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INTERNATIONAL
olume I: Principles
Roy RohatgiBASIC INTERNATIONAL TAXATION -
Second Edition Volume I: Principles
INTERNATIONAL
olume I: Principles
Roy RohatgiBASIC INTERNATIONAL TAXATION -
Second Edition Volume I: Principles
August22,2005Time:15:11Project:INTRODUCTION.tex
BasicInternational
Taxation
August22,2005Time:15:11Project:INTRODUCTION.tex
August22,2005Time:15:11Project:INTRODUCTION.tex
BasicInternational
Taxation
(SecondEdition)
ByRoyRohatgi
VolumeOne
PrinciplesofInternationalTaxation
August22,2005Time:15:11Project:INTRODUCTION.tex
Publishedby:
RichmondLaw&TaxLtd.
12-14HillRise
RichmondTW106UA
UnitedKingdom
Tel:+44(0)2086147650
Fax:+44(0)2086147651
[email protected]
www.richmondlawtax.com
HardboundISBN1904501346,SoftboundISBN1904501575
BritishLibraryCataloguinginPublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
CopyrightRoyRohatgi2005
Thispublicationisprotectedbyinternationalcopyrightlaw.Allrightsreserved.Nopartofthis
August22,2005Time:15:11Project:INTRODUCTION.tex
TABLEOFCONTENTS…VOLUMEONE
AbouttheAuthor
VOLUMEONE…PRINCIPLESOFINTERNATIONALTAXATION
CHAPTER1
ANOVERVIEWOFINTERNATIONALTAXATION
1.WhatisInternationalTaxation?1
2.InternationalTaxCon”ictsandDoubleTaxation2
3.DoubleTaxTreaties3
4.DomesticTaxSystems4
5.InternationalOffshoreFinancialCentres4
6.Anti-avoidanceMeasures5
7.InternationalTaxPlanning6
8.StructureoftheBook7
9.SuggestedFurtherReading8
9.1.Books8
9.2.OECDPublications8
9.3.JournalsandPeriodicals9
9.4.Websites10
CHAPTER2
PRINCIPLESOFINTERNATIONALTAXLAW
1.InternationalTaxLaw13
1.1.De“nition13
1.2.DoubleTaxation14
1.3.ConnectingFactorCon”icts16
1.4.DualRoleofTreaties17
1.5.CountryExamples18
1.6.IsInternationalTaxLawEnforceable21
1.7.InternationalTaxPrinciplesandTaxTreaties…Comments22
2.ApplicationofTaxTreaties27
2.1.ViennaConventionontheLawofTreaties27
2.2.HowInternationalTreatiesComeintoForce31
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2.3.LimitationsofDoubleTaxTreaties32
2.4.CanDomesticLawOverrideaTaxTreaty34
2.5.RemediesagainstTreatyOverrides37
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TableofContents
CHAPTER3
MODELTAXCONVENTIONSONDOUBLETAXAVOIDANCE
1.OECDModelConventiononIncomeandCapital(OECDMC)97
1.1.General97
1.2.OtherContentsoftheModelConvention98
1.3.DistributiveRulesundertheModelConvention100
1.4.AttributionRulesundertheModelConvention103
2.UNModelConvention(UNMC)103
2.1.General103
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5.TreatmentofTaxLosses250
5.1.General250
5.2.RevenueorTradingLosses252
5.3.CapitalLosses254
5.4.ForeignBranchLosses255
5.5.GroupTaxation256
6.AdvanceTaxRulings257
6.1.General257
6.2.CountryExamples259
7.PassiveIncome264
7.1.DividendIncome264
7.2.InterestIncomeandExpense268
7.3.RoyaltyIncomeandPayments272
7.4.CapitalGains275
8.ForeignTaxRelief278
8.1.General278
8.2.ExpenseDeduction279
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8.CommentariesonMexicoDraft(Exhibit6)andLondonDraft(Exhibit7)of
theLeagueofNations433
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TABLEOFCONTENTS…VOLUMETWO
Note:ThecontentsofVolumeTwobelowareprovisionalandmaybesubjecttochanges
whenpublished.TheyhavebeenincludedinVolumeOne(withoutpagereferences)to
providethereaderswithanoverviewofthecontentsoftheentirebook.
VOLUMETWO…PRACTICEOFINTERNATIONALTAXATION
CHAPTER5
BASICPRINCIPLESOFINTERNATIONALTAXPLANNING
1.InternationalTaxPlanning
1.1.WhatisInternationalTaxPlanning
1.2.NeedforInternationalTaxPlanning
1.3.OpportunitiesforInternationalTaxPlanning
1.4.InternationalTaxPlanningTechniques
1.5.InternationalTaxPlannin
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5.AvoidanceofEconomicDoubleTaxationofDividends
5.1.General
5.2.ImputationSystemvShareholderReliefSystem
5.3.ParticipationExemption
5.4.EuropeanUnionParent-SubsidiaryDirective
6.TaxConsolidationRules("GroupTaxation")
6.1.General
6.2.CountryExamples
7.SuggestedFurtherReading
CHAPTER6
ANTI-AVOIDANCEMEASURES
1.General
1.1.WhatisTaxAvoidance
1.2.CommonAnti-avoidanceProvisions
2.JudicialAnti-avoidanceDoctrines
2.1.CommonLaw
2.2.CivilLaw
2.3.CountryExamples
3.Anti-treatyShoppingMeasures
3.1.General
3.2.ImpactofTreatyShopping
3.3.OECDReportontheUseofConduitCompanies
3.4.BenecialOwnershipRequirement
3.5.TreatyShoppingundertheOECDModelTreatyandCommentary
3.6.CountryExamples
3.7.Comments
4.ControlledForeignCorporation
4.1.General
4.2.Anti-deferralorCFCLegislation
4.3.CountryExamples
4.4.Comments
5.ThinCapitalisation
5.1.General
5.2.WhatisThinCapitalisation
5.3.ThinCapitalisationRules
5.4.TaxTreatmentofInterestCosts
5.5.ImpactofTaxTreaties
5.6.CountryExamples
5.7.Comments
6.TransferPricing
6.1.General
6.2.TransactionsInvolvingTransferPricingIssues
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6.3.OECDandTransferPricing
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5.12.HybridCompany
5.13.Others
6.MajorFinancialCentres
6.1.BaseCountries
6.2.TreatyCountries
6.3.SpecialConcessionCountries
7.CurrentIssuesandDevelopments
7.1.TaxAvoidanceandEvasion
7.2.MoneyLaundering
7.3.BankSecrecy
7.4.RecentGrowthinOffshoreIndustry
8.SuggestedFurtherReading
CHAPTER8
SOMECURRENTISSUESININTERNATIONALTAXATION
1.ElectronicCommerce
1.1.General
1.2.ImpactonCross-borderBusinessActivities
1.3.InternationalTaxationIssues
1.4.SomeCountryViews
1.5.OECDProposals
1.6.Comments
2.Cross-borderComputerSoftwarePayments
2.1.General
2.2.InternationalTaxIssues
2.3.OECDReportandCommentary
3.TechnicalServicesandAssistance
3.1.General
3.2.TreatmentunderDomesticLaws
3.3.TreatmentunderTaxTreaties
3.4.FeesforTechnicalServices
3.5.Comments
3.AttributionofIncometoPermanentEstablishments
4.1.General
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5.4.CountryExamples
5.5.Comments
6.TriangularCases
6.1.General
6.2.SomeExamples
7.Partnerships
7.1.General
7.2.PartnershipasaTaxConduitorTaxableEntity
7.3.CanaPartnershipBenetfromTaxTreaties
7.4.HybridEntities
7.5.OECDReportonPartnerships
7.6.ClassicationofForeignEntities
7.7.CountryExamples
7.8.LimitedLiabilityPartnerships
7.FinancialInstruments
8.1.General
8.2.HybridFinancialInstruments
8.3.DerivativeFinancialInstruments
8.4.GlobalTrading
9.Trusts
9.1.WhatisaTrust
9.2.TypesofTrusts
9.3.UseofTrusts
9.4.TaxationofTrusts
9.5.CivilLawFoundations
9.6.HagueConventionsonTrusts
9.7.Comments
10.OtherSelectedTopics
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PREFACETOTHEFIRSTEDITION
Itallstartedover“veyearsagowhenadelegateatoneofmyinternationaltaxconferences
inMumbai(India)askedmeifIcouldrecommendasinglebookonbasicinternational
taxation.IcouldnotandIpromisedhimthatIwouldwriteoneforprofessionalslikehim.
Therearemanyexcellentbooksontheelementsofinternationaltaxation.However,most
writtenmaterialsonthesubjectaremeantforthespecialist.Theydealwithspeci“candoften
advancedissuesininternationaltaxation,normallyfromaspeci“ccountryperspective.This
bookismeantto“llthegap.
Thebookisbasedonmyownneedsandpastexperiencesasapractisingprofessional.
Itiswrittenfromaprofessionalperspectivetoprovideabasicunderstandingofthevarious
practicalaspectsofthissubjectinasinglebook.Itshouldbeusefultoprofessionalsasaquick
referencewithfurtherresearchonatopicthroughsuggestedadditionalreadingmaterialand
footnotedsources.Sincethebookfollowsatextbookstyle,itshouldalsobesuitablefor
students.Itisnotanadvancedstudyofthesubject,butneitherisitanelementarytext.
Thebookisnotanoriginalworkintermsofitscontent.Exceptinitspresentation
andthechoiceofthematerialincludedinthevarioussections,itisbasedonsecondary
materialsgatheredfromawiderangeofbooks,journalsandarticlesonthesubject.Italso
makesextensiveuseofthevariousOECDreportsandstudiesandtheCahiersissuedbythe
InternationalFiscalAssociation.Many(butnotall)ofthesesourcesareeitherfootnoted
orincludedinthesuggestedreadinglistattheendofeachchapter.Iwishtothanktheir
authorsforthecontributiontothesubjectanddedicatethisbooktothem.
Theprimaryobjectiveofthebookistoclarifythebasicprinciplesofinternational
taxation.Theseprinciplesdochange,butnotradicallyexceptovertime.Thecountry
updatetheminallcases.Irequestthereaderstoadvisemeifthey“ndanyinaccuracies
orchangesinthelaworpracticesothatcorrectionscanbemadeinthenexteditionofthe
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Preface
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PREFACETOTHESECONDEDITION
Thesecondeditionlargelyfollowstheformatofthe“rsteditioninstyleandcontent.Hence,
mycommentsintheprefaceofthe“rsteditionstillapply.However,thecountryexamples
August22,2005Time:15:11Project:INTRODUCTION.tex
Preface
LukasClaerhoutofRichmondLawandTax,whohavetakenoverthepublicationofthis
editionfromKluwerLawInternational.Finally,Iowemythankstomywife,Pauline,for
hercontinuoussupportinmyresearchandwritingsforthisbook.
Likemyrstedition,thiseditionisbasedlargelyonmyresearchofawiderangeof
secondarysources.Manyofthesesourceshavebeencitedeitherasfootnotesorincludedin
thesuggestedreadingmaterials.Ithanktheirauthorsanddedicatethebooktothem.Iam
awarethatthebookhasseveralshortcomingsduetothecomplexandfast-changingnature
ofthesubject.Itakefullresponsibilityforthem,aswellasformypersonalcommentson
August22,2005Time:15:11Project:INTRODUCTION.tex
ABOUTTHEAUTHOR
RoyRohatgiisaninternationalbusinessconsultant,whoadvisesoninternationaltaxation
andstrategicmanagement.Hisprofessionalexperienceoverthelastfourdecadesincludes
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CHAPTER1
ANOVERVIEWOFINTERNATIONALTAXATION
Note:Thepurposeofthischapteristoprovidethereaderwithabroadoverviewof
thebookanditscontents.
1.W
HATIS
NTERNATIONAL
AXATION
1BrianArnoldandMichaelMcIntyre,InternationalTaxPrimer(KluwerLawInternational,2002)pp.2…7;Charles
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Chapter1
2Atpresent,countriesdonotfollowacommondefinitionoftaxbaseandprovidedifferentdeductionsand
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AnOverviewofInternationalTaxation
StatetoStateagreementssignedbytwoormorecountries(calledContractingStatesunder
thetreaty).Itisestimatedthattherearemorethan2,500bilateraltreatiesandprotocolsthat
modifyorsupplementthem,inexistencetoday.Duetotheircomplexity,multilateraltreaties
arenotcommon.
3.D
REATIES
Doubletaxtreatiesgenerallyavoidandreducetheburdenofjuridicaldoubletaxationin
two(ormore)Statesonthesametaxpayerinrespectofthesamesubjectmatterandfor
identicalperiods.
TheyconferrightsandimposeobligationsontheContractingStates.
TheirprimaryobjectiveistolimitthetaxesthatcanbeleviedbytheContractingStates
undertheirdomestictaxlaw.TheContractingStatesallocatethetaxingrightsundera
contractualagreementandthenrequirethattheresidenceStategrantsdoubletaxreliefifit
3OECDModelConvention:Introduction,para.1.
4Inabilateraltreaty,theContractingStatesarethesourceState(alsocalledhostcountry),wheretheincome
isderivedfrom,andtheresidenceState(alsocalledhomecountry),wherethetaxpayerhashistaxresidence.
5WalterHDiamondandDorothyDiamond,TaxHavensoftheWorld(MatthewBender).
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Chapter1
onInternationalCo-operationinTaxMatters
appointedbytheUnitedNations
(UNModel)
6TheGroupwasrenamedinNovember2004bytheEconomicandSocialCounciloftheUnitedNations
(ECOSOC)astheCommitteeofExpertsonInternationalCo-operationinTaxMatters.
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AnOverviewofInternationalTaxation
ratios.Interestexpenseistaxdeductible,whereasdividendpaymentsarenot.Therefore,
highdebtequityratioscanreducetaxationonbusinessprofits.Undertheserules,interest
paymentsinthinlycapitalisedcompaniesisdisallowedandeventaxedasconstructive
dividends.
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Chapter1
Antitreatyshoppingprovisions:
treatyshoppingallowstheunintendeduseoftaxtreaties
bythird-countryresidents.Itmakesbilateraltreatieseffectivelytreatieswiththeworld,
andleadstoalossoftaxrevenuesinthesourceState.Somecountrieshavespecific
7Treatyshoppingmayalsobeintended.Somesourcecountries(particularlydevelopingcountries)permitloss
oftaxrevenuesthroughtreatyshoppingfornon-taxreasons.
8BrianArnoldandMichaelMcIntyre,InternationalTaxPrimer(KluwerLawInternational,2002)pp.711.
9JudgeLearnedHand(18721961),Judge,USCourtofAppeals,inthecaseof
GregoryvHelvering(1935)
,69F2d
809(US).
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AnOverviewofInternationalTaxation
8.S
TRUCTUREOFTHE
Thebookdiscusseseachoftheaboveissuesininternationaltaxationunderseparatechapters,
asfollows:
VolumeI:PrinciplesofInternationalTaxation
Chapter1:OverviewofInternationalTaxation
Chapter2:PrinciplesofInternationalTaxLaw
Chapter3:ModelTaxConventionsonDoubleTaxAvoidance
Chapter4:ImpactofDomesticTaxSystems
AppendixGlossaryofInternationalTaxTerms
ExhibitsModelTaxTreaties(textonly)
VolumeII:PracticeofInternationalTaxation
Chapter5:BasicPrinciplesofInternationalTaxPlanning
Chapter6:Anti-avoidanceMeasures
Chapter7:InternationalFinancialCentres
Chapter8:SomeCurrentIssuesinInternationalTaxation
Chapter9:NationalTaxSystems(selectedcountries)
Therearesomeexcellentbooksontheelementsofinternationaltaxation.However,most
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Chapter1
Finally,thisbookisnotintendedtobecomprehensiveordefinitive.Itisconfinedlargely
todirectcorporatetaxesleviedoncompaniesorcorporations,anddealswiththebasic
principlesandpracticesofinternationaltaxation.Althoughitisnotmeanttobeanadvanced
textoninternationaltaxation,itshouldnotberegardedasanelementarybookonthe
9.S
URTHER
9.1.Books
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AnOverviewofInternationalTaxation
ModelTaxConvention:FourRelatedStudies
183DayRuleReport
TriangularCasesReport
SoftwareReport
ContributionsReport
TransferPricingReport
AttributionReport
TransferPricingGuidelinesforMultinationalEnterprisesandTaxAdministrations
(1995Guidelines)
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Chapter1
MonitorPressLtd,theUnitedKingdom
InternationalTaxReport
InternationalTaxDigest
TaxAnalysts,theUnitedStates
TaxNotesInternational
WorldwideTaxTreaties
CampdenPublishingLtd,theUnitedKingdom
OffshoreRed
OFCReport
EuropeanMagazineServicesLtd,theUnitedKingdom
OffshoreInvestment
9.4.Websites
library.html
E-CommerceReadyforAction
www.offshore-e-com.com
ecomjurs4.html
InternationalTaxationofElectronicCommerce
www.components-online.com
Ecommerce
Taxation
OffshoreE-CommerceLinks
www.offshorepress.com
www.offshore-manual.com
free22.html
Glossaryofterms
FindLaw
www.findlaw.com
InternationalTaxGlossary(IBFD)
Taxglossary
GlossaryofTaxTerms
www.offshorebible.com
Governmenttaxwebsites
AustralianTaxOffice
law.ato.gov.au
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AnOverviewofInternationalTaxation
IrishTaxandCustoms
www.revenue.ie
MinistryofEconomy,FinanceandIndustry,France
www.finances.gouv.fr
NewZealandInlandRevenue
-http:
www.ird.govt.nz
TaxandCustomsAdministrations
www.taxmaninternational.tk
TaxationinSouthAfrica
www.sars.gov.za
brochures
brochure
UKRevenueandCustoms
www.hmrc.gov.uk
USInternalRevenueService
www.irs.ustreas.gov
home.html
www.findlaw.com
EuropeanUnionlaws
europa.eu.int
eur-lex
register
InternationalLaw(UN)
www.un.org
InternationalLawLibrary
www.lawguru.com
InternationalLawCommission(UN)
www.un.org
texts
treatfra.htm
Internationaltreaties
www.lawresearch.com
citreaty.htm
Lawrelatedjournals
stu.findlaw.com
TheLawLibrary
www.waikato.ac.nz
library
resources
LawResearch
-InternationalTaxLawbyCountry-
www.law-library.info
page
LexMercatoria(USInternationalTaxation)
www.jus.uio.no
tax.and.financial.regulation
legal
lawyers.shtml#
OffshoreCentres
www.angloirishbank.co.im
taxcorporate
index.html
OffshoreInformationCentre
index.html
Maples&Calder,BritishVirginIslands
www.maplesandcalder.com
index.cfm
www.pwcglobal.com
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Chapter1
NishithDesaiAssociates,India
www.nishithdesai.com
SovereignGroup
www.sovereigngroup.com
Publicorganisations
EuropeanUnion
www.europa.eu.int
/
taxint2001.html
/
international
OrganisationforEconomicCo-operationandDevelopment
www.oecd.org
report.asp
UniversityofSydney
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CHAPTER2
PRINCIPLESOFINTERNATIONALTAXLAW
Note:Thepurposeofthischapteristoprovidethereaderwithabroadknowledge
ofsomeoftheconceptsofinternationaltaxlaw,includingtreatiesandregionaltax
agreements.Itisnotmeanttobecomprehensive.
