Revenue Code. However, the exclusive adoption of the Personal Link System is rare. In the U.S., a combination of the two systems (the Personal Link System and the Territorial System) is utilized. In other words, in the U.S., citizenship is the principal connecting factor for tax purposes and residence is another major connecting factor. See: Ault H.J., Comparative Income Taxation: A Structural Analysis (Den Hagg, the Netherlands: Kluwer Law International, 1997) at 137. Specifically, both U.S. citizens and any individuals who are permanent residents in the U.S. will be taxed on their worldwide income. It can be concluded that the U.S. tax system is a blend of Personal Link System and Territorial System. 8 See: footnote 4 in chapter 3. 174 residents are required to use Form Tl 135 to file an information return with Revenue Canada reporting those foreign properties. With respect to offshore holdings, Canadian residents must also file information returns in three other circumstances: (1) when they own an interest in a foreign affiliate9 (using Form Tl 134); (2) when they transfer or loan property to a non-resident trust10 (using Form Tl 141) and (3) when they receive a distribution from a non-resident trust (using Form Tl 142).11 As explained by Canada's Auditor-General Denis Desautels, the Rules require Canadian residents to report their foreign assets. Their purpose is to give Revenue Canada a more complete picture of taxpayers' offshore investments so it can verify their tax returns.12 It can be concluded that Revenue Canada has established rules and will enforce them and look closely, for tax purposes, at the worldwide income of Canadian residents13, which, of course, includes immigrants. The Rules were originally intended to commence on January 1, 1996. However, the time for reporting foreign assets has been extended again and again14, mainly due to the voices of those who oppose the Rules. Some commentators have noted that the Rules are inappropriate, and the problems include the following: (1) the foreign reporting rules are a 9 See: footnote 6 in chapter 3. 1 0 See: subsection 233.2 (4) of the^4c/. 1 1 See: subsection 233.6 (1) of the,4c?. See also: footnote 8 in chapter 3. 1 2 See: footnote 9 in chapter 3. 1 3 Hogg P.W. & Magee J.E., Principles of Canadian Income Tax Law (Ontario: Carswell, 1997) at 112. 1 4 See: footnote 5 in chapter 3. 175 violation of privacy15; (2) they are a forerunner of a wealth tax16; (3) they unfairly target wealthy new Canadians and drive wealthy immigrants out of Canada17; (4) the $100,000 limit is too low; it discourages foreign investors.18 It has been suggested that an alternative should be sought to improve compliance and increase revenue.19 From my perspective, the Rules are not a cure all for tax evasion. The Rules are aimed to prevent Canadian residents from evading tax.20 In other words, Revenue Canada's main aim is to stop the flow of billions of dollars each year from Canadian residents and large Canadian corporations into overseas tax havens. However, one commentator has noted that, then Revenue Minister Jane Stewart was probably being excessively optimistic in claiming that '[w]e will make sure that all Canadians report income earned outside the country'.21 This is especially true 'if one avoids investing in countries, or in the type of assets, where automatic exchanges of information between tax authorities make it difficult to conceal such income, then tax evasion becomes relatively easy'.22 Besides, in countries where there are strict bank secrecy laws, the goal of the Rules is hard to attain. 1 5 See: subsection 2.1.1 in chapter 3. 1 6 See: subsection 2.1.2 in chapter 3. 1 7 See: subsection 2.1.3 in chapter 3. 1 8 See: subsection 2.1.4 in chapter 3. 1 9 See: subsection 2.1.5 in chapter 3. 2 0 See: footnote 28 in chapter 3. 2 1 See: footnote 57 in chapter 3. 176 Even though the Rules are mainly aimed to prevent Canadian residents from evading tax, according to the recent reports 2 3, many Asians, especially immigrants believe they are being targeted and decide to leave Canada. 2 4 In some provinces, like B . C . and Ontario, where immigrants have made a positive effect on the economy, the departure of the investor and entrepreneurial immigrants has adversely affected these provinces' economies. Therefore, i f the departure of wealthy immigrants and the rapid decline of the number of new immigrants coming to Canada are due to the Rules, some changes to the Rules are needed in order to change Canada's investment climate and the perceptions of foreign investors. 