AN event of considerable importance in the area of international taxation has not been reported at all either in the mainstream media or even over the Internet. On the 3 rd of November, the United Nations announced the conclusion of the update of its Model Convention. This will be finally published in 2012. After more than a decade of deliberations, the group of experts has finalized the third version of the UN Model. A quick look at the changes however brings in a sense of disappointment and one wonders whether it was wastage of so much of time and effort.The new UN Model in its new avatar looks more like a clone of the OECD Model and the absence of any radical proposals may partly explain the lukewarm response that the event has so far received. Before, discussing the changes, it may be worthwhile to examine the genesis of the UN Model.

That double taxation of income is not conducive to the growth of trade and investment is a fact that has been known all along. However, it is in the wake of the Second World War and the gradual decolonization in Asia and Africa that the concept of developing countries and their special needs came to be articulated. Till the early 60s, double taxation avoidance agreements have been entered into mostly amongst the capital exporting countries. These countries being more or less homogeneous, the particular problem of developing countries never took Centre stage. In the tax treaties involving two countries at the same stage of development, it makes sense to give prominence to the residence based taxation because the trade and investment of the respective countries being more or less in balance, the revenue implications are also in balance between two such countries.Thus, even the model of tax treaties which was developed in the 1920s by the League of Nations which was the predecessor of the United Nations was also geared towards the problem of solving the double taxation issues between developed countries. In this connection, it is surprising to note the observations of the Income Tax Investigation Commission in the year 1953-54. It may be noted that it is based on the recommendations of this Commission's report along with the report of the LawCommission thatindependent India's Income Tax, the Income-Tax Act, 1961 came into being. One would have expected little awareness of the various Models etc., at that time. But the following observations of the commission are revealing:

"Both the Indo-Pakistan Agreement and the Model Convention proceed on the basis of allocation of sources of income and we agree that this is the most satisfactory basis for such agreements. But, it must be remembered that the League of Nations Model Convention is suitable for adoption in its entirety only as between two fully developed countries . As between two countries at different stages of economic development, modifications depending on their comparative development will be necessary before it can be adopted ."

League of Nations having become defunct, the newly formed United Nations did not take any interest in the area of tax treaties and it was the Organisation of Economic Cooperation and Development, a group of western countries that took over the work of the League and the first OEEC model draft was put up in 1963. In the absence of any other model, it soon gained acceptance all over the world. Subsequently, the regular OECD Model came into being in the year 1978. However, OECD was and still is a club of relatively rich and homogeneous countries and the model that developed was obviously suited for these economies. Those developing countries, including India that had tax treaties, also willy-nilly had to adopt the OECD Model, at times with some modifications but entering into treaties with developed countries based on this model implied that taxation rights over important sources of income moved from the developing countries to the developed ones. There was therefore not much enthusiasm in the earlier days for the developing countries to enter into tax treaties. The fact that its model was not suitable for the developing countries was even recognized by the OOEC. Its fiscal committee, in 1965 recorded: "the essential fact remains that tax conventions which capital-exporting countries have found to be of value to improve trade and investment among themselves and which might contribute in like ways to closer economic relations between developing and capital-exporting countries are not making sufficient contributions to that end... Existing treaties between industrialized countries sometimes require the country of residence to give up revenue. More often, however, it is the country of source, which gives up revenue. Such a pattern may not be equally appropriate in treaties between developing and industrialized countries because income flows are largely from developing to industrialized countries and the revenue sacrifice would be one-sided . But there are many provisions in existing tax conventions that have a valid place in conventions between capital-exporting and developing countries too."

It was therefore, some time in the late 60s that the Economic and Social Council of the United Nations requested the Secretary General of the United Nations to set up an ad hoc working group consisting of experts and tax administrators nominated by Governments, but acting in their personal capacity, both from developed and developing countries and adequately representing different regions and tax systems, with the task of exploring, in consultation with interested international agencies, ways and means for facilitating the conclusion of tax treaties between developed and developing countries, including the formulation, as appropriate, of possible guidelines and techniques for use in such tax treaties which would be acceptable to both groups of countries and would fully safeguard their respective revenue interests. The experts, particularly from the developing countries obviously faced resource constraints and during the period 1968-1977, the group could meet only seven times to finalize the UN Model, which was ultimately published in 1980. As is fairly well known, the UN Model gave more taxing right to the source countries by relaxing the rules of permanent establishment to some extent and also allowing source country taxation of royalties and fees for technical services etc.

Although the expertgroup was numerically more tilted towards the developing countries( currently 15 from developing countries and 10 from developed countries)but in terms of resources and expertise, the ten developed countries along with the observers like OECD, IFA etc., obviously had the advantage.The biggest mistake of the group was to accept the existing OECD Model and its commentary as the base. This was done on the ground that the developed countries were using the OECD Model not only for negotiating treaties with each other but also with the developing countries and the accumulated wisdom over the years could not be ignored. Therefore the UN Model for most part not only accepted the language of the OECD Model but also recommended adoption of the OECD commentary in many places. As a result, except for the emphasis on source country taxation in a few important areas, there was not much difference between the two models and the opportunity to develop an alternative to the OECD Model, which was the original intent and which is suitable for the developing countries, was lost.

