Taxation in Trade in Services Under the NAFTA

In order to understand how the NAFTA applies in the context of direct taxes and whether a matter involving differential tax treatment can be resolved under the NAFTA, the key provisions of the Agreement must be considered.  The key provisions are: the Most-Favoured-Nation and national treatment obligations and exceptions to these obligations.

The NAFTA has certain national treatment and MFN obligations with respect to cross-border services.  These obligations ensure that, in many circumstances, each NAFTA country accord service providers of another NAFTA country similar treatment that is provided to domestic service providers (see Article 1201).  As discussed next, these obligations extend tonly in very limited circumstances to o taxation measures..

            Standard of Treatment

The NAFTA requires that Parties accord to service providers of other Parties the better of national treatment and MFN Treatment.

Each Party shall accord to service providers of any other Party the better of the treatment required by Articles 1202 and 1203.

Article 1204


            The Most-Favoured-Nation Obligation - Article 1203

Each Party shall accord to service providers of another Party treatment no less favourable than that it accords, in like circumstances, to service providers of any other Party or of a non-Party.

Article 1203


The National Treatment Obligation - Article 1202

1.  Each Party shall accord to service providers of another Party treatment no less favourable than that it accords, in like circumstances, to its own service providers.

2.  The treatment accorded by a Party under paragraph 1 means, with respect to a state or province, treatment no less favourable than the most favourable treatment accorded, in like circumstances, by that state or province to service providers of the Party of which it forms a part.

Article 1202


Taxation Measures-Article 1203  

Article 2103 of the NAFTA contains the principal provisions that relate to direct taxation. It states that no obligation exists with respect to any tax matter except as specifically provided for in the NAFTA. The NAFTA also provides that income tax treaties are generally to have priority in all cases, including those inconsistent with the NAFTA and that nothing in the NAFTA shall "affect the rights or obligations of any Party under any tax convention."

The few specific protections provided by the NAFTA against differences in tax treatment are also limited by exceptions.  For example, subject to a tax treaty, the NAFTA provides NT in respect of direct taxes relating to the purchase or consumption of cross-border and financial services.This provision prevents a NAFTA signatory from enacting legislation favoring domestic service providers through tax benefits to consumers.It would therefore prevent the income tax laws of a NAFTA signatory from allowing a deduction for consulting services purchased from a domestic consulting firm but not from the firms in other NAFTA countries. However, it would not prevent a Party from conditioning the receipt or continued receipt of an advantage relating to the purchase or consumption of particular services on a requirement to provide the service in its territory.

Any obligations in the NAFTA with respect to both direct and indirect, e.g. Canadian Goods and Services Tax (GST), taxation measures are further limited by a number of general exceptions The major exceptions are listed below In addition,  in the context of performance requirements, a Party is not prohibited from conditioning an advantage in connection with an investment in its territory to a requirement to "locate production, provide a service, train or employ workers, construct or expand particular facilities or carry out research and development in its territory."Thus, a Party may condition receiving a tax advantage to performing particular local services.

 Summary of  Key Exceptions to the Most-Favoured-Nation and National Treatment Obligations

The limited protection against discriminatory tax measures relating to cross-border services is subject to several important qualifications. 

Exception #1:

NAFTA exempts from the MFN obligation and advantage accorded under a tax agreement.

Article 2103(4)(c)


As a result, any applicable tax treaty overrides the MFN obligation under the NAFTA. 

Exception #2:

The NAFTA provisions do not apply to any taxation measures in existence at the time that NAFTA came into effect (1 January 1994).                                                                               Article 2103(4)(d)

The NAFTA provisions do not apply to the renewal or any amendment of a tax measure that does not decrease its conformity.                                                                                             Article 2103(4)(e)


Exception #3:

The NAFTA, provides an exception for "any new taxation measure aimed at ensuring the equitable and effective imposition or collection of taxes and that does not arbitrarily discriminate between persons, goods or services of the Parties or arbitrarily nullify or impair benefits accorded under those Articles."

Article 2103(4)(g)