Inside the Practice of Tax Treaty Negotiation : Germaine Rekwest

In this episode, Dr. Germaine Rekwest discusses key issues such as what drives countries to choose tax treaty partners, the costs and benefits of tax treaty negotiations, the relationship between tax treaties and foreign direct investment, and which treaty provisions are most debated by negotiators. She also shares the motivating reasons behind her career choice and her sources of inspiration. 

Transcript

Hi everyone.  A warm welcome to the third episode of Cross Border Tax Radio.  I'm your host Ankur and today we have a very special guest joining us to discuss key aspects of tax treaty negotiation.  Why do countries select a particular tax treaty partner?  What is the effect of tax treaties on FDI volume? What are the potential costs and benefits involved in tax treaty negotiations? 

These are some of the crucial topics that we will cover in this episode.  But first, I am very excited and honored to introduce our expert for today's episode, Dr. Germaine Rekwest.  I am very grateful that she accepted my invitation to share her thoughts with us. 

Dr. Rekwest is the Head of Tax Treaty Negotiations for the Government of Curacao, Ministry of Finance.  In 2022, she defended her PhD thesis on “A tax treaty policy for Curacao” at Leiden University.  Her research addressed the difficulties which Curacao is experiencing in building its tax treaty network. 

She presented the way Curacao should design a tax treaty policy as an evaluation framework, which is intended as an advice for Curacao. Shortly after her PhD defense, Dr. Rekwest was appointed chair of the tax treaty task force for Curacao and the task force international tax compliance of Curacao  the task force is set up to advise the Curacao minister of finance on compliance with international tax standards,  particularly in connection with the OECD's Pillar 1 and Pillar 2.  Dr. Rekwest is currently president of the IFA branch, Curacao, Aruba, and St. Martin.  She has also published several papers in tax journals, and she's currently chairing the Caribbean Tax Law Journal. 

Welcome to the podcast, Dr. Rekwest. 

Yes, thank you for having me.  We are very pleased to have you here. To set the stage for our first question,  There are around 3000 tax treaties around the world.  And before entering into negotiations for each of these treaties, the countries involved would have had a specific purpose or more than one purpose in mind. 

The, the clarity of this purpose would have then determined the choice of a tax treaty partner.  So while, while there isn't a global consensus, it is generally assumed that the main purpose of entering into tax treaties is to prevent double taxation.  Dr. Rekwest, from a developing country's perspective, could you please tell us whether in practice, um, is the prevention of double taxation a decisive factor when choosing a tax treaty partner or are there other important considerations? 

Yes, well, typically, uh, tax treaties are negotiated with the objectives of encouraging cross border trade investment and a transfer of skills and technology. Um, and it's being done by preventing a double taxation. So preventing double taxation is The historical reason, uh, to conclude, uh, tax treaty, but, uh, in practice, you see that, um, it's not always only about preventing double taxation.

Um, it's about trying to attract foreign investors and you do that by providing predictability and stability. Okay. And the tax treatment, of course, border transactions, and, uh, you do that by concluding a tax treaty. So, um, the tax treaty will prohibit tax discrimination and it will also provide mechanisms for sharing information, uh, preventing and resolving disputes.

But.  You see that, uh, mainly developing countries, they may also negotiate a tax treaty to pursue political or even diplomatic objectives. Because when you conclude a tax treaty, it's also an expression of willingness. that you want to conform with international tax standards. And you can also see that as a sign of a political  or economic relationship between the two parties.

So I think it's important to emphasize that, that, countries not only conclude tax treaties only to prevent double taxation, Um, but they are also doing that because they want to, um, express their, uh,  their willingness, as I already mentioned, to conform with the international tax standards. And, um, I think that is something that is, um, not always, uh, understood, um, because when you want to enter a tax negotiations, tax treaty negotiations with other countries,  may ask why you are entering a test, a treaty negotiating with this particular country, if you don't have, uh, any, or maybe just partly, um, uh, economic transactions with that country.

So it can all also be a start for Uh, start to stimulate economic transactions between the two, uh, parties. And that is particularly so, um, when you are looking at, uh, SIDS, the small island developing states, and those are a small, uh, the small scale, they have an open economy, they have a small domestic market.