1.I
NTERNATIONAL
1.1.Definition
AccordingtoArticle38(1)oftheStatuteoftheInternationalCourtofJustice,thesources
ofpublicinternationallaware(a)internationalconventionsestablishingrulesexpressly
recognisedbystates,(b)internationalcustom,asevidenceofageneralpracticeacceptedas
law,(c)thegeneralprinciplesoflawrecognisedbycivilisednations,and(d)certainjudicial
decisionsandlegalteachings.
1RobertJenningsandArthurWatts,OppenheimsInternationalLaw,9
Edition(LongmanGroup,1992);
J.G.Starke,IntroductiontoInternationalLaw,10
Ed.(Butterworths,1989)p.3.
2RamonJ.Jeffery,TheImpactofStateSovereigntyonGlobalTradeandInternationalTaxation(KluwerLaw
International,1999)p.28.
3AccordingtoJennings,thepracticeofstatesinthiscontextembracesnotonlytheirexternalconductwitheach
other,butisalsoevidencedbysuchinternalmattersastheirdomesticlegislation,judicialdecisions,diplomatic
despatches,internalgovernmentmemoranda,andministerialstatementsinparliamentandelsewhereŽ.See
Jennings(1992)p.27.
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Chapter2
Internationaltaxlawreferstotheprinciplesderivedfrompublicinternationallawthat
dealwithtaxconictsinvolvingcross-bordertransactions.Theseprinciplesarebasedonthe
internationaltaxaspectscontainedinthedomestictaxlawandthecustomarypracticesof
countries,andtaxtreaties.Withminorexceptions,taxlawsarenotinternational.
taxtreaties,therearenooverridinginternationallawsoftaxationthatareenforceableon
taxingStates.
Thesourcesofinternationaltaxlawinclude:
Multilateralinternationalagreements,e.g.theViennaConventionontheLawofTreaties,
secondarylawofinternationalcommunitiesofStates,mutualagreementproceduresfor
4BrianArnoldandMichaelMcIntyre,InternationalTaxPrimer(KluwerLawInternational,2002)pp.27.
5AsifH.Qureshi,ThePublicInternationalLawofTaxation(GrahamandTrotman,MartinusNijhoff,1994)
pp.19.
6SolPicciotto,InternationalBusinessTaxation(WeidenfeldandNicholson,1992)p.307.
7Lotuscase(1927):SinceinternationallawemanatesonlyfromthefreewillofStates,theyarefreetoassertany
jurisdictionnotexplicitlyprohibitedbyformalinternationalagreementsoragenerallyagreedpositiveprinciple.
8AsifH.Qureshi,ThePublicInternationalLawofTaxation,pp.22125.
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PrinciplesofInternationalTaxLaw
taxjurisdiction.TheyincludepersonallinkswiththehomeStatebyvirtueofresidence,
domicileorcitizenshipfornaturalpersons,andtheplaceofincorporationorlocationofa
registeredofce,ormanagementandcontrolforlegalpersons.Aneconomicactivityisalso
connectedwiththehostState,whichexercisesitstaxingrightsduetotheterritoriallink.
Thedomesticlawsincountriesnormallyapplythefollowinginternationaltaxprinciple,
basedonconnectingfactors:
Residencerule:
Unlimitedtaxationrightsaregrantedtothecountryofresidence,due
tothepersonalattachmentofpersons.Thecountryofresidence(ornationality)may
imposeitstaxesontheworldwideincomeofindividualsorcorporationsduetothe
protectionitofferstothetaxsubject.
Sourcerule:
Limitedtaxationrightsaregrantedtothecountryofsourceduetothe
economicattachmentofpersons.Thecountryofsourcereservestherighttotaxthe
incomethatisderivedfromtheeconomicactivitieswithinitsterritory.
Undertheeconomicattachment,bothStatesareentitledtotaxincomearisingintheirtax
jurisdiction.Theprimarytaxingrightsremainwiththecountrywheretheincomeisearned,
i.e.thesourceState.NotaxconictsshouldnormallyariseifallStatesfollowedaterritorial
taxsystemandrestrictedtheirtaxingrightstoincomearisingintheirownscaljurisdiction.
9Doubletaxationmayalsoariseduetoothertaxconicts(seeChapter2(1.3)).
10StefvanWeeghel,TheImproperUseofTaxTreaties(KluwerLawInternational,1998)p.33.
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Chapter2
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PrinciplesofInternationalTaxLaw
Thesevaryingdenitionsleadtoconnectingfactorconicts,suchas:
Source-Sourceconicts:twoormorecountriesclaimthesameincomeofataxpayeras
sourcedintheircountry.
Residence-Residenceconicts:twoormorecountriesregardthesametaxpayerastax
residentintheircountry.
Residence-Sourceconicts:thesameincomeistaxedtwice,rstbythecountrywhere
itisderivedunderitssourcerules,andtheninthecountrywherethetaxpayerresides
underitsresidencerules.
Incomecharacterisationconicts:twoStatescharacteriseorclassifythesameincomeor
capitaldifferentlyand,therefore,applydifferingtaxprovisions.
Entityconicts:anentityischaracteriseddifferentlyunderthedomesticlawsofthetwo
Statesand,therefore,itissubjecttodifferingtaxation.
Mismatchingtaxsystems:thetwotaxsystemsprovidefordifferingrulesforassessment,
denitionoftaxableincome,orcomputationoftaxes.
Themostcommonformofjuridicalconictininternationaltaxationrelatesto
theResidence-Sourcetaxation.AtaxpayersatisesataxrelationshipintwoStates
simultaneously.Theunilateraltaxrulesunderdomesticlawmayrelievesuchtaxconicts,
buttaxtreatiesnormallygiveamorefavourabletreatment.Othersituationsusuallyrequire
theassistanceofspecicprovisionsundertaxtreaties.
1.4.DualRoleofTreaties
11Thesameincomemaybesubjecttodifferenttaxsystems.Forexample,taxondeathmaybetaxedasestate
dutyorascapitalgainstax.Similarly,socialsecuritytaxunderFICA(FederalInsuranceContributionsAct)is
anemploymenttaxinUnitedStatesbutanincometaxinAustralia.
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Chapter2
requireaformalorproceduralexecutiveorlegislativeacttoincorporatetheminto
domesticlaw.
(ii)Indirecteffect:
treatyprovisionsmustbeenactedintodomesticlawandrequire
speciallegislativesteps.
TheCourtscannotenforcethetreatyprovisionsuntiltheyare
transformedintomunicipallaw,usuallybyalegislativeactordelegatedlegislation.
Underthisdualisticdoctrine,itisusuallytherelatedstatute,andnotthetreaty,which
hasthelegalauthorityunderthedomesticlaw.
Taxtreatiesarebindingonthetaxauthoritiesandtaxpayersunderdomesticlaw,oncethey
becomepartofit,eitherbyincorporationortransformationunderitslaw.Itsprovisionsare
thenenforceableandthetaxpayerhasrightsandobligationsunderthetreaty.Thedomestic
Courtsinthetaxjurisdictionsconcernedcanenforcethem.TheCourtsmustalsorespect
thenationalobligationsoftheStateunderaninternationalagreement.
Thetreatysnalprovisionsgovernthetiming(SeeChapter2(2.2)).Thisprovision
allowsfortherequiredlegislativeandadministrativeactionandensuresthatthenewtax
rulesapplyfromthebeginningofanincometaxyear.Thedateswhenthetreatyenters
intoforceandwhenitisenforceableunderdomesticlawmaydifferfromtheeffectivedate
underthetreatyitself.Therecanbedifferentdatesforeachcountryandevendifferentdates
13Examples:Austria,Belgium,Germany,UnitedStates.
14Examples:Australia,Canada,Denmark,India,Israel,NewZealand,Norway,Sweden,UnitedKingdom.
15KlausVogel,DoubleTaxationConventions,Introduction,m.no.2844.
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PrinciplesofInternationalTaxLaw
Parliamentissupremeitcanoverridethetreatythroughspeciclegislation.However,such
overridesarerare.
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Chapter2
forinternationallawandtreatyobligationsinthedealingsoforganisedpeopleswithone
UndertheIrishConstitution,thestatusofataxtreatydiffersfromthatofdomesticlaw.
Itslegalvalidity,aspartofthedomesticlawoftheState,isderivedfromArticle29of
theConstitution.Treatiesarenegotiatedandconcludedbythegovernment,butsubjectto
approvalbyParliament.AtreatybecomespartofthedomesticlawwhenanOrderismade
undertheTaxesConsolidationActaftertheParliamentaryresolution.Sec.826TCA1997
mentionsthatsuchagreementsaretohavetheforceoflawinIrelandnotwithstanding
anythinginanyenactment.
Japan
DomestictaxlawcannotoverridetaxtreatiesinJapanunderitsconstitution.
20CharlesHacciusandPatOBrien,DoubleTaxAgreements,(TheInstituteofTaxationinIreland,1998)p.G-15;
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UnitedStates
TheUnitedStatesfollowsthedoctrineofincorporation.Ataxtreatyisself-executingand
requiresnofurtherlegislation.Itbecomespartofthedomesticlaw,ifitisconsistent
withtheUSConstitution,untilitiseitherterminatedorspecicallycontradictedbya
subsequentfederal(notstate)legislation.TheUStaxtreatiesalsocontainasavingclause
thatpreservesitsrighttotaxitsownresidentsunderitsdomesticlaw,regardlessofthetreaty.
AtreatyisapartoffederallegislationenforceablebytheUSCourts,andhasanequal
statuswithotherfederallaws.
23IRCCode,Sec.7852(d)(1),asmodiedundertheTechnicalandMiscellaneousRevenueActof1988.
WhitneyvRobertson
(1988)124U.S.188,190(US).
CookvUnitedStates
(1933)288US102(US).
26SolPicciotto,InternationalBusinessTaxation,p.331.
27SolPicciotto,InternationalBusinessTaxation,pp.325332.
USvHarden
[1963]CLR366(SCC)(Canada);
ProvinceofBritishColumbiavGilbertson
597F:2d1161
(9thCir.1979)(US);
GovernmentofIndiavTaylor
[1955]AC491(HL)(UK).In
GovernmentofIndiav
Taylor
,theIndianGovernmentpurchasedaUKcompanyoperatinginIndiaandremittedthepurchasepayment
immediatelytoEngland.TheUKCourtsrefusedtoenforceacapitalgainstaxliabilitypayableundertheIndian
taxlaws.
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Taxauthoritiesmustfollowtheprinciplesofinternationallawwhentheyenforcetheir
domesticlawsabroad.SinceaStateisunabletoexerciseitstaxlawinanotherState,
29F.A.Mann,TheDoctrineofJurisdictioninInternationalLawHagueRecueil1964,Vol.I,pp.145149and
156158(SeeextractinAsifQureshi,ThePublicInternationalLawofTaxation,pp.310313).
30KlausVogel,WorldwidevSourceTaxationofIncome:AReviewandRe-evaluationofArguments(Intertax,
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31DalePinto,E-CommerceandSourceBasedIncomeTaxation(IBFDPublications,2003)pp.2332.
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resourcestoachieveoptimalproductivity.ItfavourstaxationintheresidenceStatewith
agrantoftaxcredittorelieveforeigntaxespaid.CINsupportsnationalefciencyand
32Inhisbook,VogelmentionsthatexclusivetaxationbythesourceState,i.e.territorialtaxationundercapital
importneutralityispreferableforbusinessprots.Itrespectsthesovereigntyofnationsintaxmatters,avoids
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(iv)Preventionofscalevasion
OneofthestatedobjectivesofModeltaxtreaties
isthepreventionoftaxevasion.Theyincludelimitedanti-avoidancemeasuressuchas
comprehensivetaxationforresidents(Article4),restrictionontaxconcessionsondividend,
interestandroyaltyincomeonlytobenecialowners(Articles10,11and12)andprovision
forexchangeoftaxinformationamongtaxauthorities(Article26).Arecentadditionin
theOECDMCisthenewArticleonmutualassistanceinthecollectionoftaxes(Article
27).Although,itdoesnotincludetaxavoidanceasanobjective,theCommentaryUpdate
2003issuedbytheOECDCommitteeonFiscalAffairsregardsitasoneofitspurposes.
Thisbroadeningofthetreatyobjectivestoallformsofdomestictaxavoidancerulesisnot
acceptedinmanycountries.
Somecommentatorsalsoregarddoublenon-taxationastaxavoidanceanddeemitas
undesirableonneutralityandfairnessgrounds.
Paragraph52oftheOECDPartnership
Report1999readsasfollows:
...thebasicpurposesoftheConvention(is)toeliminate
doubletaxationandtopreventdoublenon-taxation.PursuanttothisReport,theOECD
MC2000hasaddedanewparagraph4inArticle23A,andalsomadecertainchangesinthe
Commentary.
Asdoublenon-taxationcanbebothintendedandnon-intended,presumably
theobjectiveistopreventunintendeddoublenon-taxationresultingfromtheapplicationof
36StefvanWeeghel,TheImproperUseofTaxTreaties,pp.3436;SeealsoFrankvanBrunschot,TheJudiciary
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nonresidentswithinitsterritorialjurisdiction(SeeChapter3(1.3)).Thetaxingrightsofthe
40SeeStefvanWeeghel,TheImproperUseofTaxTreaties,p.33.
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2.A
PPLICATIONOF
REATIES
2.1.ViennaConventionontheLawofTreaties
(i)Background
TherulesundertheViennaConventionontheLawofTreaties(VCLT)applytoall
internationaltreaties,includingtaxtreaties.TheViennaConventionontheLawofTreaties
(VCLT)wasadoptedonMay22,1969andenteredintoforceonJanuary27,1980.Atthe
internationallevel,theVCLTisbindingontreatiesamongStates,whicharesignatories
afteritenteredintoforce.Asof2004,thereare96parties,whohaveratied,accededor
succeededtotheVCLT,and45signatories,whohavesignedbutnotbecomepartiestothe
Convention.UndertheViennaConvention,apartymeansaStatethathasconsentedto
beboundbythetreatyandforwhichthetreatyisinforce.
47CountriesthathaveratiedtheViennaConventionincludeAustria,Australia,Canada,Denmark,Germany,
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Article60:Terminationorsuspensionoftheoperationofatreatyasaconsequence
ofabreach
1.Amaterialbreachofabilateraltreatybyoneofthepartiesentitlestheothertoinvoke
thebreachasagroundforterminatingthetreatyorsuspendingitsoperationinwholeor
inpart.
2.(omitted)
3.Amaterialbreachofatreaty,forthepurposesofthisarticle,consistsin:
(a)arepudiationofthetreatynotsanctionedbythepresentConvention;or
(b)theviolationofaprovisionessentialtotheaccomplishmentoftheobjectorpurpose
ofthetreaty.
4.Theforegoingparagraphsarewithoutprejudicetoanyprovisioninthetreatyapplicable
intheeventofabreach.
5.(notapplicabletotaxtreaties)
Article61:Superveningimpossibilityofperformance
1.Apartymayinvoketheimpossibilityofperformingatreatyasagroundforterminating
orwithdrawingfromitiftheimpossibilityresultsfromthepermanentdisappearanceor
destructionofanobjectindispensablefortheexecutionofatreaty.Iftheimpossibilityis
temporary,itmayberevokedonlyasagroundforsuspendingtheoperationofthetreaty.
2.Impossibilityofperformancemaynotbeinvokedbyapartyasagroundforterminating,
withdrawingfromorsuspendingtheoperationofatreatyiftheimpossibilityistheresult
ofabreachbythatotherpartyeitherofanobligationunderthetreatyorofanyother
internationalobligationowedtoanyotherpartytothetreaty.
Article62:Fundamentalchangeofcircumstances
1.Afundamentalchangeofcircumstanceswhichhasoccurredwithregardtothoseexisting
atthetimeoftheconclusionofatreaty,andwhichwasnotforeseenbytheparties,maynot
beinvokedasagroundforterminatingorwithdrawingfromthetreatyunless:
(a)theexistenceofthosecircumstancesconstitutedanessentialbasisoftheconsentofthe
partiestobeboundbythetreaty;and
(b)theeffectofthechangeisradicallytotransformtheextentofobligationsstilltobe
performedunderthetreaty.
2.Afundamentalchangeofcircumstancesmaynotbeinvokedasagroundforterminating
orwithdrawingfromatreaty:
(a)ifthetreatyestablishesaboundary;or
(b)ifthefundamentalchangeistheresultofabreachbythepartyinvokingiteitherofan
obligationunderthetreatyorofanyotherinternationalobligationowedtoanyother
partytothetreaty.
3.If,undertheforegoingparagraphs,apartymayinvokeafundamentalchangeof
circumstancesasagroundforterminatingorwithdrawingfromatreatyitmayalsoinvoke
thechangeasagroundforsuspendingtheoperationofthetreaty.
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Article63:Severanceofdiplomaticorconsularrelations
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Atreatydoesnotapplyinternationallyuntilitisconcluded.Itentersintoforceafter
theContractingStatesdeclaretheirconsentthroughanexchangeofinstruments,orratify,
undertheirrespectiveconstitutionallaws.Oncethetreatyhasbeenratiedunderitslegal
procedurestheStatecannotinvoketheprovisionsofdomesticlaw(i.e.municipallaw)
51Forexample,intheUnitedKingdomtheyearofassessmentforincometaxbeginsonApril6,andcorporation
taxischargedforanancialyearbeginningonApril1,ineachyear.TaxtreatiesconcludedbytheUnited
Kingdomareaccordinglyexpressedtohaveeffectinrespectofincometaxinrelationtoyearsofassessment
beginningonandafterApril6,andinrespectofcorporationtaxinrelationtonancialyearsbeginningonand
afterApril1,inthecalendaryearnextfollowingthatinwhichthetreatyentersintoforce.