2 5 Without a full evaluation of the impact of the Rules on foreign investors and entrepreneurial immigrants, in the long run, Canada could turn out to lose revenue, even though the main goal of the Rules is to increase revenue. The full enforcement of the Rules is very difficult. It requires Revenue Canada to hire more people to do checks and counterchecks in order to achieve the goal of the Rules, preventing Canadian residents from evading tax. The cost of doing so should be taken into consideration to make the measures more cost effective. See: footnotes 63, 65 in chapter 3. See: footnote 62 in chapter 3. See: footnote 61 in chapter 3. 177 Simplicity is one of the goals to achieve in a good tax system.26 Simplicity in the tax system is desirable because it is important that taxpayers (individuals and corporations) understand the taxes that they pay and the tax implications of activities they may undertake. All tax measures should, as far as possible, be easy to understand and apply in order to facilitate compliance and enforcement.27 According to the Special Release in the 1996 Budget, different forms are used for different foreign assets. Some commentators have noted that the reporting forms are horrendously complicated for taxpayers and their accountants. Revenue Canada will have to spend millions of dollars to organize an extremely complex system of checks and counterchecks. And yet, even when those checks are in place, they will not end tax evasion.28 It can be concluded that the reporting forms are too complicated and need to be changed, in order to enhance compliance with the Rules and meet the requirement of simplicity in a good tax system. Chapter three continues the discussion of the tax consequences for some immigrants, who are considered to be permanent residents, and, how their tax resident status relates to their permanent resident status in the Immigration Act and their application for Canadian citizenship in accordance with the Citizenship Act. The concept of tax residence under the Act and the concept of permanent residence under the Immigration Act are not the same,29 26 See: footnote 66 in chapter 3. 2 1 Ibid. 2 8 See: footnote 68 in chapter 3. 2 9 See: footnote 73 in chapter 3. 178 but, in some situations, affect each other. For example, those immigrants who have not yet obtained citizenship of Canada may, for tax purposes, effectively choose to surrender their right to permanent residency in Canada pursuant to section 24 of the Immigration even though they are not required to do so to become non-tax-residents. Some immigrants are at risk of losing their permanent resident status. The reasons vary from one case to another — some are for tax purposes, others, as reported, are to avoid the requirement of disclosing their foreign assets.31 Others lose residency due to the difficulty of meeting the residency requirement, either for business purposes or for employment reasons. Thus, there arises the issue of 'whether losing permanent resident status also means losing Canadian citizenship?', which is of concern to many permanent residents. Generally speaking, failure to live in Canada for more than 183 days, without satisfactory reasons, by a permanent resident will cause him/her to lose his/her status under section 24 of the Immigration Act. This is a big concern for immigrants who want to obtain Canadian citizenship. The intertwined concepts of tax residence in the Act, permanent residence in the Immigration Act, and their relations to obtaining/losing Canadian citizenship can be analyzed as follows. A permanent resident, before he/she obtains his/her Citizenship, is not required to surrender his/her right to permanent residency to become a non-tax-See: footnote 74 in chapter 3. See: section 2.1 in chapter 3. 179 resident from the Acfs perspective. However if, in order to avoid tax, a permanent resident fails to live in Canada for at least 183 days in any one twelve month period without satisfactory reasons, he/she is very likely to lose his/her status under section 24 of the Immigration Act, and consequently, lose his/her opportunity to apply for Citizenship because he/she disrupts the Citizenship application procedure prescribed in the Citizenship Act. For practical purposes, a permanent resident, who wants to declare non residence for tax reasons, surrenders his/her right to permanent residency in Canada. Therefore, as far as the related provisions (in the Act, the Immigration Act, and the Citizenship Act) go, if a permanent resident, before he/she obtains Citizenship, declares non-residence for tax purposes and disrupts the procedure