So if you have, uh, a country like Curacao, that's a small island developing country.  Curacao has a small domestic market. And, um, when you, um, when you see Curacao wants to, uh, enter into negotiations with, uh, a big country, like OECD, uh, country, then you see that there is a difference in size of the economy.

So for Curacao, it's very important to have this tax treaty with this big country. But the other way around, that tax treaty. Uh, may not be so because the economic, uh, perspectives are more, are less than, uh, for Curacao. So it's more how you see, um, what your point of view is. If you're looking at the benefits of the tax treaty from, uh, the, the SIDS, the small island developing states and small country with, um,  with little, uh, market. And if you see that from the other side, the The OECD country. So that's something to take into aspect when you identify the priority, uh, countries to be negotiating a tax treaty with. 

Thank you so much, Dr. Rekwest for your answer. You mentioned foreign investment as one of the purposes for negotiating tax treaties or choosing a tax treaty partner. Could you please tell us if it is always true that tax treaties increase foreign  Or in other words, could you tell us what effect tax duties have on the volume of FDI, uh, in developing countries? 

Yes, that's an interesting question. And also, uh, it's been addressed in several, uh, papers. Um, what you see is that, um, the papers  that have investigated the impact of bilateral tax treaties on, uh, bilateral foreign direct investment, you see that their findings are not clear and, uh, often. Even point to negative effects,  but in my view, it's important to emphasize that the prevention of double taxation has a stimulating effect on the foreign direct investment.

But another objective of the tax treaty, the sharing of information between governments, is can contract tax evasion and thus discourage foreign direct investment. So  you see that it is difficult to attribute the positive effects of, uh, the foreign direct investment to the tax treaty,  um, Even so, when you know that more than 3000 text treaties have been concluded worldwide,  that means something.

Otherwise, not so many, uh, would have been concluded, especially when you consider how much it costs to conclude a treaty, how long it take, it takes to conclude the treaty.  So these inconclusive results in the literature are often explained by the, the other aim of the tax treaties, namely the administrative cooperation between countries to fight tax invasion. 

Um, so overall it is believed that a tax treaty have a positive impact on, uh, the foreign direct investment of a country, but it's not conclusive because of the several purposes of, uh, the tax treaty. You cannot  Attribute that solely on,  um, the textual team. So it's, it's a, it's a question that is, uh, very relevant, very important, but it, it's not easy to, um, to conclude  that it has, uh, only positive or how much the positive impact is, uh, on the FDI of the country. 

Thank you very much, Dr. Rekwest for your answer. It's very useful to know that there are a lot of variables involved. Thank you. In answering the question of whether tax treaties increase FDI volume, uh, you mentioned, uh, some of the potential costs and benefits of entering into tax treaties. Uh, and since tax treaty negotiations take time, there have to be significant costs which are associated with the negotiation process. 

Um, could you please share what are the relevant costs and benefits that should be considered during tax treaty negotiations?  Yes, well, the termination of a treaty's cost and benefit trade off for a country is not straightforward. It's really, uh, difficult. But there are some options when trying to measure these costs and benefits.

benefits. So, um, if you look at the costs, um,  you will, with the tax treaty will reduce the amount of tax that the source country can charge non residents based on its domestic law. So that's a cost.  On the other side, you have the benefit that is the ability to receive the information. And receive assistance in, assistance in tax collection from the treaty partner.

And that will likely result in a better compliance and also higher tax receipts. But, um, if you are, um, making, uh, a summary of the costs and benefits, it's not that you can't do that in. Terms of, um, figures. So it's, you have to look at the loss of tax income and, uh, also the, the, the time it costs to, um, to negotiate the tax treaties.

Uh, you have, uh, the capacity constraints, the travel costs, the time it's consuming to negotiate. Um, there has been some research on time of negotiating a tax treaty in the Netherlands. Netherlands has  like, uh, 100, uh, tax treaties, concluded tax treaties. So, um, in the Netherlands, The research, uh, being done on the length of negotiations, uh, pointed out, uh, to, uh, approximately, uh, eight years and three months to negotiate a tax treaty.

So that's only the average, but. Um, you can imagine that, uh, negotiating a tax treaty is not something that you can do, uh, in a few days, it takes time. Um, so the costs are not only the travel costs and the time consuming, but you have to consider also the treaty shopping. That's something that has been, uh, was possible in the past and nowadays it's, uh, less and less because of the anti abuse, uh, uh, provisions.