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increasethetaxpayersexposuretotax.
Taxtreatiesareprimarilyintendedtoavoidover-taxationonthesameincome.Theyare
notmeanttograntdoublecreditorexemption.Apersonentitledtobenetsfrommore
thanonetaxtreatycanclaimthemostfavourabletreaty,butthesebenetsaremutually
exclusive,notcumulative.Incaseswhenthetreatybenetsarewaived,thetaxpayermust
nottakeinconsistentpositionstoachievebenetsgreaterthanthosethatcanbederived
throughdoubletaxavoidance.
Treatiesusually,butnotalways,havepriorityoverdomesticlaw.Therefore,astreaties
remainunchangedforaperiod(averagefteenyears)andtaketimetorenegotiate,they
providecertaintyandprotectionagainstadversechangesindomestictaxlaws.Many
jurisdictionsalsoallowthetaxpayertochooseeitherthedomestictaxregimeorthetax
treaty,whicheverismorefavourable.
Thisprovisionmaybespecicallymentionedinthe
52PhilipBaker,DoubleTaxationConventionsandInternationalTaxLaw,pp.68.
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domesticlaw(Examples:Belgium,Denmark,India,Luxembourg).Somecountriesprovide
aspecicnon-aggravationorpreservationclauseintheirtaxtreaties(Examples:Japan,
UnitedStates).Thisclausepreservestherighttoapplythedomesticlawifitismore
advantageous.
TheUStaxtreatiesalsocontainasavingclausethatreservestheright
ofeachContractingStatetotaxitsowncitizensandothertaxresidents,asifthetreatydid
notexist.
2.4.CanDomesticLawOverrideaTaxTreaty?
TheOECDTreatyOverrideReport(1989)denedthetermtreatyoverrideasasituation
wherethedomesticlegislationofaStateoverrulestreatyprovisionsofeitherasingletreaty
oralltreatieshithertohavinghadeffectinthatState.
Treatyoverridesmaybeintentionalorunintentional.Intentionaltreatyoverridesinclude
situationssuchas(i)laterlawoverridespriorlaw,or((ii)superiortreaties(e.g.diplomatic
treaties)supersedetaxtreaties.
Overridesthatarenotintendedmayariseinthefollowingsituations:
55Article1(2)oftheUSMCmentions:TheConventionshallnotrestrictinanymanneranybenetnowor
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ConstitutionalProvisions
TheconstitutionalprovisionsineachStatedecidetheinteractionofthedomesticlegislation
andtheinternationaltreatyobligations.Paragraph14ofthe1989OECDReportmentions:
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Itwouldrequirelegislationwithaspecicmeasurethatwasclearlyirreconcilablewiththe
treatyprovisionsorgaveevidenceofaclearintentiontoenforceatreatyoverride.
lesscleartheintentiontooverride,thelesslikelyitisthattheCourtswouldupholdthatthe
legislationshouldoverrideataxtreaty.
Insummary,treatiesnormallyoverrideother,contrary,domesticlaws.Thetaxlaws
inseveralcountriesspecifythattheyareapplicableregardlessofanycontrarylegislation
(Examples:Australia,Canada,India,Malaysia,UnitedKingdom).Consequently,ifthe
treatyprovisions,asimplemented,conictwithotherdomesticlaws,thetreatyprevails.
Althoughtreatyoverridesbydomesticlawarepossible,thecountriesareboundtocomply
withtheirinternationalobligationsundercustomaryinternationallawandtheoverridemust
bespecicallyintended.Legislativesilencemaynotbesufcienttobreakatreaty.
ImproperUseofTreaties
The1989OECDReportregardedatreatyoverridethroughconictingdomesticlegislation
orunilateralactionasillegalunderinternationallaw.Itsuggestedthatmembersshould
avoidtreatyoverridesandconsultwitheachotheronanylegislationlikelytoleadtotreaty
violations.Italsodiscouragedunilateraloverridinglegislationtocountertreatyconicts.In
situationswhereconictofprovisionswasinevitable,thetreatiesshouldberenegotiated.
SubsequentadditionstotheOECDCommentaryonImproperUseoftheConvention
in2003nowillustrateseveralanti-treatyabuseprovisionsinOECDMemberStates.They
dealwithtreatyshopping,controlledforeigncorporationrulesandpreferentialtaxregimes
thatareconsideredasharmfultaxpractices.TheCommentaryalsoincludestheprevention
ofbothtaxavoidanceandtaxevasionasatreatyobjective.Moreover,itmentionsthatthe
applicationofprovisionsunderthedomesticlawtocountertreatyabusedoesnotconstitute
treatyoverride.
TheOECDCommentary2003supportstheviewthattheseanti-abuserulesunder
domesticlawdonothavetobespecicallyincludedintaxtreatiestobeeffective.
arguesthattaxesareultimatelyimposedthroughdomesticlawprovisions,asrestrictedby
taxtreaties.Thus,atreatyabuseisessentiallyanabuseofthedomesticlawunderwhichthe
taxislevied.Totheextentanti-avoidancerulesarepartofthebasicdomestictaxation,these
rulesarenotaddressedintaxtreatiesandthereforenotaffectedbythem.Itconcludesthat
aproperconstructionoftaxconventionsallowsthemtodisregardabusivetransactions
involvingunintendedtreatybenets.Therefore,Statesdonothavetograntbenetsofa
istruethatCongressmaymodifyatreatybystatute,CourtshouldnotlightlyattributetoCongresstheintention
tomodifyorabrogateatreaty
....
Woodland(KVCeylon)Rubber&TeaCo.Ltd.vCIR
[1971]A.C.321:ThePrivyCouncilheldthatthe
subsequentlegislationwasintendedtobecomprehensiveandthetreatyoverridewasjustiedeventhough
therewasnoexplicitreference.
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doubletaxationconventionwherearrangementsthatconstituteanabuseoftheprovisions
oftheconventionhavebeenenteredinto.
TheseviewsexpressedintheCommentarybytheCommitteeonFiscalAffairscouldleadtoa
treatyoverrideifappliedunilaterallybyContractingStates.Theyrequirespecicprovisions
inthetreatyitselftobeapplicable.AccordingtoPhilipBaker,counteringanti-avoidance
throughdomestictaxrulescannotjustifyaunilateraltreatyoverrideandcouldamountto
abreachofaninternationalobligation.
ThisviewwasalsotakenbytheIndianSupreme
Court,whichheldthatdomesticanti-avoidancerulescouldnotbeappliedunlesstheyare
containedinthetreatyitself.
Theconcernrelatingtotheambulatoryuseofdomesticlawtocountertreatyabuse
isalsoexpressedbyVogel.AStatecanimproveitstreatypositionunilaterallythrough
subsequentchangesinitsdomesticlaw.SuchattemptsbytheStatetocircumventordodge
atreatycouldamounttoinfringementoftheinternationallegaldutytofullthetreatiesthat
itconcludedingoodfaith(VCLTArticle26).However,theacceptanceofthenewlawfor
sometimebytheotherContractingStatemayconstitutesubsequentpracticeunderArticle
31(3)(b)oftheVCLT.
2.5.RemediesagainstTreatyOverrides
Treatyviolationscouldbeeithertheresultofatreatybreachorafundamentalchangeof
circumstances.AtreatybreachcouldarisewhentheStatelegislatesinbreachofatreaty
provision,andappliesitslawtoactualtaxsituations.Suchlegislationwillbetreatedasan
overrideonlyifthetreatypartnerdisapprovesofitunequivocally.Itthenviolatestherule
pactasuntservanda
(i.e.mustbeperformedingoodfaith)underVCLTArticle26.The
ContractingStateshaveageneralobligationundertheinternationallawtoseekanegotiated
solutiontotreatyviolations.
ThereislittlethataStatecandotostoptheotherStateifitunilaterallypassesadomestic
lawtooverridethetaxtreaty.Thestepsitcantakearelimited.Itcanterminateorsuspend
eitherpart(breachedorunbreachedprovisions)orthewholeofthetreaty,anddemand
renegotiation.Itmayalsobepossibletodemandcompulsoryindependentadjudicationand
69OECDCommentary:Article1,paras.9.29.4
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fundamentalchangemustnotbetheresultofatreatybreachbythepartyinvokingit.
Similarly,animpossibilityofperformancemaynotbeinvokedbyapartyasagroundfor
terminating,withdrawingfrom,orsuspendingtheoperationofatreatyiftheimpossibility
istheresultofabreachbythatpartyeitherofanobligationunderthetreatyorofanyother
internationalobligationowedtoanyotherpartytothetreaty(VCLTArticle61(2)).
Thus,inthecaseofatreatyviolationeitherContractingStatecould:
makeanofcialprotestandinvokethemutualagreementproceduresunderOECDMC
Article25;or
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principlestoavoiddoubletaxation.Moreover,asthelifeofatreatycanbelongitmust
beexibleenoughtoadapttochangesinthedomesticlawwhilecontinuingtoreectthe
originalnegotiatedbalanceofobligationsandconcessions.
Taxtreatiestendtobelesspreciseandrequireabroadpurposivesubstanceoverform
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providedintheof“cialCommentaryonthepreliminarydraftoftheVCLT,assupplementary
(ii)thelanguageisambiguousorobscureŽ,or
(iii)itleadstoaresultthatismanifestlyabsurdorunreasonableŽ(VCLTArticle32).
(b)TheexpressedintentionsŽofthepartiesfromthetermsofthetreatyintheir
Theexpressedintentionsofthepartiesmustbeascertainedfromtheactualtreatytext
andnotbasedonpresumedintentions.
76Seepages1012…1018intheMaterialsonInternational&ECTaxLawpublishedbyInternationalTaxCentre
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Thecontextisrestrictivelydenedtoincludetheentiretextofthetreaty,its
preambleandannexures(VCLTArticle31(2)).Italsocoversadditionalmaterial
79Thecontextexcludesanyunilateralmaterial(e.g.USTechnicalExplanationandSenatereports,oralstatements
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preambleandotherrelatedprovisions.Tounderstandthemeaning,oneneedstoexamine
thetextatthesametimeasitscontextandobjectandpurpose.Itwouldbeinappropriateto
startwiththewordsandthenfollowupwiththecontext,andthentheobjectandpurpose.
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CourtsmaynotreplacethewordingofthetextwithsupposedintentionsoftheContracting
Thetaxtreatiesaredraftedbyexpertsininternationallaw.Itisreasonabletoassume
thatthosenegotiatingataxtreatyknewwhattheyweredoing,meantwhattheysaid,and
saidwhattheymeant.
However,unlikedomesticlaw,itmaybegivenabroad(notliteral)
86KlausVogelandRainerProkisch,IFACahiersVol.78A,GeneralReport,1993.
CrownForestIndustriesLtdvTheQueen
[1995]D.T.C.6305,6309(Canada).
88TheCommitteeonFiscalAffairscomprisesoftaxexpertsfromOECDMemberStates.However,asmanyof
themarealsoadministrative(primarilytax)ofcials,theirviewsmaybeinuencedbytheirbackgroundand
ofcialduties,andhencemaynotbedisinterestedorimpartial.TheCourts(andtaxpayers)inseveralcountries
frequentlydisagreewiththeviewsexpressedintheModelCommentariesandReports.Manycommentators
havesuggestedthattheCommitteeshouldbebroad-basedtoincludeindependenttaxexpertstorepresent
taxpayersrightsandtotakeintoaccounttheinterestsofnon-OECDcountries.
89TheGroupwasrenamedtheCommitteeofExpertsonInternationalCo-operationinTaxMattersbythe
EconomicandSocialCounciloftheUnitedNations(ECOSOC)inNovember2004.
90TheUNMCandCommentariesmaybesimilarlytreatedaspersuasivefactors,iftheyareusedintreaty
negotiations.
91OECDMC:Introduction,para.29.
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92PhilipBaker,DoubleTaxationConventions,pp.E1314.
93KlausVogel,DoubleTaxationConventions,Article3,m.no.6874:AccordingtoVogel,thetermcontext
includestherelevantprovisionsofthelegalsystemsofbothContractingStatesandalsotheOECDMCandits
Commentaries.SeeChapter2(3.5(a)).
94AccordingtotheAustralianTaxOfce(TaxRulingTR2001/13),whilenotbinding,thereisageneralor
quasi-politicalratherthanlegalexpectationthatOECDMemberStateswillcomplysubjecttotheirspecic
ObservationsandReservations.
95KlausVogel,DoubleTaxationConventions,Introduction,m.no.7982.
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ThielvFCT
(1990)21ATR531(537)(Australia):TheAustralianHighCourtheldthattheOECDModel
ConventionanditsCommentariesshouldberegardedaspartofthecontextunderVCLTArticle31,appliedas
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TheambulatoryapproachalsocreatesproblemsundertheVCLTonthelegalbasisforthe
referencetosubsequentCommentaries.UndertheVCLT,thenewCommentariesareneither
contextunderthegeneralmeaningnorspecialmeaning,noraretheylateragreementsor
practicesregardingoldertreaties.
IncertainOECDcountries,theCommentariesmaybe
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subsequentagreements,theymaybetreatedsimilartocontext(VCLTArticle31(3))orat
114OECDMC:Introduction,para.3336.
115KlausVogelandRainerProkisch,IFACahiersVol.78A,GeneralReport,1993,pp.7071.
116In
CITvVishakhapatnamPortTrust
[1983]144ITR146(India),JusticeJ.Raoheld:Inviewofthestandard
OECDModelwhichisbeingusedinvariouscountries,anewareaofgeneralinternationaltaxlawisnow
ModelusedbyaStatefortreatynegotiations.
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treatiesmayhavedifferentmeanings.Ontheotherhand,differentwordingmayrepresent
thesameordifferentnegotiatingintentions.Moreover,revisionsinsubsequenttreatiesmay
notnecessarilybeapplicabletoearliertreaties.
Despitetheselimitations,theyoften
providepersuasivesupportwhenusedwithsomecaution.
118PhilipBaker,DoubleTaxationConventionsandInternationalTaxLaw,pp.4344.
119SeeChapter3(4-Article3).
EstateofBurghardtvCommrs.
(1983)(US);
IRCvExxonCorp.
(1982)(UK);
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Severaltreatytermsareeitherdeneddifferentlyfrom,ornotrecognisedin,thedomestic
taxlaw.
Aspartofthetreaty,Article3(2)permitstheuseofthemeaningunderthe
domesticlawincertainsituationswhenthetermsarenotspecicallydenedunderthe
treaty.Thealternativewouldbetohaveatreatydenitionforallthetermsinthetreaty.
Article3(2)referstothemeaningofanundenedtermandnotitsdenition.Aterm
maynotbedenedforpurposesofacountrystaxlawsbutitshouldhaveanordinary
Thereferencetodomesticlawislimitedtoundenedtermsandexcludes
open-ended(Example:companymeans...inArticle3(1)(b)).Treatydenitionsmayalsocontainundened
terms(Example:thetermsindividualandbodyofpersonsareundened),orbelimitedtoaspeciedArticle
(Example:thetermdividendsasusedinArticle10).
124KeesvanRaad,TheTermEnterpriseintheModelTaxationConventionsSeventyYearsofConfusion
(Intertax,1994/11).
125BrianJ.ArnoldandMichaelJ.McIntyre,InternationalTaxPrimer,p.115.
126KlausVogel,DoubleTaxationConventions,Article3,m.no.62.
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wasnegotiatedand(iii)thepolitical,economicanddiplomaticbackgroundofthetreaty.
ThebroaddenitionincludesnotonlytheOECDMCanditsCommentariesbutalsoall
theirgrammatical(analysethewholelaw),historical(identifyoriginalintent),systematical
(considertheprovisionaspartofthewholelaw)andteleological(contemporaneous
purpose)aspects.
TheOECDCommentaryalsogivesawidemeaningtothetermcontextunderArticle
ItdenescontextastheintentionoftheContractingStateswhentheysignedthe
treatyaswellasthecurrentmeaninggiventotheterminthedomesticlawoftheother
ContractingState.Theintentionwhensigningthetreatyalsoimpliesconsiderationofthe
domesticlawmeaninginbothStatesatthattime.Thus,theseconditionseffectivelydisallow
theuseofthedomesticmeaningbyoneStatewithoutproperconsiderationofthepastand
currentmeaningofthetermintheotherState.AccordingtotheOECDCommentary,this
safeguardensurestherequiredpermanencyofcommitmentingoodfaith(
pactasunt
)underthetreatyanddeniesanychangeinthedomesticlaw,whichmightmake
thetreatypartiallyinoperative.
Otherwise,achangeindomesticlawcouldeffectively
changethecontext.
(b)Doesthecontextalwaystakeprecedenceoronlyifthereisanessentialdifference?
TheOECDCommentaryspecicallymentionsthatunderparagraph3(2)thedomesticlaw
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140BrianJ.ArnoldandMichaelJ.McIntyre,InternationalTaxPrimer,pp.115116.
141KeesvanRaad,1992AdditionstoArticles3(2)
...ofthe
1992OECDandCommentary(Intertax1992/12);
JohnF.AveryJones,Article3(2)oftheOECDMC
...(IBFDEuropeanTaxation,August1993).
142Examples:
BurghardtvCommissioner
(1983)80TC(US)705;
DuckingvGollan
(1965)42TC333(UK).
143KlausVogel,DoubleTaxationConventions,m.nos.124126.
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146OECDCommentary:Article3,paras.1113.
PierreBoulez
(1984)83TCNo.131(US):Thefamousconductor,aGermanresident,enteredintoacontract
withCBSrecordsintheUnitedStatestoconductcertainmusicalperformancesformakingphonographrecords
againstroyaltypayments.TheagreementprovidedthatallpropertyrightsbelongedtoCBS.TheIRStreated
itascompensationforpersonalservices,atermnotdenedinthetaxtreaty,andappliedthedomestictax
denition.TheUStaxCourtacceptedtheIRSposition.(Note:Thisissuehasnowbeenclariedinfavourof
thetaxpayerundertheUSModelTreaty1996seeTechnicalExplanation,Article12,para.178).
148H.Shannon,USIncomeTaxTreaties,ReferencetoDomesticLawfortheMeaningofUndenedTerms
(Intertax,1989)p.157.
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TheOECDCommentaryUpdate2000hasadoptedthelatterviewandsuggestedthat
thequalicationconictsshouldbeavoidedbyobligingtheresidenceStatetoacceptthe
categorisationofthesourceState(SeeChapter2(3.6)below).