of the Citizenship application, he/she in reality loses both his/her permanent resident status and opportunity for citizenship. I demonstrate in chapter three that those immigrants who choose to lose their permanent resident status for tax reasons, may still be subject to Canadian income tax. If an individual wants to become a non-resident for tax reasons, he/she can not stay in Canada for more than 183 days, or he/she will be caught by subsection 250(1) of the Act and deemed to be a tax resident and thus have to pay income tax on his/her worldwide income. Therefore, any individual who gave up his/her permanent resident status and declared non-residence, is still subject to Canadian income tax but only on amounts earned or produced from employment in Canada, business in Canada or dispositions of taxable Canadian property, under subsection 2(3) of the Act. In addition, the individual is also liable to Part III tax on interest, dividends, etc. in the Act, as illustrated in chapter two. 180 Chapter four explores the potential of having a treaty (or an agreement) between Canada and Taiwan to avoid double taxation. The possibility of having a tax agreement between Canada and Taiwan has been the concern of many Canadians as well as Taiwanese, particularly those who are involved in business and/or for immigration reasons. A treaty is probably the most efficient mechanism to solve the double taxation problem. The benefits of having a tax treaty are that, by employing the 'tie-breaker rules', a treaty determines which contracting state has the authority to tax and therefore provides a tax credit as a relief. This avoids double taxation. However, a treaty can only be signed between nation states having international personalities. Most members of the international community, including Canada, do not formally recognize Taiwan as a sovereign state. Canada ceased diplomatic recognition of the 'Republic of China' (Taiwan) in 1970,32 which means that Canada only recognizes Taiwan as a province of mainland China under its 'one China policy'.33 Due to Canada's non-recognition of Taiwan, the signing of a tax treaty (or an agreement) faces a political dilemma, that is how can a nation state enter into a treaty with a jurisdiction that it does not recognize as a country? In other words, the political dilemma is caused by the general non-recognition of Taiwan as a nation state by most countries in the world. 3 2 See: Canadian Trade Office in Taipei, Taiwan - A Briefing Book (Taipei: Canadian Trade Office in Taipei, 1998) at 5. 3 3 Ibid 181 In response to the political dilemma, Taiwan has successfully developed its pragmatic foreign policy. In addition, due to the factual economic power of Taiwan,34 most members of the international community, even though they do not formally recognize Taiwan as a sovereign state, maintain strong unofficial ties at the personal and trade/investment level with this economy.35 The establishment and maintenance of private sector organizations to facilitate the bilateral trading relations can speak for itself. For example, Australia has 'The Australian Commerce and Industry Office' in Taipei, and New Zealand also has 'The New Zealand Commerce and Industry Office' in Taipei to improve their trade and investment flows with Taiwan. Likewise, the 'Taipei Economic and Cultural Offices' are established and maintained in those countries to serve the same purposes. It can be concluded that Taiwan's active pragmatic diplomacy reflects its desire for an international identity, which is its foremost foreign policy and is derived from its economic power.36 The bilateral economic relationship between Australia and Taiwan brought about the unique Australia-Taiwan Tax Agreement signed on May 29, 1996. More specifically, the Australia-Taiwan Tax Agreement was signed between two private sector organizations — 'The Australian Commerce and Industry Office' and 'The Taipei Economic and Cultural 3 4 Taiwan is one of Asia's economic dragons, enjoying an average 8.6% growth for three decades. Taiwan has transformed itself into the world's 19th largest economy with annual per capita income of US $14,200 (PPP) in 1996. Ibid, at 4. 3 5 Ibid. 36 See: section 3.3 in chapter 4. 