Transcribed  At the other,  on the other side, you have the benefits like, uh, the international relations that you are, uh, putting in place and you can, uh, secure the stability and thus, uh, attracting, uh, investors to your country. So  I think it's important to consider the potential, potential, uh, costs and benefits before deciding to conclude the text, uh, uh, treaty, um, and to, uh, Look, if there are other ways that you can, uh, achieve what you want to, uh, achieve.

But, um,  I think it is, uh, nowadays, uh, more and more, um,  clear that,  uh, countries are looking at those costs. Um,  for example, Norway, Norway terminated the, the tax treaty with, uh, several countries like, uh, Sierra Leone, Barbados, um, Jamaica, also with  Trinidad and Tobago,  but, uh, and particularly, uh, also with Curacao.

So as of 2024, um, the tax treaty between Norway and Curacao is no longer, uh, effective. Okay. And they did that, so Norway did that because they were in, uh, a process of updating their tax treaty network  in light of the BAPS minimum standards. And so are many other countries that are also doing that. They have to update that with a new international tax treaty standards, and they are also updating their current tax treaty policy. 

So as such, they They are, uh, facing capacity constraints because they have to renegotiate, negotiate those, uh, old treaties. And, uh, that's why, uh, Norway, but also other countries can decide to terminate the tax treaties, uh, the tax treaty with several countries because of those costs, the time,  um, time involved in updating and  yes, renegotiating those, uh, tax treaties. 

Thank you for your answer, Dr. Rekwest.  My next question to you tries to, um, gain some insight into the discussions that take place across the table during tax treaty negotiations.  Uh, could you tell us which treaty provisions are most deliberated upon, uh, between, between tax treaty negotiators and which are the articles that are generally accepted in the standard form as, as they appear in the OECD or UN model? 

Each country presents a different set of negotiating circumstances. So, um, you can imagine that a country may hold a strong negotiating position, uh, vis a vis one, a treaty partner, uh, and that can be, uh, due to the economic size, but also a weak stance, uh, against each other. Um,  And  so it really depends, uh, which country, uh, you are negotiating with and what you, what's the, um, which country you are, because  if you look at the classic treaty provisions, then that's the, the source tax reductions coupled with relief of double taxation and the exchange of information.

So, um, you can imagine that, uh, OECD member, uh, countries, they will be focused on the source tax.  And, uh, the SIDS, uh, countries or developing countries, they will focus on the relief of double taxation because that's very important for them  to, um, to have as a signal about a stable environment for foreign investment. 

Um, so  you see that, um, the provisions, um, where you don't have, uh, or less changes in those are the, uh, intercompany pricing and. A taxation of cross border business income, also, um,  the, the mutual agreement procedures,  um, but you have. more changes in, um, certain, uh, definitions like the geographical extent to which treaties apply, but that also depends on, uh, the country  and, um, on the question of how to release a double taxation. 

Um,  as I mentioned before, it is, uh, it really depends on the country that you are negotiating with. So if you're negotiating with a country that has, uh, oil and gas, uh, platforms, so they will stress more on a broader definition of the permanent establishment because they want to tax that.  Um, but you also see the provision regarding the entitlement benefits.

You see some, uh, negotiating, uh, time on that, um, for Curacao, for instance, it is important, um, to negotiate extensively on the provision of dividends because Curacao does not tax dividends at source.  So in this sense, there is no point in pursuing source state taxation with regard to outgoing dividends.

And then for the incoming dividends, source stays taxation is unfavorable to Curaçao.  So, um,  you, you see that,  uh, Curaçao is,  uh, trying in this case to minimize the, the, the dividend, uh, taxation.  uh, also in the case of participation of dividends to full state of resident taxation. So,  um, yes, it is something that, um, you can all only answer this question and depending on which, with which country are you negotiating the tax treaty. 

To add something there, there is some research  from a few years ago about  The language used in text treaties,  and that's, uh, research from, uh, Marian Omrie, amongst others. And one of the results is that, um, they see that there are less changes in, uh, the linguals in the definitions  of some provisions that are, they think, uh, difficult to understand. So for, um, developing countries, they will just use the, the, the definition that is stated in the OECD model or in the UN model. So you only see some deviation in, well, the, the provisions I already mentioned, like, uh,  Um,  about, uh,  the, the geographical,  uh,  state.