AccordingtoVogel,the
150OECDCommentary:Article23,para.32.132.7;SeeChapter3(4-Article23).
151KlausVogel,DoubleTaxationConventions,Article3,m.no.6174;SeealsoFrankvanBrunschot,The
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ItmaypresumethatthesourceStatehasnottaxedtheincomeinaccordancewiththe
provisionsofthetreaty.
160OECDCommentary:Article23,para.32.6;OECDPartnershipsReport1999,para.52.
161KlausVogel,DoubleTaxationConventions,m.nos.90101b;SeeChapter3(4-Article23).
162SomecommentatorsbelievethattherearesafeguardstoavoidthemisusebythesourceStateofthenew
approach.UnderOECDMCArticle3(2),thedomesticmeaningshouldapplyonlyifthecontextdoesnot
requireanalternativemeaning.AStatecanbeguiltyofatreatyoverridesinceamaterialchangeinthetreaty
willalsochangethecontextandnotconveygoodfaithrequiredunderVCLTArticle26.
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derthemaxim
indubiocontrascum
Irelandconsiderslegislativehistorybutfollows
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However,thereisanincreasingtrendtowardsapurposiveandliberalapproachtotreaty
168VictorThuronyi,ComparativeTaxLaw,pp.149150.
169Examples:
PeppervHart
(1993)AC593(UK);
JamesBuchanan&Co.Ltd.vBabcoForwardingandShipping
(UK)Ltd
(1977)3AllER1048(UK);
FothergillvMonarchAirlinesLtd.
(1981)AC251(UK).
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GimpeyvIreland
(1988)IR567,582(Ireland).
GladdenEstatevTheQueen
(1985)DTC5188(Canada):AUSresidentdiedowningCanadianshares.Under
theCanadiantaxlaw,thedeceasedpersonwasdeemedtohavedisposedoffallhisCanadianpropertyjust
beforedeathandwassubjecttocapitalgainstax.Thetaxtreatyexemptedrealcapitalgains.TheCourtheld
thattheViennaConventionshouldapply,anditwasunreasonableandabsurdtocoverarealgaininatreaty
butnotadeemedgain.
179OECDMC:Introduction,para.29.
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MCArticle26:intheBurbankcase,theCourtreferredtoboththeOECDMCandthe
UnitedStatesvA.L.Burbank&Co.
(1975)525F2d9(US).
SunLifeAssuranceofCanadavPearson
(1984)STC461(UK).
CuddPressureControlInc.vTheQueen
(1999)CTC1,12(Canada).
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oftheUStreatynegotiators.Nevertheless,theCourtciteditsinceitwasahelpinthetreaty
192SeeHughAultandBrianArnold,ComparativeIncomeTaxation,pp.430432.
193See
HortavCommonwealth(1994)181CLR183
194Examples:
TheCommonwealthvTasmania
(1983)158CLR;
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GrantJheldinthe
HunterDouglas
case:TheViennaConventionontheLawofTreaties,
FranceisnotapartytotheVCLT,itfollowstherulesascustomaryinternationallaw.
GermanysignedtheVCLTin1970andratieditin1987.TheGermanCourtsgenerally
CuddPressureControlInc.vTheQueen
[1995]DTC565and566(Canada).
CrownForestIndustriesLtd.vTheQueen
(1995)2SCR802.
RvMelfordDevelopmentsInc
(1982)82D.T.C.6281(Canada):TheCanadianSupremeCourtappliedthe
denitionunderthedomesticlawwhentheCanada-Germanytaxagreementcameintoforcetoexcludea
loanguaranteefeeasinterestincome.ItignoredthesubsequentchangesintheprovisionundertheCanadian
IncomeTaxActof1974.
203DecisionofJune29,1990,Req.no.78519,RJF8-9/90(Source:PhilipBaker:DoubleTaxConventionsand
InternationalTaxLaw,p.25).
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205RoyRohatgi,CaseHistoryforTaxPlannersinIndia(InternationalTaxReview,October1997).
CITvVishakhapatnamPortTrust
(1983)144ITR146(India).
(1994)208ITR400(India).
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obstructtheessentialquestintheapplicationoftreaties,namely,thesearchforthereal
intentionoftheContractingpartiesinusingthelanguageemployedbythem.
Memecplcv1RC,
theCourtofAppealfollowedasimilarapproach.Itheldthata
IRCvCommerzBankAG
[1990]STC285(UK).
MemecplcvIRC
(1998)STC754at766g-j(UK).
FactorvLaubenheimer
290US276,293(US);
BacardiCorporationvDomenech
,311US150,163(US).
EstateofBurghardtvCommissioner
(1983)80TC705,713(US).
220VictorThuronyi,ComparativeTaxlaw,p.119.
221ManuelPires,InternationalJuridicalDoubleTaxationofIncomeKluwerlawInternational,1989)pp.93105;
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224Duringtheperiodfrom1923to1927,thegroupdraftedseveralModeltreaties.TheyincludedtheBilateral
ConventionforthePreventionofDoubleTaxationintheSpecialMatterofDirectTaxesdealingwithIncome
andPropertyTaxes(Exhibit4),aBilateralConventionforthePreventionofDoubleTaxationintheSpecial
MatterofSuccessionDuties,aBilateralConventiononAdministrativeAssistanceinMattersofTaxationand
aBilateralConventiononAssistanceintheCollectionofTaxes.
225TheSecondRegionalTaxConferenceheldinJuly1943inMexicoadoptedaModelBilateralConvention
forthePreventionoftheDoubleTaxationofIncomeandaModelBilateralConventionfortheestablishment
ofReciprocalAdministrativeAssistancefortheAssessmentandCollectionofDirectTaxes.Bothofthem
containedarelatedProtocol.
226Althoughbothobjectiveswere(andare)meantultimatelyfortheencouragementofforeigninvestment,the
preambleofthetreatytodaydoesnotreectthisultimateaim.(Seefootnote222)
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bytheOECDCommitteeonFiscalAffairsinanambulatoryform(loose-leaf)topermit
continuousfutureupdates.
TheOECD,asagroupofdevelopedcountries,hadsimilartaxinginterestsandtax
treatypolicies.ItsModeltreatywasintendedfortheusebyitsMemberStates,whohad
comparabletaxsystemsandtaxobjectives,particularlyontaxingrightsoftheStateof
residence.Itwasbasedessentiallyontwopremises:(a)thecountryofresidencewould
231UNNegotiationManual,Part1,para.68.
232UNMC:Introduction,para.3;OECDFiscalCommittee,FiscalIncentivesforPrivateInvestmentinDeveloping
Countries:ReportoftheOECDFiscalCommittee(OECD,1965)para.164.
233UNMC:Introduction,Para.32.
234Byitsresolution2004/69ofNovember11,2004,ECOSOChasnowrenamedtheGrouptheCommittee
ofExpertsonInternationalCo-operationinTaxMatters.ThemandateoftheGrouphasbeenbroadenedto
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TaxTreaties(LexisNexis,2004)pp.531534.Additionalinformationisavailableonitswebsite:
http://www.un.org/esa/ffd/ffdtaxation.htm
236UNModelConvention:Introduction,para.35.
237VictorThuronyi,ComparativeTaxLaw,p.120.
238AsifH.Qureshi,ThePublicInternationalLawofTaxation,pp.350363.
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1946BilateralConventionforthePreventionoftheDoubleTaxationofIncomeand
PropertywithProtocol(LondonDraft)
(b)OrganisationforEuropeanEconomicCo-operation/OrganisationforEconomic
Co-operationandDevelopment:
1963DraftDoubleTaxationConventiononIncomeandonCapital(1963Draft)
1977ModelTaxConventiononIncomeandonCapital1977(1977MC)
1992ModelTaxConventiononIncomeandonCapital1992(1992MC),asupdated
in1994,1995,1997,2000and2003.Thenextupdateisproposedin2005.
(c)UnitedNations:
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maybeamendedinnegotiationsbytheContractingStates.TheseArticlesmaybegrouped
PersonalscopeThetreatyappliestotaxresidentsofoneorbothContractingcountries
undertherespectivedomesticlaws.
MaterialscopeThetreatyincludesincomeandcapitaltaxesatfederal,stateand
municipallevels,irrespectiveofthemannerinwhichitisimposed.
TerritorialscopeThetreatyspeciesthegeographicalareaortaxjurisdictioncovered
underthetaxagreement.
TemporalscopeGenerally,thedurationofthetreatyisindeniteoncethetreatyis
ratied,butitcanbeterminatedorrenegotiatedasandwhenrequired.
DistributiverulesThetreatyprovidestherulesfortheavoidanceofdoubletaxationon
incomeorcapital.
doubletaxation.
Modeltaxtreatiesarerelievinginnature.Mostofitsprovisionsaredesignedtocreate
rightsandbenetsfortaxpayerswherenonewouldotherwiseexist.Theyallocatetaxing
rightsbutdonotmakethetaxrules,whicharebasedsolelyondomesticlaw.
Theydo
notrequirethattheallocatedtaxingrightsmustbeexercisedbyaStateordictatehowthey
mustbeexercised.Theuseoftreatiesisalsooptionalsincethetaxpayercanchoosein
manycountriestoapplythedomestictaxlawifitismorebenecial.TheModeltreaties
mayreducebutnormallydonotincreasethetaxingrightsunderthedomesticlawofeach
239Thereareafewcountries(Examples:Australia,France)wheretaxtreatiescanexpandtheareasofdomestic
taxliabilityundertheirconstitutionallaws.
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240KlausVogel,DoubleTaxationConventions(KluwerLawInternational,1997)Introduction,m.no.45a45c.
241OHanlonJ:AtreatydoesnotimposeanobligationoneitherContractingStatetointroduceorcontinueany
formoftaxation,butmerelyregulatesthepositionwhensuchtaxationisimposed(
Murphy(Inspectorof
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Taxsparingormatchingcreditforthetaxnotlevied(i.e.sparedbythesource
country)duetoincentivesorallowances.Taxsparingisaconcessiontoensurethat
theforeigntaxincentivesgrantedtoattractforeigninvestmentcapitalforparticular
activitiesarenotrecapturedbytheresidenceState.
244Truecapitalexportneutralityrequiresthattheshareholdersaretaxedontheentireincomeofaforeign
subsidiaryonanaccrualbasis.AccrualtaxationundertheCFCrulesisusuallyrestrictedtopassiveinvestment
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245JohnF.AveryJones,ProblemsofCategorisingIncome(InternationalandComparativeTaxation,KluwerLaw
International,2002)pp.927.
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Thisobjectivegivesthetreatyawiderperspectivethanjustavoidanceofdouble
taxation.Itjustiesdoublenon-taxationwhencountriesgiveuptheirtaxingrights,incases
suchastaxsparing.Italsopermitstaxtreatieswithcountriesthatdonotlevydirecttaxes
onsomeorallofitsresidents.
251ManyoftheIndiantaxtreatiescontainwordssuchaspromotionofmutualeconomicrelations(orsimilar
words).
252Manydevelopedcountriesalsoencouragetreatyshoppingthroughtheirjurisdictiontoenablemultinationals
toestablishholdingcompaniesandotherbusinessactivities.
UnionofIndiaandAnr.vAzadiBachaoAndolanandAnr.
[2003]263ITR706(India).
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258AnumberofdevelopingcountrieshavepublishedtheirpositionregardingtheOECDMCandCommentaries.
(SeeChapter3(1.2))
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263TheCARICOMmembercountriescurrentlyareAntiguaandBarbuda,theBahamas,Barbados,Belize,
Dominica,Grenada,Guyana,Haiti,Jamaica,Montserrat,St.KittsandNevis,St.Lucia,St.Vincentand
theGrenadines,Surinam,andTrinidadandTobago.
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for30daysina12-monthperiodinthecontinentalshelfofaNordiccountryconstitutea
permanentestablishmentoraxedbase.
6.5.CouncilforMutualEconomicAssistanceAgreement(CMEA)
SeveralEastEuropeancountries
signedamutualeconomicassistanceagreementin1949.
AlthoughtheCMEA(CouncilforMutualEconomicAssistanceorCOMECON)nolonger
exists,thetwomultilateraltaxtreaties,whichwereconcludedinthelate1970s,havenotbeen
renounced.ItstillappliestoBulgaria,MongoliaandthecountriesoftheCommonwealth
ofIndependentStates,exceptGeorgiaandKazakhstan.
Thersttreatysignedin1977dealswithindividuals;asimilartreatywasconcluded
in1978forlegalentities.Thelattertreatyappliestoentitiesthathavetheirlegalseatina
countrywithintheCOMECON.ItgrantstheresidenceStatetheexclusivetaxingrightson
allincomeandcapitalwithnowithholdingtaxesondividends,interestandroyaltiesinthe
sourcecountry.Asanexception,theincomefromimmovablepropertyfollowsthetaxation
265ThecountriescomprisedBulgaria,Czechoslovakia,GermanDemocraticRepublic,Hungary,Mongolia,
Poland,RumaniaandUSSR.
266TheCIScountriesincludeArmenia,Azerbaijan,Belarus,Georgia,Kazakhstan,Moldavia,Russia,
Turkmenistan,UkraineandUzbekistan.
267WillemGKuiper,TheMultilateralCMEATaxTreatyItsRelevanceToday(IBFDEuropeanTaxation,August
268ThepresentmembersoftheCentralAfricanEconomicandCustomsUnion(UDEAC)compriseCameroon,
CentralAfricanRepublic,Chad,Congo,EquatorialGuineaandGabon.
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enteredintoforceinNovember1993tocreateasingleEuropeanCommunity(EC).Oneof
themainobjectivesoftheRometreatywastoeliminateinternaltradeandtariffbarriersand
269ThefundamentalfreedomsundertheECtreatyarethefreemovementofgoods,thefreemovementofpersons,
thefreedomofestablishment,thefreemovementofservicesandthefreemovementofcapitalandpayments.
Thetreatyalsoprohibitsdiscriminationongroundofnationality.
270Mostofthetax-relatedmeasureshavebeenintroducedthroughvariousDirectivesoftheEuropean
Commission.TheyarebindingontheMemberStatesandrequirethemtoamendtheirdomesticlaws
accordingly.
271UnderthevariousDirectivesandrulings,non-taxablepersons(largelyindividuals)followtheoriginprinciple
andVATischargedonthemonintra-EUtransactionsonlyinthecountryofpurchase.Transactionswith
taxablepersons(e.g.businesses)areleviedunderthedestinationprinciplewheretheimporterpaysinputVAT
andthenrecoversitfromhisdomesticcustomersonresale.
272ReportoftheCommitteeofIndependentExpertsonCompanyTaxationChairman,OnnoRuding(European
Communities,Luxembourg,1992).
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Recentprogresshasbeenmorerapid.TheCommissionhasnowtakenstepsto
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7.2.BusinessCodeofConduct
IntheECOFIN
277TheECOFINCouncilcomprisesoftheministersofeconomicandnancialaffairsfromtheEUMember
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bysubsidiariestoparentcompanies(notindividuals)thatarelocatedintwodifferent
MemberStates.TheprovisionswererecentlyamendedbyDirective2003/123/ECdated
December22,2003thatareenforceableonallMemberStatesby1January2005.See
Chapter5(5.4).
(ii)SavingsDirective(2003)
TheSavingsDirective(2003/48/EC)wasnallyadoptedinJune2003forimplementation
byendof2004.TheaimoftheDirectiveistoensurethatsavingsincomeiseffectively
taxedwhenpaidwithintheEuropeanUnion.TheEUDirectivealsoappliestoassociated
andcertaindependentterritoriesofEUMemberStates.TheyincludeJersey,Guernsey,Isle
ofMan,CaymanIslands,BritishVirginIslands,Monserrat,TurkandCaicosIslandsand
includingcashdepositsandcorporateandgovernmentbondsandothersimilarnegotiable
debtsecurities.Thedenitionofinterestextendstocasesofaccruedandcapitalisedinterest.
Thisincludes,forexample,interestthatiscalculatedtohaveaccruedbythedateofthe
saleorredemptionofabondofatypewherenormallyinterestisonlypaidonmaturity
(i.e.investmentfundsmanagedbyaspecialistfundmanagerwhoplacestheinvestments
278SeveraloftheassociatedanddependentterritoriesoftheEUMemberStateshavealsoelectedforthe
withholdingtaxregimeduringthetransitionalperiod.
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thecommitmentbytheUnitedStatestodiscloseinformationuponrequest(notautomatic)
constitutesequivalentmeasures.
TheECCouncilannouncedinJune2004thattheexchangeofinformationshouldbeon
aswideabasisaspossibleinlinewithinternationaldevelopments.Moreover,thisDirective
shouldbeintroducedaspartoftheMemberStatesnationallaws.
TheCommission
reachedagreementwiththevenon-EUcountries,includingSwitzerland,subsequently.
OnJuly19,2004,theCouncilannouncedthattheDirectiveshouldbeappliedasfromJuly1,
(iii)InterestandRoyaltyDirective(2003)
TheEuropeanCommissionissueditsDirective(2003/49/EC)oncross-borderpaymentsof
279EuropeanCommissionReleaseonJune3,2004.
280MarcelloDistasoandRaffaeleRusso,TheECInterestandRoyaltiesDirectiveAComment(European
Taxation,April2004)pp.143154;PhilippedeClippeleandBenoitVerschueren,InterestandRoyalties
DirectiveMovestoFullEnactment(InternationalTaxReview,May2004)pp.3338.
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provisionsinclude:
(a)TheStateofthetransferringcompanywillnotrecogniseanytaxablegainsuponthe
281AsifH.Qureshi,ThePublicInternationalLawofTaxation,pp.363367.
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UndertheConvention,therighttoafairtrial(Article6)hasbeenappliedinseveraltax
disputes.Ithasbeencitedinbothcivilandcriminalcases.Theyincludecasesinvolving
thepresumptionofinnocenceandtherighttolegalaidandcertainguaranteesincriminal
cases.AccordingtotheEuropeanCourt,althoughArticle6doesnotusuallyaffectciviltax
proceedings,itdoesapplytocriminaltaxpenaltiesornes.Forexample,inaSwisscase,the
Courtheldthat400%penaltyfortaxevasionwasacriminalcharge.
Asimilardecision
wasgiveninanothercasewhereUKtaxauthoritiesimposedsubstantialpenaltiesforling
282TheCourtalsoheldinthiscasethattaxpenaltiescannotbeinheritedsincecriminalliabilitydieswiththe
offender.TheSwisstaxauthoritieshadtriedtoimposepenaltiesfortaxevasionimposedonthedeceased
fatheronhisheirs.