182 Office', instead of between two governments. The Australia-Taiwan Tax Agreement is the mechanism to attain the goal of improving their bilateral trade and investment relations.37 The legal consequence of having the tax agreement is to protect the two-way flow of economic activities from punitive double taxation.38 In order to avoid additional complex legal procedures to bring the unique Australia-Taiwan Tax Agreement into effect, both Houses in Australia allowed the agreement to go through the same debate and passage procedure, as used in other tax agreements. Therefore, the Australia-Taiwan agreement was passed by the Parliament, and became a part of the International Tax Agreement Act 1953 and binding. In doing so, Australia successfully avoided the problem of its non-recognition of Taiwan. Since the Australia-Taiwan Tax Agreement has become binding, double taxation by the two countries is avoided. However, there arises an interesting question as to 'how does an agreement between two non-governmental bodies become law or a binding treaty on the tax authorities of Australia and Taiwan'. Since the Australia-Taiwan Tax Agreement was passed by the Parliament of Australia, and is part of the law (the International Tax Agreement Act 1953), it is a binding agreement and the original signatories to the agreement became irrelevant. That is to say, once the Australia-Taiwan Tax Agreement is incorporated into a law (the International Tax Agreements Act 1953), it takes effect and it does not matter who signed the agreement originally, in this case, two private sector See: footnotes 70, 71 in chapter 4. 183 organizations not governments. By doing so, Australia intelligently upheld its one-China policy, and successfully resolved the technical problem of'how can an agreement between two non-governmental bodies become law or a binding treaty on the tax authorities of Australia and Taiwan'. Australia and Canada are very similar in that politically they do not recognize Taiwan as a state39, but economically, Canada, like Australia, has strong and continuing economic relationship with Taiwan. According to a report, 'Taiwan is Canada's 9th largest trading partner; Canada is Taiwan's 13th largest market'.40 It can be concluded that the Australia-Taiwan Tax Agreement can be a precedent for the potential Canada-Taiwan Tax Agreement. Following the Australia-Taiwan Tax Agreement, the New Zealand-Taiwan and Vietnam-Taiwan tax agreements were signed respectively in Nov. 1996, and in Apr. 1998 in the same manner. These facts emphasize that the signing of a tax agreement between two private sector organizations is practical and acceptable to countries meaning to facilitate their bilateral economic ties with Taiwan. By comparison of the three model treaties, namely, the OECD, the U.N. and the U.S. Models, it can be concluded that both Canada and Taiwan would prefer to have the potential Canada-Taiwan Tax Agreement follow the OECD Model. The reasons are as follows. Firstly, Canada is one of the OECD member countries and almost all of Canada's See: footnote 65 in chapter 4. See supra note 32 at 12. 184 existing tax treaties are based on the provisions of one or other of the versions of the OECD Model. Thus, it is very likely that Canada would prefer to have the hypothetical treaty (or agreement) between Canada and Taiwan follow the OECD Model. Secondly, OECD Model is the most widely-used model treaty. Therefore, it is more likely that Canada would choose to have the hypothetical treaty follow the OECD Model. On the other hand, Taiwan would also prefer to have the hypothetical treaty follow the OECD Model, since Taiwan is a country exporting capital to Canada41 and the OECD Model is in favour of the capital exporting countries. However, Canada might negotiate that the treaty between Canada and Taiwan be adjusted toward the U.N. Model, which is biased more to the benefit of capital importing nations in such a way that the tax rights of Canada are elevated. Since Taiwan is a country exporting capital to Canada, to adjust the treaty between Canada and Taiwan more toward the U.N. Model would not necessarily be to the benefit of Taiwan. Due to different political concerns and economic benefits between Canada and Taiwan, there may exist a conflict. The conflict should be resolved by some degree of compromise and concessions. Theoretically, a fair negotiation should conform to the global standards while being adjusted to the special concerns between two Contracting States. However, if more Taiwanese continue to be interested in investing in Canada than vice versa, then the expected concessions will be more likely to benefit Canada than Taiwan. Thus, investment by individuals from Taiwan will likely be more acceptable and have more 4 1 According to CTOT's report, 'Canada-Taiwan trade has grown steadily, reaching close to CAD [Canadian Dollars] $4.6 billion in 1996. Taiwan's surplus is approximately CAD$ 800 million'. See supra note 32 at 5. 