This article provides a note on multilateral tax agreement.

Introduction to Multilateral Tax Agreement:

There have been several efforts to agree on a multilateral tax treaty. In 1958, the OEEC Fiscal Committee attempted to draft a multilateral convention but was unsuccessful due to the difficulties of definition and application. Similar conclusions were also reached by the UN Group of Experts when drafting the UN Model Convention.

A preliminary draft multilateral tax treaty, prepared in 1968 by the European Economic Community, has still not been pursued further. An EFTA working party concluded in 1969 that there were more disadvantages than advantages in a multilateral convention, compared with bilateral tax treaties, in terms of complexity and flexibility.


Multilateral treaties tend to be complex and difficult to apply and understand. They also require a reasonable degree of uniformity in the domestic tax systems of the various countries and in the application and interpretation of the treaties by them. Nevertheless, several regional groups of countries have entered into limited multilateral tax arrangements.

Andean Pact:

Five South American countries are members of the Cartagena Agreement of 1969, which established a sub-regional common market in Latin America. They signed a model multilateral tax treaty called the “Andean Pact” (Exhibit 9) in 1971. It aims at a common tax regime for foreign capital, patents, trademarks, licences and royalties among its members.

The Andean Pact is primarily based on the territorial or source tax principle. It gives the source State exclusive taxing rights. The profits are taxable in the State where the business activities are undertaken. The concept of a permanent establishment is, however, retained. The income from personal services is taxable in the country where the work is performed.


The sole right to tax royalties is reserved for the country where the technology is used. Only the country in which the property is situated at the time of its disposal taxes capital gains. There is also a provision for exchange of information and mutual assistance on tax matters among the member countries.

CARICOM Multilateral Tax Agreement:

Several Caribbean countries renegotiated the CARICOM double tax agreement in 1994. It replaced an earlier multilateral tax agreement signed in 1973. The agreement applies to internal transactions within the member countries, and lays down common guidelines for them in their treaty negotiations with non-members.

It meets the objectives of the Treaty of Chaguaramas to encourage free trade and movement of capital within the member countries and to harmonies their economic policies.


Like the Andean Pact, this agreement relies on the source or territoriality-based taxation in preference to the residence-based OECD MC. Therefore, the income is taxable only by the Member State where the income arises. Some of the specific treaty provisions include zero withholding on ordinary dividends.

The maximum withholding rate on preference share dividends, interest, royalties and management fees is limited to 15% rate. Management fees (excluding independent professional services) are taxable in the source country at a rate not exceeding 15%. There is no limitation on benefits or beneficial ownership requirements for treaty benefits.

Nordic Convention:

The Nordic countries (Denmark, Finland, Faeroes Islands, Iceland, Norway and Sweden) in Europe have a multilateral tax convention for double tax avoidance and mutual assistance on tax matters. A revised multilateral treaty was signed in 1989. Generally, the Nordic treaty follows the OECD MC but with certain local variations.


The treaty provides for zero rate withholding tax, subject to certain exceptions, on the dividends paid by qualifying subsidiaries to qualifying parent companies within the Nordic region. It also contains special provisions to prevent “double tax exemption”. If the taxing rights allocated to a Contracting State cannot be exercised by the State under its domestic law, they revert to the other Contracting State.

Interest is only taxable in the State of residence, while pensions and annuities are taxable solely in the paying State. Exploration activities for 30 days in a 12-month period in the continental shelf of a Nordic country constitute a permanent establishment or a fixed base.

Council for Mutual Economic Assistance Agreement (CMEA):

Several East European countries signed a mutual economic assistance agreement in 1949. Although the CMEA (Council for Mutual Economic Assistance or COMECON) no longer exists, the two multilateral tax treaties, which were concluded in the late 1970s, have not been renounced. It still applies to Bulgaria, Mongolia and the countries of the Commonwealth of Independent States, except Georgia and Kazakhstan.


The first treaty signed in 1977 deals with individuals; a similar treaty was concluded in 1978 for legal entities. The latter treaty applies to entities that have their legal seat in a country within the COMECON. It grants the Residence State the exclusive taxing rights on all income and capital with no withholding taxes on dividends, interest and royalties in the source country.

As an exception, the income from immovable property follows the taxation based on situs. Special rules apply to international economic organisations set up under a separate charter or under a bilateral or multilateral agreement. The treaty does not contain any provisions for the avoidance of double taxation or tax discrimination.


Other multilateral tax arrangements include the Central African Economic and Customs Union (UDEAC) in Africa. They provide for source taxation of employment income, dividends and commercial profits of permanent establishments. Interest and royalties are usually taxed in the Residence State.


Another similar multilateral tax treaty exists among the members of the West African Economic and Customs Community. Certain Arab countries signed a treaty in 1973 to establish a mutual double tax avoidance arrangement (Egypt, Iraq, Jordan, Kuwait, Sudan, Syria and the Arab Republic of Yemen).