283InaDutchcase,anelderlyladywithnochildrendidnotpayachildcontributionwhileamanofsimilarage
hadtodoso.TheCourtheldthatthistaxtreatmentwasdiscriminatory.
284Thisbriefwrite-uponECHRisbasedonapaperpresentedbyPhilipBakerattheInternationalTaxPlanning
AssociationinJune2001.Forfurtherstudy,readPhilipBaker,TaxationandtheEuropeanConventionon
HumanRightsintheDomesticLawoftheCouncilofEuropeCountries,EuropeanTaxation,December2001
andotherrelatedarticlesinthatissueofEuropeanTaxation.
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multilateralapproachbyallcountries.Itidentiedthreetypesoftaxregimesthatcould
divertinvestment,andtaxrevenues,toothercountries.Theywere:
Taxhavens:taxhavensimposenotaxornominaltax,andassistnonresidentstoavoidthe
taxesintheirhomecountry.Theyattractinvestmentortransactionsthatarepurelytax-
drivenwithouteconomicsubstance.Manyofthemhaveaweakregulatoryframeworkor
businessinfrastructure.Astheyusuallyhavefewornotaxtreaties,theyimposeserious
limitationsoneffectiveexchangeoftaxinformation.
Preferentialtaxregimes:theseregimesarebasedincountrieswithhightaxesthatallow
certainbusinessactivitiestobesubjecttoloworzeroeffectivetaxunderspecialtaxrules.
Theyincludetaxconcessions,suchasanarticialdenitionofthetaxbase,inadequate
transferpricingrules,taxexemptionforforeignsourceincome,negotiabletaxrateortax
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(10)FurtheramendmentsintheMCCommentarytoremoveanyuncertaintyorambiguity
regardingthecompatibilityofdomesticanti-abuseprovisionswithtaxtreaties;
(11)Thepreparationofalistofspecicexclusionprovisionsfoundintreatiestoprovidea
referencepointintreatynegotiations;
(12)Theterminationofexistingtaxtreaties(andalsoavoidfuturetreaties)withtaxhavens;
(13)Theundertakingofco-ordinatedenforcementprogramsamongtaxauthorities,such
assimultaneousexaminations,specicexchangeofinformationprojectsorjointtraining
activities;and
(14)Themutualassistanceoftaxauthoritiesintherecoveryofcross-bordertaxclaims.
(c)Recommendationsforinternationalco-operation
(15)TheadoptionoftheGuidelinesprescribedintheReportbymembercountriesfor
dealingwithharmfulpreferentialtaxregimes,andtheestablishmentofaForumonHarmful
TaxPracticestocarryouttheguidelinesandotherrecommendations;
(16)Thepreparationofalistoftaxhavens;
(17)Thereviewbycountriesthathavelinkswithtaxhavensasdependenciestoensurethat
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(ii)TowardsGlobalTaxCo-operation(20002003)
InJune2000,theOECDissuedaprogressreportonitseffortstoidentifyandeliminate
288CommitteeonFiscalAffairs:TowardsGlobalCo-operation(OECD,2000)para.4.
289Bytheendof2004,onlyvejurisdictionshadrefusedtogivetheircommitment:Andorra,Liberia,
Liechtenstein,MarshallIslandsandMonaco.ThislistexcludesAntiguaandBarbuda,whichwithdrewits
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Denytheavailabilityoftheforeigntaxcreditortheparticipationexemptionon
distributionsthataresourcedfromuncooperativetaxhavensandtotransactionsthat
takeadvantageoftheirharmfultaxpractices.
Imposewithholdingtaxesoncertainpaymentstoresidentsofuncooperativetaxhavens.
Enhanceauditandenforcementactivitieswithrespecttouncooperativetaxhavensand
ontransactionsthattakeadvantageoftheirharmfultaxpractices.
Ensurethatanyexistingandnewdomesticdefensivemeasuresagainstharmfultax
practicesarealsoapplicabletotransactionswithuncooperativetaxhavens,andto
transactionsthattakeadvantageoftheirharmfultaxpractices.
Nottoenterintoanycomprehensiveincometaxconventionswithuncooperativetax
havens,andtoconsiderterminatinganyexistingconventions,unlesscertainconditions
290SeeChapter6(7.1).
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(c)December31,2005Provideforexchangeofinformationonciviltaxmatters.Theterm
291CommitteeonFiscalAffairs:ReportonHarmfulTaxPractices:The2004ProgressReport(OECD2004).
292CommitteeonFiscalAffairs:ConsolidatedApplicationNoteGuidanceinApplyingthe1998Reportto
PreferentialTaxRegimes(OECD,2004).
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293Therequirementthatthelocalactivitiesbesubstantialwasdroppedin2001.
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ownership,orcouldnotprovidereliableandup-to-datebooksandrecordsoftheentity
forareasonabletime-period.
Tobeeffective,theremustbelegalaccesstotheinformation.Theaccessshouldinclude
informationonbothcriminalandciviltaxmatters,onrequest,butmayexcludemere
shingexpeditions.Itshouldbeavailabletothetaxauthoritiesoftherequestingstate
incriminaltaxcasesonrequestevenifitisnotlegallyacrimeintherequestedcountry,
orneededforitsowntaxpurposes.
TheReportalsoprovidedcommentsonharmfultaxpracticesinvolvingtransferpricing,
taxrulings,holdingcompaniesandshipping,alongwithitsrecommendations.It
mentionedthatpreferentialtaxregimescouldservelegitimatecommercialandpolicy
objectives.Forexample,holdingcompanieswereacceptableastheyallowedrepatriation
ofprotswithoutmultiplelayersoftaxandwerenotgenerallyharmful.
Itisnotthepreferentialnatureoftheregimesthatisofconcern.Itisonlythecharacteristics
ofringfencing,lackoftransparencyorlackofinformationexchangethatcreatepotential
TheOECDdenitionofharmfultaxpracticesaffectingmobilenancialservices
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regimesarepermittedforcertainactivities,e.g.shipping.Holdingcompaniesareallowed,
eventhoughtheyhavecertainunacceptablefeatures(e.g.treatyshopping).Advancedtax
rulingsontransferpricingandgeneraltaxcomplianceissuesarenotharmful.Participation
exemptionforforeigndividendsandcapitalgainsareacceptable.
8.4.Comments
TheprimarypurposeoftheOECDinitiativeonharmfultaxpracticesappearstobeto
removepreferentialtaxregimeswithinitsMemberStates.However,asanyattempttodo
sowouldhavesimplyshiftedtheactivitiestosimilarregimesinnon-membercountries,the
OECDexpandedthescopeofitsprojecttocertaincountriesthatitdenedastaxhavens.
Accordingtothe2004ProgressReport,ithadsubstantiallyachieveditsobjectiveswithin
itsMemberStates.Theprogresswithtaxhavenswasstillongoing.
295SeeChapter2(7.3).
296RobertGoulder,TNINewsmakerInterviewwithJeffreyOwens(TaxAnalysts,March22,2004).
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Switzerland,BelgiumandDenmark.Non-OECDmembersincludedHongKongand
Preferentialtaxregimesarewidelyusedbymultinationalenterprisesto
providegeographicallymobileintra-groupservicesincludingconduitorholdingcompany
baseforoverseasinvestments.
299MartinA.Sullivan,EconomicAnalysis,TaxAnalysts,February17,2004&October20,2004:AlexEasson,
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TheOneTrueMeaningofaTaxTreaty(
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CHAPTER3
MODELTAXCONVENTIONSONDOUBLETAX
AVOIDANCE
1.OECDM
ONVENTIONON
NCOMEAND
APITAL
(OECDMC)
1.1.General
TheOECDMCconsistsof30Articlesundersevenchapters.
Thespeci“csubjectscovered
intheMCarelistedbelow:
Personalscope(Article1)
Taxescovered(Article2)
Generalde“nitions(Article3)
Resident(Article4)
Permanentestablishment(Article5)
Incomeclauses
Active:
Businesspro“ts(Article7)
Shipping,inlandwaterwaystransportandairtransport(Article8)
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Interest(Article11)
Royalties(Article12)
Capitalgains(Article13)
Pensions(Article18)
Students(Article20)
Otherincome(Article21)
Taxrelief
Eliminationofdoubletaxationandtreatyrelief(Article23)
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ModelTaxConventionsonDoubleTaxAvoidance
expressedbytheOECDMemberStates.TheReservationsexpressadisagreementwiththe
text(oranyvariationspermittedbytheCommentaries)oftheMCbyMemberStates,
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1.3.DistributiveRulesundertheModelConvention
ThedistributiverulesarecontainedinArticles6to22oftheOECDMC.Theserulesclassify
itemsofincomeandassignthetaxingrightstooneorbothContractingStates.Underthese
rules,aschedularsysteminitiallyclassiesthetaxableincomeunderdifferentcategories
(incomeclassicationrules).Eachcategoryofincomeisthensubjecttospecicsource
rulesunderthetreaty(treatysourcerules).Thetaxingrightsforeachsourceofincome
arethenallocatedtoeitherthesourceorresidenceState,ortobothStates(assignment
rules).IncaseswherebothStateshavetherighttotax,thetaxcreditorexemptionrelief
isgivenonthedoublytaxedincomebytheStateofresidence(reliefprinciple).
Incomeclassicationrules:
Theincomeclassicationrulesarenormallybasedon
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governmentsalariesandpensions:thecountryofthepayer.
otherincome:theresidenceoftherecipient.
Assignmentrules:
TheassignmentprincipleappliedintheOECDMCcomprises:
(a)CertainincomeshallbetaxableonlyinaparticularContractingState.Thistermis
mandatoryandprecludestheotherStatefromexercisingitsrighttotax.Therefore,the
incomeorcapitalmustbeexemptedfromtaxintheotherContractingState.(Examples:
Articles8(1),8(2),12(1),13(3),13(5),15(2),18,19(1),19(2),21(1)),22(3),22(4)).
(b)CertainincomeshallbetaxableonlyintheContractingState...unless.Thisterm
providesexclusiveprimarytaxingrightstotherstState.However,ifcertainconditionsare
12OECDCommentary:Article23,paras.67.
13KlausVogel,DoubleTaxationConventions,PrefacetoArts.6to22,m.no.35;OECDCommentary:Article
23,paras.67.
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Income,capital,andcapitalgainsoncertainshippingorairtransportincomeifeffective
managementisintheresidenceState.
Royaltyincome.
Capitalandcapitalgains,otherthanfromcertainmovableandimmovableproperty.
Incomefromperformanceofindependentpersonalservicesnotattributabletoaxed
baseinthesourceState(Article14nowincludedinbusinessprotsundertheOECD
Employmentincomefromdependentpersonalservices,includingincomefromservices
performedinasourceStateonstaysnotexceeding183daysinany12-monthperiod,
provideditispaidbyanonresidentemployerandtheexpenseisnotbornebyapermanent
establishmentinthatState.
Privatepensionsandothersimilarpayments.
ForeigngovernmentsalariesandpensionspaidforservicesrenderedintheStateof
residencebyemployedindividuals,whoarenationals;ifnon-nationals,theymustbe
residentforreasonsotherthanforrenderingtheirservices.
Otherincomenotspecicallycoveredinthetreaty,unlesseffectivelyconnectedtoa
permanentestablishmentorxedbaseinthesourceState.
(b)TaxedinthesourceStateonly(Article8(1),8(2),13(3)19(1a),19(2a)and22(3)).
Income,capitalandcapitalgainsoncertainshippingorairtransportincomeifeffective
managementisinthesourceState.
ForeigngovernmentsalariesandpensionsaretaxableonlyinthesourceState,unlessthe
individualisapermanentresidentornationaloftheresidenceState.
(c)TaxedinboththeContractingStateswithoutrestriction(Article6(1),7(1),13(1),13(2),
13(4),14(1),15(1)secondsentence,15(3),16(1),17(1),17(2),22(1)and22(2)).
Income,capitalandcapitalgainsfromimmovableproperty(includingsharesof
immovablepropertycompanies).
Businessprots,capitalandcapitalgainsofapermanentestablishment,unlessdealtwith
separately.
Independentpersonalservicesattributabletoaxedbase(nowincludedinbusiness
DependentpersonalservicesexercisedinasourceState,unlesstaxableonlyintheState
ofresidence(see(a)above)
Directorsfeesandincomeofartistesandsportsmen.
(d)TaxedinboththeContractingStatesbutwithrestrictioninthesourceState(Article
10(2)and11(2))andwithoutrestrictionintheresidenceState(Article10(1)and11(1)).
Dividendsandinterestincome(subjecttowithholdingtaxlimitsinthesourceState).
(e)IncomenottaxedinthesourceState(Article20).
Paymentsfromabroadtoforeignstudentsorbusinessapprenticesformaintenance,
educationortrainingaretax-exemptintheStateofstudyortraining.
TheOECDModelappliesfourtypesofrulesfortaxingrights.Theyare:
RulesassigningaparticularclassofincomeorcapitaltooneStateexclusively.
RulesassigningaclassofincomeorcapitaltobothStates.
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RulesassigningaclassofincomeorcapitaltobothStates,butlimitingthelevelof
taxationinthesourceState.
14OECDCommentary:Article23,paras.13
15OECDMC:Introduction,para.1
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theOECDnumbering,exceptthatArticle28onTerritorialExtensionhasbeenexcluded.
Moreover,itdoesnotcontainthenewArticle27onAssistanceinCollectionofTaxes.
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whollyonbehalfoftheenterpriseaspermanentestablishmentsunlessthetransactionsare
conductedonanarmslengthbasisasindependententities.Moreover,theCommentary
clariesthatsubparagraph5(b)doesnotleadtoapermanentestablishmentunlessthestock
agentconductssales-relatedactivitiesbesidesdeliveryofgoods.
Article9:
ThisArticlehasanewparagraph3thatdeniesthecorrespondingorcorrelative
adjustmentunderArticle9(2)incasesoffraud,grossnegligenceorwilfuldefault.The
paragraphdoesnotexistintheOECDMC.
Articles1012:
AsintheOECDMC,thetreatybenetsundertheseArticlesnowdepend
solelyontheresidenceofthebenecialownerintheotherContractingState,regardless
oftheresidenceofanyagentorotherintermediarycollectingtheincomeonbehalfof
thebenecialowner.Previously,thebenetsweregrantedonlyiftherecipientwasthe
benecialowner.
TheUNCommentarynowincludestheOECDconclusionsonthetax
classicationofsoftwarepaymentsandcontainsmostoftheOECDCommentarychanges
uptotheCommentaryUpdate1997.
Article13:
Theparagraph4nowextendsthetaxingrightsofaContractingStatetogainson
thealienationofinterestsinpartnerships,trustsandestates,besidessharesofcompanies,
thatdirectlyorindirectlyprincipallyownimmovablepropertiessituatedinthatState.The
termprincipallyisdenedassuchimmovablepropertycomprisingmorethan50%of
19UNCommentary:Article10,para.5.
20EdwinvandenBruggen,APreliminaryLookattheNewUNModelTaxConvention(BritishTaxReview,2002
No.2)pp.119134.
21SeeChapter2(5.5).
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ThereareseveralprovisionsintheUNMCthatareeithernotfoundintheOECDMC
oraredifferentfromtheOECDMC.Theyincludebothtreatypolicyissuesaswellas
greaterallocationoftaxestothesourceState.Forexample,itprovides(i)aloweractivity
thresholdunderthepermanentestablishmentrule,(ii)alimitedforceofattractionfor
protsattributabletoapermanentestablishment,(iii)awithholdingtaxonroyalties,and
(iv)non-exclusivetaxingrightsoverotherincome,notspecicallydealtwithinthetreaty,
forthesourcecountry.
TheUNCommentariesalsoreproducemuchoftheOECDCommentaries.Besides
theseextracts,theycontainusefulinsightsontreatypolicyissuesaffectingdeveloping
countriesandcommentaries(somewhatlimited)onArticleswherethetwoModelsdiffer.
Forexample,theUNCommentaryonArticle23advocatestaxsparingasapolicymatter.
Taxsparingcreditsaregivenbyseveraldevelopedcountries(excludingtheUnitedStates)
undertheirtaxtreatieswhilemanymajordevelopingcountriesinsistonthemfortaxes
sparedbythem.
TheCommentariesofboththeUNandOECDMCsaccepttaxsparing
creditsfordevelopingcountriesbuttheformerisfarlessscepticalasregardssuchcredits.
BothModelsprovidesuitablewordingsfortaxsparingprovisionsintheirCommentaries
totheModeltreaty.
TheUNMC2001containsseveralofthechangesintheOECDModelandCommentaries
until1997,aswellasthemodicationssuggestedbyitsownstudyandanalysisofthetreaty
22AdditionalbackgroundinformationiscontainedintheManualfortheNegotiationofBilateralTaxTreaties
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Anindependentagentwhoactswhollyoralmostwhollyforanenterprise,unlessthe
transactionsareonanarmslengthbasis.
Moreover,theexemptionunderthepreparatoryorauxiliaryservicesdoesnotapplytothe
useoffacilitiesormaintenanceofstockfordeliveryiftheyconductsales-relatedactivities.
Article7:
Alimitedforceofattractionruleextendstheprotsattributabletoapermanent
establishmenttoincomederivedfromothersalesandbusinessactivitiesthatarethesame
orsimilartothoseperformedbythepermanentestablishment.Severalexpensespaidby
apermanentestablishmenttoitsheadofce,andviceversa,areignoredincomputing
theattributableprots.Theparagraphthatexcludesprotsattributabletothepurchase
functionperformedbythepermanentestablishmentisomitted.
Article8:
TheArticleprovidesanoptionalprovision(alternativeB)thatgrantsthesource
Statealimitedrighttotaxshippingprots,iftheshippingactivitiesinthesourceStateare
morethancasual.
Article9:
Article9(3)deniesthecorrespondingorcorrelativeadjustmentunderArticle9(2)
incasesoffraud,grossnegligenceorwilfuldefault.Thisparagraphdoesnotexistinthe
OECDMC.
Articles10and11:
UnliketheOECDMC,theUNModeldoesnotprovidealimitonthe
maximumpercentagerateforthewithholdingtax.Therateislefttobilateralnegotiations.
Article12:
TheArticlegrantssharedtaxingrightsonroyaltyincometothesourceState,
26Theinclusionofthisparagraphislefttobilateralnegotiations.