185 access to the Canadian market. Consequently, Canada would be able to use access to the market as a vehicle to negotiate better benefits in the hypothetical treaty between Canada and Taiwan. The conclusion of this thesis is that, despite the political dilemma, the signing of the hypothetical Canada-Taiwan tax agreement is still possible, mainly due to pragmatic reasons. 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A., Jones J.F., & Broe L.D., \"A Resident of a Contracting State for Tax Treaty Purposes: a Case Comment on Crown Forest Industries (Canada)\" (1996) 44 Canadian Tax Journal. Weizman L., \"Basic Principles for a Democratic Treaty-Making Process (Denmark)\" (1995) 10 Tax Notes International. 193 Wenman R., Interim Report On The Immigrant Investor Program (Ottawa: Canada Communication Group, 1992). Yang C, \"Taiwan's Control of the Tax Sheltering Use of Tax Haven Base Companies Substance over Form Rule or Subpart F-Type Legislation?\" (1993) 31:231 Columbia Journal of Transnational Law. 194 Appendix I: Definitions of the term 'resident' in the three model treaties (i) OECD Model Treaty (Organization For Economic Co-operation And Development Model Convention, 1992) (hereinafter referred to as OECD Model): T. For the purposes of this Convention, the term \"resident of a contracting State\" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. But this term does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests); (b) if the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the States of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement (ii) U.S. Model: (United States Model Income Tax Convention Of September 20, 1996), (hereinafter referred to as U.S. Model): T. Except as provided in this paragraph, for the purposes of this Convention, the term \"resident of a Contracting State\" means any person who, under the laws of that State, is liable to tax therein by 1 CCH Canadian Limited, Canadian Tax Reports, (Toronto: CCH Canadian Limited, 1993), at 37570-37571. 195 reason of his domicile residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature 2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests); (b) if the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the States of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement '2 (iii) U.N. Model Treaty (United Nations Model Convention, December 10 to 21, 1979) (hereinafter referred to as U.N. Model): ' 1. For the purposes of this Convention, the term \"resident of a contracting State\" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows: (a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (center of vital interests); (b) if the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode; Diamond W.H., Diamond D.B., Overseas Press and Consultants, ed, International Tax Treaties Of All Nations Vol. XL Series B (New York: Oceana Publications, Inc., 1997) at 360-361. 196 (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the States of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement ....'3. 3 Diamond W.H., Diamond D.B., Overseas Press and Consultants, ed, International Tax Treaties Of All Nations Vol. XXV Series B (New York: Oceana Publications, Inc., 1992) at 546-547. 197 Appendix II: Immigrants to Canada by Class, 1986-93 Table 1: Immigrants to Canada by Class, 1986-93 1986 1987 1988 1989 1990 1991 1992 1993 Family 42,378 53,905 51,482 61,034 73,865 86,739 100,041 111,776 Refugee 6,615 7,666 8,937 10,370 11,634 18,465 28,853 22,109 Dependent 120 Designated 12,870 14^ 284 18^ 293 26^ 990 28^ 556 35^ 294 23J190 8,046 PDRCC 1 Asst. relatives 5,919 12^ 360 15^ 617 2L384 25^ 582 22^ 340 19^ 888 22,778 Live-in caregivers 2,955 Entrepreneur 1,683 2^ 332 2J957 V35 3^ 070 2^ 473 3^ 868 4,199 Self-employed 514 738 824 653 612 611 859 1,077 Investor .5 88 250 535 1,005 1,254 2,268 3,054 Bus. dependent 5,353 8,001 11,135 13,288 13,862 12,832 21,152 24,318 Retired 1,839 2,677 3,181 3,573 3,549 4,244 5,481 7,724 Independent 22,759 51,276 500,007 51,693 54,006 47,758 47,545 46,379 Total 99,935 153,327 162,683 192,855 215,741 232,010 253,145 254,536 Business 2,202 3,158 4,031 4,323 4,687 4,338 6,995 8,330 Source: Unpublished data from Canada, Department of Citizenship and Immigration, Immigration Statistics Division (Ottawa, 1994) 198 Appendix HI: Immigration By Class, 1994-96 (Business Class Immigrants) Business Class 1994 1995 1996 Entrepreneur Principal Applicant 3,572 13.05% 2998 15.43% 3,174 14.1 Entrepreneur Dependent 10,594 38.71% 8,416 43.32% 8,673 38.7 Self Employed Principal Applicant 890 3.25% 952 4.90% 1,380 6.17 Self Employed Dependent 1,846 6.75% 1,898 9.77% 2,975 13.3 Investor Principal Applicant 2,562 9.36% 1,344 6.92% 1,597 7.14 Investor Dependent 7,901 28.87% 3,820 19.66% 4,564 20.4 Total 27,365 100% 19,428 100% 22,363 100% Abstracted from: Citizenship and Immigration Canada, \"Immigration by Class\" (1997) Facts and Figures 1996 at 3. 