In the meantime, OECD with all the resources at its command kept on making changes in its commentaries as also the models. To its credit, the OECD did give attention to the numerous problems that obviously arise out of the implementation of tax treaties in practice. However, the solutions, it came up with could not be nor were tilted towards the source countries. The constitution of the Technical Advisory group and the refusal to have a relook at the PE concept in the wake of e-commerce revolution is a case in point. Much was therefore expected of the revision of the UN model, which tookanother 20 years and was finally out in 2001. By this time, efforts were already on to converge the OECD and UN Models. In this regard, the efforts of the International Chamber of Commerce are also revealing. In a presentation to the Ad hoc group of experts, the taxation committee, inter-alia, mentions:

"… The ICC welcomes all efforts to harmonize the UN and the OECD models. It notes with satisfaction that many of the 1992 amendments to the OECD Model as well as substantial parts of the revised OECD commentaries are taken up in the revised UN draft. The ICC is clearly of the opinion that in view of increasingly close international economic cooperation it is no longer possible to justify having both an OECD Model and a UN Model, the latter of which actually creates impediments to international economic exchanges. The ICC is convinced that such provisions are not in the long term interest of those countries…" So, what is good for the developing countries has to be decided by the rich countries and their organizations!

In fact also, apart from refusing to accept the deletion of Article 14 relating to independent personal services from its model, which the OECD resorted to in its 2000 model, the 2001 UN Model, did not add much to the 1980 model. In fact, there was a slight dilution of the source country bias in some areas.

In the meantime, the OECD, which is much more nimble footed, does not lack any resources and where experts from member countries and others meet on a regular basis, came out with successive versions of its model and commentaries in the years 2003, 2005, 2008 and 2010. Its work in the core area of allocation of taxing rights has not taken into account the aspirations of the developing countries. This is not surprising as the OECD's work is done in working groups, which consist of officials from the capital exporting countries. In the meantime, in order to get more acceptability, the OECD invited countries like China, Russia, South Africa and India to take part in the deliberations of its working groups as observers. However, observers do not have any voting power and it is not surprising that the slant of OECD has always been towards an interpretation that suits the developed world. The 2008 model on permanent establishment and particularly the attribution of profits to permanent establishment through what is known as authorized OECD approach (AOA) is horrendously complicated and can be understood only by specialists in transfer pricing. The OECD would like this standard to be followed all over the world. It was also insistent on removal of Article 14 and it seems was initially successful in convincing the expert group to this effect. However, due to resistance from countries like China, India, and Brazil from the developing world and the support of some countries like New Zealand and Canada, the final outcome was different.

The UN was also working to come out with its revised version now for over a decade.As compared to the 2001 version, the main differences as proposed in the new version are as follows:

(1) Alternative version of Article 25 providing for mandatory binding arbitration (for countries wishing so) when a dispute, arising under a treaty, cannot be resolved under the usual Mutual Agreement Procedure (MAP). This has been one of the highlights of the 2008 OECD model. There is strong reservation among the developing countries about binding arbitration particularly taking into account the capabilities of their administration when disputes will arise with the developed countries.

(2) New version of Article 26, which confirms and clarifies the importance of exchange of information under the UN Model. Again this will be a replica of the OECD Model, which now is used as a standard to judge the work in the area of transparency.

(3) New Article 27 concerning assistance in the collection of taxes, which provides the rules under which States may agree to assist each other in tax collection, along the lines of the corresponding provision in the OECD Model Tax Convention. This article was adopted in the OECD model in the year 2003.

(4) Updated Commentary to Article 5, addressing cases where countries wish to delete Article 14 on independent personal services and deal with income, formerly dealt with by Article 14, in Articles 5 and 7 (thus bringing it in line with the OECD Model, in which Article 14 was deleted already in 2000). This, as we mentioned earlier was on the wish list of the OECD and it seems that they have been partially successful.

(5) Modified Article 13, dealing with taxation of capital gains, which now addresses possible tax evasion. The table below indicates the proposed changes in Article 13(5).

The current UN Model gives the taxing right over alienation of shares of companies other than real estate companies to the source country unless it is a transfer of a substantial shareholding in which event, the residence country gets the right to tax the capital gains. The group of experts felt that taxpayers could attempt to divide the substantial shareholding in a number of smaller shareholdings and hence came up with the new formulation in terms of which the alienator is required to hold the shares for 12 months and each transfer has to be of substantial shareholding. This is definitely an improvement over the current formulation and is completely different from the OECD Model which,but for the real estate companies, would like to have residence taxation of capital gains from all other kinds of shareholding.

Thus, apart from the provisions relating to capital gains, there does not seem to be anything spectacular in the new UN Model. There is no talk of the tax sparing credit, which is a persistent demand of the developing countries. Nor is there any discussion about the force of attraction principle.

It is true that that the concerns of the developed and the developing countries do not coincide. It is also true that the UN is not meant only for developing countries. Therefore, it is unlikely that there will ever be any consensus on all these aspects within the UN system. What is happening now is that in the matter of developing international standards relating to international taxation, the OECD is taking the lead. It is also trying to engage some of the developing countries. The behemoth that is the United Nations then puts its seal of approval to the OECD's work albeit with a few changes. The OECD's work thus acquires legitimacy. However, by the very nature of the composition of its members, the OECD Model has to be geared towards the interests of the richer nations. Therefore the original intent of developing a model suitable for negotiation by the developing countries seem to be getting farther and further away. The only solution therefore seems to be for regional groupings to develop their models and if sufficient countries can come together, then only OECD will be forced to modify its stance. Of course, adequate resources need to be made available for research discussion, debate and final adoption of such regional models. Till such time, it is the OECD supermodel that will trump.