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Article18:
TheArticlegrantsexclusivetaxingrightsonpublicpensionschemestothe
payingState.Inaddition,itacceptstheexclusiverightoftheresidenceStatetotaxprivate
pensions.However,italsooffersanoptionalwording(alternativeB)forthemtobetaxed
bybothStatesiftheyarepaidbyaresidentoftheotherStateorapermanentestablishment
situatedinthatState
Article19:
TheUNMCdoesnotcontaintheproposedchangesinOECDUpdate2005to
covernon-periodicpaymentsbesidespensionsunderthisArticle.
Article21:
TheArticlegrantssharedtaxingrightstothesourceStateontheresiduaryother
incomenotdealtwithintheotherArticlesofthetreaty.
Article23:
ThisArticledoesnotincludetheadditionalparagraph4inArticle23A,
whichwasintroducedinOECDMCUpdate2001,thatdeniesexemptionreliefincertain
Article25:
TheArticleprovidesformorecomprehensiveimplementationclausesunderthe
mutualagreementprocedures.
Article26:
TheArticleincludesthepreventionoftaxfraudandtaxevasionasadditional
27TheOECDMC2003includesaprovisionsimilartoArticle13(4)oftheUNMCgrantingtaxingrightstothe
sourceStateongainsfromalienationofsharesinarealestatecompany.
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Article6:
(ii)anychangeinthevalueofanypropertyofadebtororrelatedperson;or(iii)anydividend,
partnershipdistributionorsimilarpaymentsmadebythedebtortoarelatedperson.Such
interestincomemaybetaxedattheratenotexceedingtheupperconcessionalrateapplicable
todividendsunderArticle10(2)(b)ofthetreaty.
Article12:
AsinOECDMC,theresidenceStatehasexclusivetaxingrights.Theterm
royaltiesalsoincludescopyrightsonotherwork,suchascomputersoftware,audio,
videotapesordisks,andothermeansofimageorsoundreproduction.Inaddition,itincludes
anygainsthatarecontingentontheproductivity,useordispositionofaproperty.
Article13:
TheUSMCdoesnotincludethenewparagraph4addedinOECDMCUpdate
2003tograntsourcetaxingrightsongainsderivedfromthesaleofsharesincompanies
derivingover50%oftheirvaluefromimmovablepropertyinthatState.
Article14:
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Article16:
Thedirectorsfeesandtheirothercompensationmaybetaxedintheother
ContractingStateonlytotheextentthattheyrelatetoservicesrenderedinthatState.
Article17:
Incomederivedbyasportsmanorentertainermayonlybetaxedbytheother
ContractingStateifitexceedsUS$20,000(orequivalentinthecurrencyoftheother
ContractingState)inataxableyear.Whenpaidtoanotherperson,theprovisiondoesnot
applyiftheentertainerorperformeroranypersonrelatedtohimdoesnotprotfromthe
incomeinanymanner.
Article18:
Besidesprivatepensions,thetreatytextincludesannuities,socialsecurity
benets,alimonyandchildsupportpayments,andtaxdeductionsforoverseaspension
contributions.SocialsecurityreceiptsaretaxableonlyinthepayersState,whilealimony
istaxableonlyintheresidenceState.Childsupportistax-exemptinbothStates.The
contributionstoarecognisedpensionplanbyanindividual,whoperformsservicesin
theotherContractingState,shallbedeductibleintheStatewheretheservicesare
Article19:
Besidesgovernmentemployees,governmentserviceincludesindependent
contractorsengagedbythegovernmentforfunctionsofagovernmentalnature.The
USMCdoesnotcontaintheproposedchangesinOECDUpdate2005tospecicallycover
non-periodicpaymentsbesidespensionsunderthisArticle.
Article20:
TheArticleexemptsanypaymentsreceivedforfull-timeeducationatan
accreditedinstitutionorfull-timetrainingbyavisitingstudent,apprenticeorabusiness
traineefromoutsidetheState.Thetaxexemptionislimitedtotherstyearofstayonlyfor
anapprenticeorbusinesstrainee(butnotastudent).
Article22:
TheArticleonCapital(OECDMCArticle22)isexcludedsincethereareno
federalcapitaltaxesintheUnitedStates.TheUSMCArticle22dealswiththeLimitation
onBenetsunderthetreaty.ThereisnosimilarArticleundertheOECDortheUNModel
Article23:
TheArticlecontainsanorderingprovisionwhenaUScitizenisaresidentin
theotherContractingState.ItprovidesspecialforeigntaxcreditrulesintheUnitedStates
forrelievingdoubletaxationimposedonthem.
Article24:
TheArticledoesnotrequirethetaxtreatmentonnationalsoftheotherStatetobe
thesameasthatimposedonitsownnationalsinthesamecircumstances,provideditisnot
moreburdensome.Moreover,nonresidentswhoaretaxableasUSnationalsonaworldwide
basisdifferincircumstancesfromnonresidentforeignnationals.ItalsoauthorisestheUnited
Statestoimposeabranchprotstaxwithoutviolatingthenon-discriminationArticle.The
Articledoesnotcoverstatelesspersons.
Article25:
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29Thesignicantchangesinthe2005Update,issuedasapublicdiscussiondraftinMarch2005,arebriey
mentionedinthischapter.TheyrelatetoArticles5(multiplepermanentestablishments),8(shipping,inland
waterwaysandairtransport),15(stockoptionplans),18(cross-borderpensions)and26(exchangeof
information).ThechangesinArticle15(2)relatingtoeconomicemployer,proposedintheApril2004discussion
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arepersonsandresidentsofoneorbothStates,asdenedbythetreaty.However,the
provisionsundercertainArticlesapplytononresidentsaswell(Articles19,20,24(1),26(1)
and27).
TheOECDMCnowcontainsspecialprovisionsrelatingtotreatyissuesaffecting
Partnershipscoverentities,whichqualifyassuchundercivilorcommercial
lawasopposedtotaxlaw.Somecountriesregardapartnershipasanindependenttaxable
entity,likeacompany.Inotherjurisdictions,apartnershipistreatedasascallytransparent
(orpass-through)entity,wherethetaxisleviedprorataonthepartners.EachContracting
Statenormallyappliesitsownrulestocharacteriseentities(domesticandforeign)asa
partnershipandthenrecognisepartnershipseitherasataxableorscallytransparententity.
ConictingtaxtreatmentintheContractingStatesoftencreatescomplextaxissues.
UnderOECDMCArticle4,thetreatyappliesonlytopersonswhoareresidentbecause
theyareliabletotaxduetocertaincriteriaintheirdomesticlaw.Apartnership,whichis
treatedasacompanyorataxableentityinaState,isaresidentofthatContractingState
andentitledtothetreatybenetsasaresident.However,ascallytransparententitydoes
notqualifyasaresidentsincethepartnershipitselfisnottaxable.Insuchcases,thetreaty
benetscouldpossiblyberefusedtothepartnersunlesstheyarespecicallyprovidedfor
byaspecialrule.
TheCommentariesincludetherecommendationsonsuchissuesbasedontheconclusions
reachedinthe1999OECDReportonPartnerships.
Thesignicantrecommendationsof
theReportwereasfollows:
SourceState:ThesourceStateshouldtakeintoaccountthetaxtreatmentintheresidence
Stateofthepersonclaimingthetreatybenetsasaresidenttoavoidconictsof
qualication.Underthisprinciple,iftheindividualpartnersinascallytransparent
partnershiparetaxableintheresidenceState,thesourceStateshouldgivethetreaty
benetstothem.Thistaxtreatmentshouldbedeniedtothemonlyiftheincomeis
notallocatedtothembytheirresidenceStatefortaxpurposes.
Alternatively,ifthe
partnershipisataxableentityandthereforeresidentintheotherState,thesourceState
shouldgrantthetreatybenetstothepartnershipandnotthepartners.
Theclassication
ofthepartnershiporpartnersunderthedomesticlawinthesourceStateshouldbeignored
fortreatypurposes.Itshouldbaseitsolelyonthethewayinwhichanitemofincome
arisinginitsjurisdictionistreatedinthejurisdictionofthetaxpayerclaimingthebenets
ofthetreatyasaresident.
ResidenceState:Ascallytransparentpartnershipasanentityisnotentitledtotreaty
benetssinceitisnotliabletotaxtobearesident.Insuchcases,theresidenceState
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Chapter3
shouldgivethetreatyrelieftothepartnerstotheextentthatthepartnershipsincomeis
allocated(i.e.paidtoorderivedby)tothemfortaxpurposesintheirStateofresidence.
Thepartnersarethenliabletotaxonthepartnershipincome,andtheyshouldberegarded
asresidentsfortreatypurposes.
Residentpartnersinaforeignpartnership:Incaseswhereaforeignpartnershipisatreaty
resident,anytreatyprovisionsthatrestrictthetaxingrightsofthesourceStateoverthe
partnershipsincomedonotapplytoitsrighttotaxthepartners,whoareresidentinthat
sourceState,ontheirshareoftheincomeofthepartnership.
AmajorchangeintheCommentaryUpdate2003isthenewdenitionofthepurpose
oftaxtreaties.TheCommentary(Article1,paragraph7)nowmentionsspecicallythat,
besidestheprincipalpurposeofeliminatinginternationaldoubletaxation,oneofthe
purposesofataxtreatyistopreventtaxavoidanceandevasion.AccordingtotheCommittee
onFiscalAffairs,countrieswereunlikelytoenterintotaxtreatiesthatallowedabusive
(i.e.improperorunacceptable)useofdomestictaxlawsthroughtaxarbitragetosecure
thetaxbenetsofbothdomesticlawsandtaxtreatiesusingarticiallegalstructures.The
wordinginallpreviousCommentarieswaslessspecicandonlyrequiredthattreaties
shouldnothelptaxavoidanceorevasion.
TheCommentaryonArticle1discussestheissueoftreatyabuse.UnderImproperUse
37OECDCommentary:Article1,para.5;Article4,para8.4.
38OECDCommentary:Article1,para.6.1.
39BrianJ.Arnold,TaxTreatiesandTaxAvoidance:The2003RevisionstotheCommentarytotheOECDModel
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CommentaryUpdate2003givesexamplesofmeasuresthatareusedbysomecountries,such
astheLimitationonBenetsprovisionandvariousanti-abuseprovisionsaimedatparticular
incometypes(e.g.dividends,interest,royaltiesandotherincome).
Theseexamplesinclude
restrictionsontheentitlementtotreatybenetsinpreferentialtaxregimes,asrecommended
42AdolfoJ.MartinJimenez,The2003RevisionoftheOECDCommentaryontheImproperUseofTaxTreaties
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47USModelTechnicalExplanation(1996):Article1,paras.1113.
48Ameasureisdenedtoincludealaw,regulation,rule,procedure,decision,administrativeactionorguidance,
oranyotherformofmeasure.
49OECDCommentary:Article25,paras.44.144.7.
50OECDCommentary:Article2,paras.25.
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Article2(3)liststhetaxescoveredbythetreatywhenitwassigned.Althoughthelist
maynotbeexhaustive,inprincipleitwouldincludeallthetaxesexistingatthattime,unless
theyhavebeenspecicallyexcluded.
Article2(4)extendstheArticletonewtaxesintroducedafterthetreatyhasbeensigned,
providedtheyareidenticalorsubstantiallysimilartothetaxestowhichthetreatyapplies.
51Itmustbeataxandnotanimpositionsimilartotax,e.g.aroyaltypayment.(
AshantiGoldeldsCorpLtdv
(1934)19TC52(UK)).
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Chapter3
UndertheMC,thetermpersonisusedinseveralArticles.Theyincludepersons
covered(Article1),resident(Article4),permanentestablishment(Article5(5)),associated
enterprises(Article9),interest(Article11),royalties(Article12),artistesandsportsmen
(Article17),non-discrimination(Article24),mutualagreementprocedure(Article25)and
exchangeofinformation(Article26).
(b)Theterm
isanybodycorporate,oranyentitythatistreatedasabody
corporatefortaxpurposesunderthetaxlawsoftheContractingStatewhereitisorganised.
Thus,evenwhenanentityisnotacompanyunderthecivilorcommerciallaw,theterm
personwouldincludesuchentitiesiftheyhavecorporatestatusforscalpurposes.The
termbodycorporateitselfisnotdenedintheModeltreaty.
ThedenitionofacompanyisapplicableintheArticlesonpermanentestablishment
(Article5(7)),dividends(Article10)anddirectorsfees(Article16).
(c)Theterm
enterprise
isusedinseveralArticlesinthetreaty.Inthepast,theOECDMC
didnotprovideadenitionofthetermandleftittothedomesticlawsoftheContracting
TheOECDMCanditsCommentarynowconrmthatthetermappliestothe
carryingonofanybusiness.Itwouldincludeanyentity,whichisusedbyapersontocarry
onincome-generatingactivitiesthatconstituteatradeorbusiness.Thepersonshouldassume
entrepreneurialrisksandexercisethepowertomakebusinessdecisions.Certaincaselaw
decisionsmaintainthatthewordenterpriseispartofaninternationaltaxlanguageand
thismeaningshouldbeappliedfortreatypurposes.
ThetermenterpriseisusedintheArticlesontaxescovered(Article2),permanent
establishment(Article5),incomefromimmovableproperty(Article6),businessprots
(Article7),shipping,inlandwaterwaystransportandairtransport(Article8),associated
enterprises(Article9),capitalgains(Article13)andnon-discrimination(Article24).
(d)Theterms
enterpriseofaContractingState
and
enterpriseoftheother
ContractingState
meanrespectivelyanenterprisecarriedonbyaresidentofaContracting
TheyareusedintheArticlesonbusinessprots(Article7),associatedenterprises
(Article9)andnon-discrimination(Article24).
(e)Theterm
internationaltrafc
meansanytransport(e.g.journey)byashiporaircraft
operatedbyanenterprisethathasitsplaceofeffectivemanagementinaContractingState.It
excludestransportbyanenterprisewithitsplaceofeffectivemanagementinoneContracting
56OECDCommentary:Article3,para.3.
57OECDCommentary:Article3,para.4;SeeKeesvanRaad,TheTermEnterpriseintheModelDouble
TaxationConventionsSeventyYearsofConfusion(Intertax,1994).
ThielvFCT
(1990)ATC4717,4728(Australia);
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Theterm
internationaltrafc
isusedintheArticlesonshipping,inlandwaterways
transportandairtransport(Article8),capitalgains(Article13(3)),incomefromemployment
(Article15(3))andcapital(Article22(3)).
(f)Theterm
60SeeChapter2(3.5).
61TheModeltreatyrequirestheuseofthedomesticlawmeaningincertainArticles(Examples:Articles4(1),
6(2),10(3)).
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theotherStateatthetimewhenthetreatywassignedorthecurrentmeaningunderitslaws.
Oneviewisthatboththemeaningsshouldbeconsidered.
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capital)whoisaresidentofaContractingState.SomeArticles(e.g.Article10)alsorefer
totheStatewherethepayerisaresident.
Article4(1)denesresidenceunderthetaxtreaty.ThetermresidentofaContracting
Statemeansapersonwhois(i)liabletotaxinaContractingState(ii)underitsdomestic
law(iii)byreasonof(iv)hisdomicile,residence,placeofmanagementoranyothercriterion
ofasimilarnature.Toqualifyasatreatyresident,allfourconditionsmustbesatised.The
ArticlealsomentionsthatthegovernmentofeachState,itspoliticalsubdivisionsandlocal
authorityareresidentsofthatState.
Thedenitionofresidenceappliestothepersonandnottheincome.Apersonmustbe
liabletotaxationunderthedomesticlawbecauseofhistaxstatusunderoneofthecriteria
listedinArticle4(1).Asachargingprovision,aliabilityshouldexistduetoapersonal
attachmenttoaContractingState.Therefore,thetermliabletotaxreferstosubject
relatedtaxation,andnottoobjectrelatedtaxation.
Thepersonmustbeliabletotaxontheworldwideincome(fulltaxliability)due
toalocality-relatedattachmenttothatStateasaresidentunderitsdomesticlaw.
taxresidencemustbebasedondomicile,residence,placeofmanagementoranyother
criteriaofasimilarnature.Thephrasesimilarnaturesuggeststhatitmustresemble
domicile,residenceorplaceofmanagement.
Thesecriteriaaregenerallyrecognisedunder
internationaltaxlawtojustifyworldwidetaxationofresidents.Anyotherbasisunderthe
domesticlawmaynotqualify.
Tobeliabletotax,thepersonhastobesubjecttothetaxlawsofaContractingState.
Thetermreferstotheexistingtaxlawsandtotaxescoveredbythetreatywhenitisapplied.
However,apersondoesnotnecessarilyhavetobesubjecttotax.Thetermsubjectto
taxreferstoacurrenttaxliability.IfaStatecantaxthepersononhisworldwideincome
underitscurrentlawsatafuturedateduetoanyofthelistedcriteriaundertheArticle,the
personisdeemedliabletotax.Suchapersonisliabletotaxpresentlybutdoesnothaveto
payanytax.IfthepersoncannotbeataxpayerunderthepresentlawsoftheState(nowor
infuture),hecannotbesaidtobeliabletotax.
Thus,aperson,whoisliabletotax,maynotnecessarilyhavetobesubjecttotax
i.e.actuallypaytax.
Itwouldincludepersonswhoarenoteffectivelytaxeddueto
67J.D.B.Oliver,CompanyResidenceFourCases(BritishTaxReview,1996No.5)pp.535.
68KlausVogel,DoubleTaxationConventions,Article4,m.no.24.
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73SeeMichaelLang,TaxationofIncomeintheHandsofDifferentTaxpayersfromtheViewpointofTaxTreaty
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mostofhistime,regardlessofpurpose.Itreliesonthefrequencyordurationofhisphysical
presenceorstay(s)inaContractingStateoverasufcientperiod.
Thenationalityofthe
individualisappliedasthefourthtie-breaker.Themutualagreementprocedurecanonly
beinitiatediftheabovecriteria,whenappliedoneaftertheother,donotbreakthedual
Thetreatyresidenceofaperson,otherthananindividual,ifitisdualresident,isdeemed
tobetheContractingStateinwhichithasitsplaceofeffectivemanagement(Article
itisnotaresidentunderatreaty(Examples:Canada,SouthAfrica,theUnitedKingdom).
UnderthedomesticlawsinCanada(CITASec.250(5))andtheUnitedKingdom(FA1994
76Ingeneral,thehabitualabodecriterionbasedontheactuallengthofstaysshouldprovideasolutiontodual
residenceforindividuals,butthelengthofperiodtobeexaminedforthereviewmaypresentdifculties.
77KlausVogel,DoubleTaxationConventions,Article4,m.no.82.