So that, that is something that, that you've seen, but  yes, it is, it is difficult to say which definitions are, or which provisions are more,  um, negotiated about or discussed because it's, it depends on the country.  Thank you for your answer, Dr. Rekwest.  We will now move on to the next part of our podcast, where I will ask you two questions related to your remarkable career journey. 

Um, so, so everybody's career journey, uh, you know, has a story behind it and it's always inspiring to hear what sparks someone's passion for their area of work. Could you, could you please tell us if you have always wanted to pursue a career in tax law? Thank you. Or was there a particular moment or experience that influenced your decision? 

Well, international tax law has always interested me because,  um, it is a unique world with its own rules and these rules are really complex. Um, I see that like a puzzle. So in the end it makes sense and it gives a good feeling that you can understand the text puzzle and.  Maybe more importantly, that you can explain it to others. 

And I guess that it's also my passion being active in the academic world and teaching that's law. And I've done so for a long time at Rasmus University, Rotterdam, and later on also at the University of Curacao.  And.  Recently, I have become more and more involved with the fiscal, uh, policy of Curaçao.  And it gives a feeling of added value to make an impact.

And you see instant results when working for small island developing states like, uh, Curaçao. And I think that is something that is. Really, um, really gives me joy, um, to work,  uh, in an international text law  atmosphere. Yes.  Thank you for sharing that Dr. Rickwest. I think, uh, being able to simplify complex issues as well as making a difference are very motivating reasons for pursuing a area of work.

And this will guide a lot of our young listeners. I have one final question about your source of inspiration.  Um, so inspiration can come from, uh, various people and places for different people.  You know, given your remarkable career achievements, as we saw when I was introducing you earlier, could you please share if there is anyone whose work has inspired you?

inspired you either in the tax law field or in any other area?  Well, many people have inspired me throughout my career. Um, I think that in the beginning it was mainly, um, the people who encouraged me to continue my studies and ultimately to obtain a PhD.  Uh, to mention some names, um, in early years, uh, Gerd Derfman, my tax manager, and later on Maarten Koper, they are both tax professionals with whom I still enjoy working with.

So, um, there is a mutual recognition of appreciation for each other. And that is really great. Um, on a personal level, my husband, Arthur Isebald. He played a major role for me in doing my PhD. He encouraged me to persevere and I'm convinced that with perseverance, you can really achieve a lot  and yet you also need  luck.

And well, if I may add something, I think that it is important to show what you are doing to stand out, um, because you have to let people know what.  Um, what your passion is about and what, what you are working on.  Um, so for example, the Curacao minister of finance, he attended my PhD defense and he approached me, uh, after my defense to advise him and to support him in concluding the tax treaties. So you always need people who really see you and also believe in you.  I love involving younger tax professionals as much as possible in the projects that I, that I'm doing and that have an impact. Because working with them can be very inspirational. 

And I think my, my career is now really focusing on Curaçao because Curaçao is, is, is my country. It's my mother country. I was born there and I, I see that they need more tax professionals to help the country. So I am very, very honored, but also very happy that I can contribute to that.  Thank you for sharing that, uh, Dr. Rekwest. It's now time to wrap up our episode. I would personally recommend our listeners to keep the Caribbean Tax Law journal on their reading list. It's, it's packed with great articles and the journal can be accessed at caribbeantaxlawjournal.com. Also, Dr. Rekwest's doctoral thesis is a treasure trove of knowledge.

If you are interested in,  um, tax duty policy, uh, negotiations, or, or, you know, even the impact. Of OECD on a country's tax system. I think it's a must read it's publicly available on the website of Leiden University, and I would personally recommend going through Dr. Rekwest's, doctoral thesis.

Dr. Rekwest, I understand how busy you must be with your multiple responsibilities.

So I'm very grateful for the time you've given us to share your knowledge. Thank you once again for your extremely valuable insights.  Yes, thank you very much for the kind invite.  And to our listeners, I hope you found this episode as insightful as I did. Thank you very much for joining us. Until next time, this is Ankur signing off from Cross Border Tax Radio.