199 Appendix IV: Business Immigration - Top Ten Source Countries Business Immigration - Top Ten Source Countries Principal Applicants 1994 1995 1996 COUNTRY Rank # % Rank # % Rank # % Hong Kong 1 3,122 44.45 1 1,778 33.59 1 2,308 37.5 Taiwan 2 1,154 16.43 2 914 17.26 2 1,181 19.2 Korea South 3 390 5.55 3 525 9.92 3 427 6.94 China-mainland 16 79 1.12 6 141 2.66 4 215 3.5 Germany W. 4 165 2.35 4 189 3.57 5 185 3.01 Iran 14 92 1.31 8 109 2.06 6 168 2.73 Pakistan 15 86 1.22 17 61 1.15 7 147 2.39 Switzerland 17 75 1.07 7 120 2.27 8 138 2.24 Netherlands 21 40 0.57 16 64 1.21 9 122 1.98 United Kingdom 10 111 1.58 11 95 1.79 10 111 1.8 Kuwait 11 111 1.58 5 150 2.83 11 95 1.54 Jordan 9 114 1.62 19 48 0.91 15 58 0.94 Saudi Arabia 5 139 1.98 9 102 1.93 17 55 0.89 Arab Emirates 7 133 1.89 10 96 1.81 18 51 0.83 Egypt 8 120 1.71 14 71 1.34 19 48 0.78 Philippines Rep. Of The 6 138 1.96 25 22 0.42 30 17 0.28 Total for Top Ten Only - 5,586 79.53 4,124 77.9 _ 5,002 81.3 Total Other Countries - 1,438 20.47 1,170 22.1 1,149 18.6 Total 7,024 5,294 6,151 Principal Applicants and Dependents 1994 1995 1996 COUNTRY Rank # % Rank # % Rank # % Hong Kong 1 11,921 43.56 1 6,298 32.42 1 8,163 36.5 Taiwan 2 4,706 17.2 2 3,520 18.12 2 4,441 19.8 Korea South 3 1,567 5.73 3 1,992 10.25 3 1,662 7.43 China-mainland 16 246 0.9 9 422 2.17 4 684 3.06 Iran 13 379 1.38 8 434 2.23 5 662 2.96 Pakistan 14 360 1.32 13 294 1.51 6 645 2.88 Germany W. 10 479 1.75 5 626 3.22 7 610 2.73 Netherlands 20 159 0.58 16 223 1.15 8 493 2.2 Kuwait 9 502 1.83 4 675 3.47 9 405 1.81 Switzerland 17 228 0.83 12 307 1.58 10 396 1.77 United Kingdom 12 381 1.39 10 344 1.77 11 376 1.68 Saudi Arabia 4 731 2.67 6 497 2.56 12 286 1.28 Jordan 7 578 2.11 18 221 1.14 13 260 1.16 Arab Emirates 5 627 2.29 7 444 2.29 14 239 1.07 Egypt 8 541 1.98 11 324 1.67 18 195 0.87 Philippines Rep. Of The 6 608 2.22 22 95 0.49 26 80 0.36 Total for Top Ten Only - 22,260 81.34 - 15,252 78.51 - 18,161 81.2 Total Other Countries - 5,105 18.66 - 4,176 21.49 - 4,202 18.7 Total 27,365 19,428 22,363 Source: Citizenship and Immigration Canada, \"Business Immigration - Top Ten Source Countries' (1997) Facts and Figures 1996 at 55. 200 Appendix V: Five Key Issues compared in the treaties of the U.N. Model, the OECD Model, and the Australian treaties with U.S., P.R.C., and Taiwan TAXATION U.N. Treaty OECD United Treaty States PRC Taiwan Maximum source country tax rate on Interest no maximum stated 10% | 10% 10% 10% Maximum source country tax rate on Divi-dends no maximum stated 5% for 25% | 15% or greater share-holders; ! 15% for all | other share-holders 15% (But under domestic law, Australia imposes no withholding tax on franked dividends) Australia can charge 10% on franked dividends and 15% on unfranked dividends; Taiwan can charge 10% for 25% or greater shareholders and 25% for all other share-holders Maximum source country tax rate on Royalties no maximum stated no maximum j 10% stated ib% 12.5% Time for a project to be treated as a PE 6 months 12 months j 12 months 6 months 6 months Time for consultancy to be treated as a PE : period of ac-tivities in other country total 183 days or more over a 12-month period no PE for j no PE for consultancy j consultancy services i services period of activities in other country total 183 days or more over a 12 month period period of activities in other country total 120 days or more over a 12-month period Source: Krever R., \"Australia-Taiwan tax treaty: pragmatism prevails\", (1997) 71, The Australian Law Journal) at 102. 201 "@en ; edm:hasType "Thesis/Dissertation"@en ; dcterms:spatial "Canada"@en, "Taiwan"@en ; vivo:dateIssued "1999-05"@en ; edm:isShownAt "10.14288/1.0088921"@en ; dcterms:language "eng"@en ; ns0:degreeDiscipline "Law"@en ; edm:provider "Vancouver : University of British Columbia Library"@en ; dcterms:publisher "University of British Columbia"@en ; dcterms:rights "For non-commercial purposes only, such as research, private study and education. Additional conditions apply, see Terms of Use https://open.library.ubc.ca/terms_of_use."@en ; ns0:scholarLevel "Graduate"@en ; dcterms:title "\"Can't be nailed twice\": avoiding double taxation by Canada and Taiwan"@en ; dcterms:type "Text"@en ; ns0:identifierURI "http://hdl.handle.net/2429/8973"@en .