78Jean-MarcRivier,IFACahiersVol.72A,GeneralReport,1987;SeealsoOECDDiscussionPaperonPlace
ofEffectiveManagementasTieBreakerRule(OECD,February2001)paras.1735.
79TheUKInlandRevenuehasclariedthattheyregardeffectivemanagementastheplacewherethehead
ofceasthecentraldirectingsource(notasregisteredofce)islocated.Thisdenition,whichisappliedin
severalEuropeancountries,referstothecentreoftop-levelmanagementanddiffersfromcentralmanagement
andcontrolbydirectors.However,inmostcasesbothwillbelocatedinthesameplace.(SeeInlandRevenue
manualITH348);SeealsoJohnJ.AveryJones,PlaceofEffectiveManagementasaResidenceTie-Breaker
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Sec.249),acompany,whichisdeemedasnonresidentunderthetie-breakerprovision,isalso
regardedasnonresidentfordomestictaxpurposes.Similarrulesnowapplytoindividuals
inCanada.
TheMConlycoverspersonswhoareresidentinoneorbothContractingStates.Itdoes
notdealwithsituationsinvolvingtriangularcases.
OECDObservationsorReservations:
Canada,France,Germany,Greece,Italy,Japan,
Korea,Mexico,Spain,TurkeyandtheUnitedStates.
TheObservationsandReservationsofOECDMemberStatesintheCommentarygive
additionalinsightsonArticle4(3).TheUnitedStates,CanadaandMexicoreservetheir
rightstobasethetaxresidenceontheplaceofincorporation.JapanandKoreapreferthe
locationoftheheadormainofce.Turkeyreservestherighttoincludetheuseofthe
registeredofcecriterion(legalheadofce).
Non-OECDPositions:
Albania,Belarus,Brazil,Bulgaria,China,Estonia,Gabon,Ivory
Coast,Latvia,Lithuania,Morocco,Russia,SouthAfrica,Thailand,Tunisia,Ukraineand
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Tax-exemptentitiesestablishedexclusivelyeither(i)forareligious,charitable,
educational,scienticorothersimilarpurpose,or(ii)toprovidepensionsorsimilar
benetstoemployeesunderapensionplanareresidentfortreatypurposes.
Aqualiedgovernmentalentityistaxresidentwhereitisestablished.
Anitemofincome,protorgainthroughanentitythatisscallytransparentunderthe
lawsofeitherContractingStateisdeemedtobederivedbyaresidentofaStatetothe
extentthattheitemistreatedasincomeofaresidentofthatContractingStatefortax
purposes(derivedthroughentityprinciple).
86Strictlyspeaking,thereareonlytwokindsofpermanentestablishment,namelybasicPEandagencyPE.The
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enterprisehasacertainamountofspaceintheotherStateatitsdisposali.e.availablefor
itsuse.
Theplaceofbusinessdoesnothavetobeownedorrentedbytheenterprise.Itis
notnecessarythatitisexclusivelyusedbytheenterprise.Itmaybesituatedinthebusiness
facilitiesofanotherenterprise.Itmayexistevenwhennopremisesareavailableorrequired
forbusinesspurposesanditsimplyhasacertainamountofspaceatitsdisposal.Itmaybe
legallyorillegallyoccupied.However,themerepresenceofanenterpriseataparticular
placedoesnotnecessarilymeanthatitisatitsdisposal.
Theplaceofbusinessmustbexedintermsofbothtimeandlocation,i.e.adistinct
inwhichthebusinessactivityiscarriedout(locationtest)withacertaindegree
ofpermanency(permanencetest).Theremustbeageographicalorphysicallinkwith
theplaceofbusiness.Ifactivitiesareperformedatmorethanonepreciselocation,these
locationsmayconstituteasingleplaceofbusinessprovidedtheyconstituteawholethat
isbothcommerciallyandgeographicallycoherent.Theywouldincludeactivitiesthatare
connedtoaspecicarea,evenifmovedaround,e.g.constructionactivity,oildrillingrig,
(Bundesnanzhof4BFH
NV119(1988)(Germany).AnyspaceprovidedbyacustomerinthesourceState
solelyforperforminganyworkonhisbehalfisnotapermanentestablishmentoftheforeignenterprise.(See
KlausVogel,DoubleTaxationConventions,Article5,paras.2128).
90Thispowermaybeheldaloneorjointlywithotherparties.Ifjointly,theplacemaybetreatedasapermanent
establishmentofeachofthepartiesinvolved.
91OECDCommentary:Article5,para.44.6.
92OECDCommentary:Article5,paras.55.4.
93IntheFrenchtextoftheModeltreaty,thetermusedis
establishmentstable
.Thewordpermanentdoesnot
appearintheFrenchtreatytext.
94OECDCommentary:Article5,paras.66.3.
95OECDCommentary:Article5,para.11.
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receiveinstructionsfromtheenterprise.
96OECDCommentary:Article5,para.2.
97OECDCommentary:Article5,para.2;thephrasecarriesonsuggestsanoccupationalundertakingtowhich
onehabituallydevotestime,attentionoreffortwithsubstantialregularity.(
FahsvCrawford
F2d315,317
98OECDCommentary:Article5,para.42.6.
99Examples:vendingandgamingmachines,atelephoneexchange,automaticllingstations,equipmentfor
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operationsthroughthem.
Aregisteredofceofabrassplatecompanywouldnot
qualify.
(ii)Constructionpermanentestablishment(Article5(3)):
103OECDCommentary:Article5,para.12.
104JohnCHustonandRobertLWilliams,PermanentEstablishmentAPlanningPrimer,pp.6566.
105OECDCommentary:Article5,para.1919.1.
106OECDCommentary:Article5,para.18.
107OECDCommentary:Article5,para.20.
108KlausVogel,DoubleTaxationConventions,Article5,m.no.73a.
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constructionprojectsandofnewequipment.Thisparagraphalsocoverson-siteplanning
andsupervision.
(iii)Agencypermanentestablishment(Article5(5)):
Theagencyparagraph(Article5(5))
replacestherequirementofaplaceofbusinessunderthebasicrulebyanagent(Article
5(1)).Anenterprisethatdoesnotqualifyunderthebasicrulemaystillhaveadeemed
permanentestablishmentifitcarriesonbusinessactivitiesthroughaperson,
whoisnot
anindependentagentunderArticle5(6).Aforeignenterprisedoesnotneedtohaveaxed
placeofbusinessortherighttousesuchaplaceifitusesanagent.Theagencyclause
doesnotrequireanyspecialbusinessactivity.Itcanbeanyactivityessentialandsignicant
totheprincipalsbusiness.
Toqualifyasanagencypermanentestablishment,either(a)adependentagentor(b)
anindependentagentwhoisnotactingintheordinarycourseofhisownbusinessmust
(i)actonbehalfoftheenterprise(i.e.theprincipal),
(ii)musthavetheauthorityto
concludecontractsinthenameoftheenterprise,and(iii)mustexercisethisauthorityona
habitualorongoing(notisolated)basis.Thecontractsshouldrelatetothecoreoperations
oressentialandsignicantbusinessactivitiesoftheenterprise.
Iftheseconditionsare
109OECDCommentary:Article5,para.17.
110ThetermpersonisdenedinArticle3(1)(a)toincludeanindividual,acompanyoranybodyofpersons.
Therefore,anagentcanbeeitherindividualsorcompanies.
111ArvidSkaar,PermanentEstablishment,p.464.
112Undercommonlaw,anagentalwaysactsonbehalfoftheprincipalandlegallybindshim.Hewillconstitute
anagencyPEunlessheislegallyandeconomicallyindependentandactsintheordinarycourseofhisown
business.Undercivillaw,thelawofrepresentationapplies.Apersonbindstheprincipalifheactsinhisname
(directrepresentation)butnotwhenheintendstobindhimselftothethirdparty(indirectrepresentation).A
civillawcommissionaireorcommissionagentnormallyconcludescontractsinhisownnameasanundisclosed
agentonbehalfoftheprincipalanddoesnotbindhim.
113Theparagraphexcludesanagentwhoseactivitiesareconnedtoauxiliaryorpreparatoryactivitieslisted
underparagraph4ofthisArticle,providedtheydonotformanessentialorsignicantpartoftheactivityof
theenterprise.
114OECDCommentary:Article5,para.34.
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Theagentmusthavetheauthority(informorsubstance)toconcludecontractsthatbind
theprincipal.Theyarenotlimitedtocontractsthatareliterallyinthenameoftheenterprise,
providedtheyarebindingonhim.Theagenthastheauthoritywhereabonadethirdparty
isjustiedinbelievingthathisactionscreatealegallybindingobligationfortheprincipal.
Anagencypermanentestablishmentwouldalsoexistiftheagentconcludesthecontracts
ornegotiatesthetermsofabindingcontractforformalapprovalbytheprincipal.Thelackof
activeinvolvementbytheprincipalmaysuggestanimplicitauthoritygiventotheagent.He
doesnothavetoliterallysigncontractsinthenameoftheenterpriseforthispurpose.
Meresolicitationofbusinessornegotiationofcontracts,subjecttoapproval,shouldnot
normallyleadtoanagencypermanentestablishment.
Theagentmustexercisehisauthoritytoconcludehabituallythecontractsrelatingto
115OECDCommentary:Article5,paras.3233.
116Generally,noagencyPEshouldexistiftheagentisonlyauthorisedtonegotiatethetermsofthecontractand
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Althoughasubsidiaryisnotanagentoftheparentcompanysolelyduetotheshare
ownership,itmaybeapermanentestablishmentincertaincircumstances.UnderArticle
5(1),apermanentestablishmentrequiresaplaceofbusinessatonesdisposal.Article5(5)
supplementsthisrulebydeemingapermanentestablishmenttoexistwhereanenterprise
doesnothaveaplaceofbusinessbutactsthroughanagent.Therefore,theparentcompany
mayhaveapermanentestablishmentifeitheritcarriesonitsbusinessactivitiesthrougha
xedplaceofbusinessinthesubsidiaryspremisesorthesubsidiaryconductsthemasa
dependentagent.
Theparentcompanycanalsobeconsideredtohaveapermanentestablishmentifthe
subsidiary,asanindependentagent,actsoutsideitsordinarycourseofbusinessforthe
parentcompany.Tobeapermanentestablishment,thesubsidiarymusthavetheauthority
toconcludecontractsinthenameoftheparentcompanyandhabituallyexercisethat
authority.
Similarrulesapplytoactivitiescarriedoutbyfellow-subsidiariesorincases
whentheparentcompanyactsasapermanentestablishmentforthesubsidiary.
Inarecentcase,
theItalianSupremeCourt(CorteSupremediCassazione)heldthata
subsidiaryofPhilipMorrismonitoringitscontractswithItalianlicenseesasanindependent
agentmightbeapermanentestablishment.
PhilipMorrisGermanyGmbHhadacontract
121OECDCommentary:Article5,para.41.
DepartmentoftheMinistryofFinancevPhilipMorris
(CourtofCassation,Decision3368ofMarch7,2002)
123AcontraryviewwastakeninJune2003bytheFrenchSupremeCourtinthecaseof
Soci
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ThesenewprovisionsareincludedintheOECDCommentaryUpdate2005.
125Asanexample,asubsidiarymaybeaPEwhenitconcludesacontractforjointbusinessactivitieswithoutthe
abilitytofullitexceptinpartnershipwiththeparentcompany.
126DiscussionDraftonAttributionofProtstoPermanentEstablishments(partIII),paras.256261(OECD,
April2002).
127OECDCommentary:Article5,para.23;accordingtoVogel,theinabilitytoallocateincomeandexpenditure
maybetakentosuggestthenon-existenceofapermanentestablishment(SeeKlausVogel,DoubleTaxation
Conventions,Article5,m.no.9).
128KlausVogel,DoubleTaxationConventions,Article5,m.no.109.
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Anactivitycannotbeconsideredaspreparatoryorauxiliary,ifitissimilartotheessential
andsignicantpartoftheactivityoftheenterpriseasawhole.
TheCommentarygives
examplesofactivitiesthatarenotauxiliaryorpreparatory.Theyincludemanagementofce
orco-ordinationcentres,after-salesactivities(e.g.supplyofspareparts,andrepairor
maintenanceservices),manufacturingbyaresearchestablishment,andservicesperformed
forotherenterprises.
Apermanentestablishmentwouldexistifanyoftheexempt
functionswereperformedforotherenterprisesorwithcoreactivities.Forexample,a
researchfacilityorwarehousewillbeapermanentestablishmentifitisalsoengagedin
sellingactivities.Thecohesiveactivitiesofanorganisationcannotbesplitintoseveralsmall
operationstoregardthemaspreparatoryorauxiliary.
(ii)Article5(6)
Theuseofabroker,ageneralcommissionagent
oranagentof
independentstatus,providedtheyareactingintheordinarycourseoftheirownbusinessor
trade,doesnotconstituteapermanentestablishment.Ageneralcommissionagenthandles
goodsorservicesforseveralprincipals,
whileabrokermerelybringsvariouscommercial
129OECDCommentary:Article5,para.24and26.1;IntheGermanpipelinecase,theexclusionunderArticle
5(4)wasdeniedsincetheDutchoperatorwasengagedinthetransportofcrudeoilownedbythirdpartiesas
itscoreactivity(Bundesnanzhof30October1996,IIR12
130OECDCommentary:Article5,para.2135.
131OECDCommentary:Article5,para.27.1.
FlemingvLondonProduceCo.
(1968)44TC582(UK):Ageneralcommissionagentisanagentwhoholds
himselfoutasbeingreadytoworkforclientsgenerally,andwhodoesnotinsubstanceconnehisactivities
tooneprincipal,ortoaninsignicantnumberofprincipals.
133Undercivillaw,ageneralcommissionagentactinginhisownname(undisclosedagent)asacommissionaire
doesnotbindtheprincipaland,therefore,cannotusuallybeanagencypermanentestablishment.Under
commonlaw,ageneralcommissionagentusuallybindstheprincipal.HewillconstituteanagencyPEunless
heislegallyandeconomicallyindependentandactsintheordinarycourseofhisbusiness.
134OECDCommentary:Article5,paras.38.238.5.
135In
DonroyLtdvUnitedStates
301F.2d200,206(9thCir.)(1982),theCourtheldthatanindependentagent
generallymeansonewho,exercisinganindependentemployment,contractstodoapieceofworkaccording
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iftheprincipaldidnotrequirehisservices.However,legaldependencemayexistevenwith
136OECDCommentary:Article5,para.3838.8.
137OECDCommentary:Article5,para.37.
138KlausVogel,DoubleTaxationConventions,Article5,m.no.169174.
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UNMC
UndertheUNMCArticle5,thedenitionofpermanentestablishmentcontainsadditional
criteria,asfollows:
Article5(3)(a)reducesthequalifyingperiodforallconstructionpermanentestablishment
tosixmonths.Moreover,itclariesthatanassemblyprojectisincluded.Supervisory
activitiesonabuildingsiteoraconstruction,assemblyorinstallationprojectalsoconstitute
apermanentestablishmentiftheycontinueformorethansixmonths.
Article5(3)(b)addsthefurnishingofservices,includingconsultancyservices,by
anenterprisethroughemployeesorotherpersonnelengagedbytheenterpriseforsuch
Thereisapermanentestablishmentiftheservicesareperformedbyanenterprise
ofaContractingStateforaperiodorperiodsaggregatingmorethansixmonthsinany
12-monthperiod,onthesameoraconnectedprojectwithintheotherState.Themere
furnishing(i.e.provision)ofanyservicemayleadtotaxationasadeemedservice
permanentestablishmenteveniftheenterprisehasnoxedbaseorplaceofbusinessin
thatStatetocarryonitsbusiness,asrequiredunderArticle5(1).
Article5(4)excludesfromtheexemptactivitiesthefacilitiesusedsolelyforthedelivery
ofgoodsormerchandisebelongingtotheenterprise,andthemaintenanceofastockof
goodsormerchandisesolelyfordelivery.TheUNMC2001includessub-paragraph(f)
inOECDMCthatreferstotheexclusionofaxedplacesolelyforanycombinationof
activitiesmentionedinsubparagraphs(a)to(e).
Article5(5)(b)regardsadependentagent,whohabituallymaintainsastockofgoodsor
merchandiseandregularlydeliversthemonbehalfoftheenterprise,asanagencypermanent
establishment,evenifhehasnoauthoritytoconcludecontracts(stockagent).TheUN
Commentaryclariesthatthissubparagraphappliesonlyifthesaleofthegoodsisthe
resultofanysales-relatedactivities(e.g.advertisingorpromotion)conductedinthatState
143OECDCommentary:Article5,para.10;undertheOECDCommentary,thetermpersonnelincludespersons
inpaidemploymentwiththeenterprise.Thus,personnelincludebothemployeesandotherpersonsreceiving
instructionsfromtheenterprise(e.g.dependentagents).SeeEdwinvanderBruggen,PEImplicationsWhen
FurnishingConsultingServicesUnderOECDandUNModelTreaties(TaxAnalysts,May21,2001)Section
144UNCommentary:Article5,paras.915;TheUNCommentaryreferstomanagementandconsultancy(i.e.
advisory)servicesunderthisparagraph.Althoughitdoesnotmentiontechnicalservices,thewordingiswide
enoughtoincludethem.(SeeChapter8(10.1)).
145UNCommentary:Article25,para.25.
146ArvidSkaar,PermanentEstablishment,pp.532536.
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unlessthetransactionsareconductedonanarmslengthbasis.Thus,foraPEtoexistthe
147UNCommentary:Article5,paras.2931;EdwinvanderBruggen,APreliminaryLookattheNewUNModel
TaxConvention(BritishTaxReview,2002No.2)pp.122124.
148USModelTechnicalExplanation(1996):Article5,para.8182.
149OECDCommentary:Article6,para.1.
150KlausVogel,DoubleTaxationConventions,Article6,m.no.22.
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toimmovableproperty,livestockandequipmentusedinagricultureandforestry,rights
underdomesticlawattachedtolandedproperty,usufructofimmovableproperty,andrights
tovariableorxedroyaltypaymentsfortheworkingof,ortherighttowork,mineral
deposits,sourcesandothernaturalresources.UnderArticle6(3)theprovisionsalsoapply
toalltypesofincomederivedfromthedirectuse,
specicallyexcludedandistaxableasinterestincomeunderArticle11.
Article6(4)clariesthattherulealsoappliestoincomefromimmovablepropertyof
industrial,commercialandotherenterprises.Thus,the
principleunderthisArticle
takesprecedenceovertherulesgoverningpermanentestablishment(Article7).
Articleappliestoallincomearisingdirectlyorindirectlyfromimmovablepropertyinthe
State,evenifthereisnopermanentestablishmentinthatState.Incasetheimmovable
propertyispartofthepermanentestablishment,theincomewillbeincludedinitstaxable
income,buttherightofsourceStatehaspriorityovertherightoftheotherState.
OECDReservations:
Canada,Finland,France,NewZealand,SpainandtheUnited
Non-OECDPositions:
Belarus,Estonia,Latvia,LithuaniaandMorocco.
UNMC
USMC
UnderUSMCArticle6(5),aresidentofaContractingStatemayelecttobetaxedon
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underArticle5,thesourceStatehasthetaxingrightsovertheincomeattributabletoit.Tobe
taxableinthesourceStateunderthisArticle,(a)theremustbeanenterpriseofaContracting
State,(b)theremustbeapermanentestablishmentoftheenterpriseintheotherState,
(c)theenterprisemustcarryonbusinessintheotherStatethroughthepermanent
establishmentand(d)theenterprisemustearnbusinessprotsfromthepermanent
Theconceptofbusinessprotsandtheunderlyingterms(namelybusinessand
prots)arenotdenedinthetreatytextortheCommentaries.TheCommentarysuggests
thatthetermprotscomprisesbroadlyalltheincomederivedbyanenterprise.
Therefore,thetermbusinessprotscoversallformsofprotsfromindependent
commercialactivity,
includingincomederivedfromacontracttoabstainfromtheseforms
ofbusinessactivities.
Cross-borderleasingactivities,i.e.theuseof,ortherighttouse,
industrial,commercialorscienticequipment(includingcontainerleasing),
aretaxable
asbusinessprots.
TheMCUpdate2000nowspecicallyincludestheincomefromthe
performanceofprofessionalservicesandotheractivitiesofanindependentcharacteras
businessprotsunderthisArticle.
Article7(1)mentionsthatanenterpriseshallonlybetaxed(exclusive)onthebusiness
prots(alsoreferredtoasindustrialandcommercialprots)intheStateofresidence.
However,thesourceStatemayalsotax(non-exclusive)theincomeofapermanent
establishmentofanenterpriseintheotherState.
TheArticlelimitsthistaxingright
ofthesourceStatetothebusinessprotsattributabletothepermanentestablishment.The
taxingrightappliestotheworldwideincomeofthepermanentestablishment
anyincomederivedfromtheStateofresidenceandthirdStates.
TheOECDMCdoes
notapproveoftheforceofattractionprincipleandexcludesanyincome,whichisnot
attributabletothepermanentestablishment.Thisparagraphdoesnotlimittherightofa
ContractingStatetotaxitsownresidentsbasedonprotsofarelatedresidententerprisein
theotherStateunderitscontrolledforeigncorporationrules.
TheOECDMCrequirestheuseofthedistinctandseparateenterpriseandthearms
156OECDCommentary:Article7,paras.3236.
157Anythingwhichoccupiesthetimeandattentionandlabourofmanforthepurposeofprotisbusiness
TransvaalAssociatedHideandSkinMerchants(Pty)Ltd.vCollectorofTaxes
,Botswana(1967)SATC97).
Anisolatedactivityofacquiringshareswithaviewtotheirsaleataprotwastreatedasabusinesscarried
onbyanenterprise(
ThielvFCT
158KlausVogel,DoubleTaxationConventions,Article7,m.no.22.
159TheprotsfromcontainerleasingareincludedunderArticle8,iftheyaresupplementaryorincidentaltothe
internationaloperationofshipsoraircraft.
160OECDCommentary:Article7,para.37.
161KlausVogel,DoubleTaxationConventions.Article7,m.no.69-71.
162Severalcountriesattributeonlytheincomederivedfromdomesticsourceswithintheirjurisdictiontothe
permanentestablishmentandexcludeforeignsourceincome(Examples:Australia,France,Italy,Malaysia,
SouthAfrica,theUnitedKingdom).
163RobertJPatrick,IFACahiersVol.65B,GeneralReport,1980.
164OECDCommentary:Article7,para.10.1.
165TheOECDCommitteeonFiscalAffairsiscurrentlystudyingtheissuesrelatingtoattributionofprotsto
permanentestablishments.ThenalReportontheAttributionofProtstoPermanentEstablishments,with
proposedchangesintheCommentary,isexpectedbyJanuary2007.Thereportwillbeinfourparts.Part1
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ruleisbindingonboththeStateofthepermanentestablishmentandtheStateofresidence.
Therefore,thebusinessprotsofthepermanentestablishmentmustbecomputedbyeach
ContractingState,astheprotswhichitmightbeexpectedtomakeif(a)itwereadistinct
andseparateenterprise(b)engagedinthesameorsimilaractivities(c)underthesameor
similarconditionsand(d)dealingwhollyindependentlywiththeenterpriseofwhichitisa
permanententerprise.Itisequivalenttotheprotsthatapermanentestablishmentmight
beexpectedtoearnasanindependententityunderconditionsandatpricesprevailinginthe
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otherbusinessincomeorprotsarealsodealtwithinspecialArticlesunderthetreaty.
172SeeArticle10(dividends),Article11(interest),Article12(royalties)andArticle21(otherincome).
173SeeOECDMCArticles10(4),11(4),12(3)and21(2).
174OECDCommentary:Article7,para.35.
175OECDCommentary:Article7,para.4.
176OECDCommentary:Article7,paras.3854.
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performed,(iv)feesformanagement,and(v)exceptinthecaseofabank,interestpayments
onloansmadetothepermanentestablishment.Similarly,noaccountshallbetakenofsuch
expenseschargedbythepermanentestablishmenttotheheadofceoranyofitsotherofces
177UNCommentary:Article7,para.25.
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toatradeorbusinessofdealinginsuchinstruments,orrelatedtoatradeorbusinesscarried
onthroughapermanentestablishment.
Article7(8):Deferredbusinessprotsattributabletoapermanentestablishmentorxed
basearetaxableevenaftertheyceasetoexist.
TheArticledoesnotcontainaparagraphsimilartoOECDMCArticle7(4)since
itisdeemedunnecessary.TheTechnicalExplanationmentionsthat,initsview,the
apportionmentbasisispermittedundertheCommentaryonOECDMCArticle7(2)and
Article8:Shipping,InlandWaterwaysTransportandAirTransport
OECDMC
TheArticleprovidesthattheprotsfromtheoperationof(a)shipsoraircraftininternational
trafc,asdenedinArticle3(1)(e)oftheOECDMC,or(b)boatsengagedininland
waterwaystransportshallbetaxableonly(exclusive)intheContractingStateinwhich
theplaceofeffectivemanagement(notresidence)oftheenterpriseissituated.Acompany
maymanageoneormoreenterprises.
Internationaltrafccoversanyshippingoraircrafttransportbyanenterprisewithaplace
180USModelTechnicalExplanation(1996):Article7,para.103.
181TheCommentarytothisArticlewasupdatedin2004totakeintoaccountthedevelopmentsininternational
transportactivities.TheproposedamendmentswillbeincludedintheCommentaryUpdate2005.
182WhileArticle4(3)referstotheeffectivemanagementofacompany,Article8(1)referstotheeffective
managementoftheenterprise.Acompanyorindividualmaycarryonmorethanoneenterprise.(See
R.DoernbergandK.Raad,The1996USModelTaxConvention,p.70)
183OECDCommentary:Article3,para.6.3.
184OECDCommentary:Article8,para.16.
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oftheenterprise,andwheretheeconomicactivitiesaremanaged.
Iftheplaceofeffective
managementisaboardashiporboat,thenitisdeemedtobeintheStateofthehomeharbour
ortheportoftheshiporboat.Incasethereisnosuchhomeharbour,theStateofresidence
oftheoperatoroftheshiporboatisused.Wheretheoperationisconductedeffectively
throughapermanentestablishmentthatdiffersfromtheplaceofeffectivemanagementof
thewholeenterprise,theContractingStatewherethepermanentestablishmentissituated
isconsideredtheplaceofeffectivemanagement.
Theproposed2005CommentaryUpdatedenesthetermprotsunderthisArticle
evenmorebroadly.Besidesprotsfromactivitiesdirectlyconnectedwithinternational
185KlausVogel,DoubleTaxationConventions,Article8,m.no.38.
186OECDCommentary:Article8,paras.1821.
187OECDCommentary:Article8,paras.44.3.
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OECDObservationsorReservations:
Australia,Canada,Denmark,Germany,Greece,
Hungary,Ireland,Mexico,NewZealand,Norway,Poland,Portugal,SlovakRepublic,
Sweden,Turkey,theUnitedKingdomandtheUnitedStates.
Non-OECDPositions:
Albania,Argentina,Brazil,Bulgaria,China,Croatia,Estonia,
Gabon,Latvia,Lithuania,Malaysia,Morocco,Philippines,Slovenia,SouthAfrica,
191OECDCommentary:Article8,paras.2742.
192UNCommentary:Article8,para.13.
193OECDCommentary:Article8,para.5.
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Article8(3):Theprotsfromtheuse,maintenance,orrentalofcontainers(including
trailers,barges,andrelatedequipmentforthetransportofcontainers)ininternationaltrafc
aretaxableonly(shallbe)intheresidenceState.Itisnotnecessaryfortheenterprisetobe
engagedintheoperationofshipsoraircraftininternationaltrafcortoavoidapermanent
establishmentintheotherContractingState.
Article9:AssociatedEnterprises
OECDMC
194TheOECDMCArticle8onlycoverstheincomefromtheuse,maintenanceorrentalofcontainersifitis
incidentaltootherincomefrominternationaltrafc.
195OECDCommentary:Article9,para.1;SeeChapter6(6.7).
196Theparticipationbythesamepersonswouldincludeassociationsthatjointlymanageenterprises,e.g.co-
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either(i)byreopeningthetaxassessmentintheotherContractingStateandadjustingthe
taxableprots,or(ii)bythegrantofanadditionalcreditunderArticle23(doubletaxrelief)
fortheincometaxedintherstContractingState.
TheotherContractingStateisnotrequiredtomaketheadjustment,unlessitagreeswithit
inprincipleandamount.
197OECDCommentary:Article9,para.6.
198OECDCommentary:Article25,paras.9and29.
199OECDCommentary:Article9,paras1617.
200OECDCommentary:Article25,para.10.
201OECDCommentary:Article9,para.2.
202OECDCommentary:Article9,paras.1219.
203UNCommentary:Article9,para.9.
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USMC
Thesignicantvariationsare:
Article9(1):TheTechnicalExplanationmentionsthatthetermcontrolreferstoall
204USModelTechnicalExplanation(1996):Article9,para123.
205OECDCommentary:Article10,paras.12.12.2;KlausVogel,DoubleTaxationConventions,PrefacetoArticle
1012,m.no.11:AccordingtoVogel,itisnotnecessaryfortherecipientandthebenecialownertoberesident
inthesameState.
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thedividendsarepaid,i.e.whenthefundsareputinthehandsoftheshareholdersina
mannerrequiredbycontractorbycustom.
ThewithholdingtaxunderthisArticleaffects
onlythetaxationofthedividendsandnotthetaxationoftheunderlyingcorporateprots
fromwhichthedividendsarepaid.
Thetermdividendsfollowsthedenitioninthecountryofsource(payingcountry)
underthisArticle.
Dividendsincludethedistributionofprotsbycompanieslimited
byshares,limitedpartnershipswithsharecapital,limitedliabilitycompaniesandother
jointstockcompanies.
Moreover,thetermincludesbenetsinmoneyormoneysworth,
suchasbonusshares,bonuses,liquidationprots,disguisedprotdistributionsaswellas
similarbenetsreceivedbyconnectedthirdparties,butexcludescapitaldistributionsby
Article10(3)containsalistofitemsthataretreatedasdividendsforthepurposesof
thisArticle.Itreferstoincomefromcorporatesecuritiesthatcarryarighttoparticipate
intheprotswithoutbeingdebt-claims.Itspecicallyincludesshares,jouissanceshares
orjouissancerights,
miningshares,founderssharesandotherrightsthatshareinthe
prots.Inaddition,itmentionsthatanycorporateincome,whichistaxedasincomefrom
sharesunderthedomesticlawoftheStatewherethecompanymakingthedistributionisa
resident,mustalsobedenedasdividendsunderthisArticle.
Theinterestonparticipatingorconvertiblebondsisnotnormallydividends.The
Commentary,however,justiessuchinterestasdividendsifthelendereffectivelyshares
thebusinessrisksofthedebtorcompany.Itprovidesexamplestoincludesituationswhere:
theloansignicantlyexceedstheequitycontributionsandissubstantiallyunmatchedby
206OECDCommentary:Article10.para.7;KlausVogel,DoubleTaxationConventions,Article10,m.no.22;
StefvanWeeghel,TheImproperUseofTaxTreaties,pp.5764.
207KlausVogel,DoubleTaxationConventions,Article10,m.no.199.
208OECDCommentary:Article10,para.1.
209OECDCommentary:Article10,paras.2829.
210SeeGlossary.
211OECDCommentary:Article10,para.25.
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partlyorwhollyfromapermanentestablishmentinthatState.Itsrighttotaxsuchdividends
isrestrictedtopaymentsmadetoitsownresidentsortoapermanentestablishmentinits
ownState.Thus,thisArticlepreventsaStatefromtaxingdividendincomeexceptwhere
thepayerorthepayeeisaresidentofthatState.
TheArticledoesnotapplyeithertoadividendpaidbyacompanyresidentinathird
State,ortoadividendpaidbyacompanyresidentinaContractingStatethatisattributable
toapermanentestablishment,whichanotherenterpriseofthesameStatehasintheother
ContractingState.Insuchcases,Article21applies.
Moreover,theprovisionsunder
thisArticlerelateprimarilytodividendpaymentsundertheclassicaltaxsystem.
Commentarydiscussesthetaxissuesundertheimputationsystembutleavesthesolution
tobilateraltreatynegotiations.
OECDObservationsorReservations:
Belgium,Canada,Denmark,France,Germany,
Ireland,Italy,Luxembourg,Mexico,NewZealand,Poland,Portugal,Spain,Turkey,the
UnitedKingdomandtheUnitedStates.
Non-OECDPositions:
Argentina,Belarus,Brazil,Bulgaria,Estonia,Gabon,Israel,Ivory
Coast,Latvia,Lithuania,Morocco,Romania,Russia,Slovenia,SouthAfrica,Thailand,
212OECDCommentary:Article10,para.3335;SeeChapter4(7.1).
213OECDCommentary:Article10,para.8;Article21,paras.45.
214SeeChapter5(5).
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USMC
ThereareseveraldifferencesfromtheOECDMC:
UnderArticle10(2),thesameconcessionalwithholdingtaxratesaregivenasunderthe
OECDMC,namely:Article10(2)(a)5%;Article10(2)(b)15%.However,theArticle
reducestheparticipationrequirementfrom25%shareholdingtoownershipof10%direct
votingsharesforthelowerconcessionalwithholdingratelimittoapply.
TheUSModeltextmentionsthatthetreatyentitlementisgivenonlyifthedividend
ispaidtoaresidentoftheotherContractingStateasabenecialownerofthedividend.
TheUSMCappliesaspecicdenitionofthetermbenecialowner.TheTechnical
ExplanationdenesthetermtomeananypersonresidentintheotherContractingStateto
whomthatStateattributesthedividendforthepurposesofitstax.
Article10(3):Thelowerconcessionalwithholdingratelimitdoesnotapplytodividend
paymentsbyaregulatedinvestmentcompany(RIT)orarealestateinvestmenttrust(REIT)
intheUnitedStates.ThehigherratelimitalsodoesnotapplytoaREIT,unlessanindividual
beneciallyownslessthan10%interest.
Article10(4):QualiedgovernmentalentitiesintheotherContractingStatearegranted
fullexemptionfromsourcetaxonthedividendsreceivedbeneciallybythem,iftheydo
notcontrolthepayerofthedividend.
Article10(8)and10(9):ThesourceStatemayimposeanadditionalbranchprotstax
onthedividendequivalentamountoftheprotsorincomeofacorporationresidentinthe
otherState,if(a)ithasapermanentestablishmentinthatState,or(b)ithasincomefrom
establishmentinaContractingStatearetaxableunderArticle7asbusinessprotsof
thepermanentestablishment.(Article11(4)).
TheArticlegrantssharedtaxingrightsontheinterestincome,whicharisesina
ContractingStateandispaidtoaresidentoftheotherContractingState.
Itmaybe
taxed(non-exclusive)inbothContractingStates.However,ifthebenecialownerofthe
220USModelTechnicalExplanation(1996):Article10,para.140.
221UnderArticle11(5),theinterestisnormallydeemedtoariseintheStateofresidenceofthepayerofthe
interest;SeeChapter4(7.2)).
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interestisaresidentoftheotherContractingState,theprimarytaxingrightofthesource
Stateislimitedtoamaximumof10%ofthegrossinterestunderthetreaty.
TheCommentaryclariesthatthetermbenecialownerisusedinawidersenseasan
anti-avoidancemeasureunderthetreaty.Itexcludesinterestpaymentstoanintermediary
suchasanomineeoragent,aswellasconduitcompanieswheretheformalownerhasvery
narrowrightsinrealityovertheincome,unlessthebenecialownerisalsoaresidentofthe
ContractingStateoftherecipient.Theyareresidentbut,astheydonotowntheincomefor
taxpurposes,arenotliabletopotentialdoubletaxation.Theapplicationofthelimitationis
11(3)).Itspecicallyincludesincomefromgovernmentsecuritiesandincomefrombonds
ordebentures(includingpremiumsandprizes).Theinterestonaparticipating(i.e.prot-
sharing)orconvertiblebondisnormallyinterest,unlesstheloaneffectivelysharestherisks
oftheborrowersbusiness.
Thetermdebt-claimisnotdenedeitherintheMCortheCommentary,butapayment
isnotinterestunlessthereisanunderlyingclaimformonieslent.
Itisthepayment
formakingcapitalavailable,nomatterwhentheinterestpaymentismade.Interestis
deemedpaidwhenfundsareputatthedisposalofthecreditorasrequiredbycontract
orbycustom.
Allpayments,whichtheissuermakestothesubscriberthatexceedthe
facevalueofthenancialinstrument,areregardedasinterestpayments.Accordingtothe
Commentary,thedenitionisexhaustiveand,therefore,thereshouldbenorecoursetoan
222OECDCommentary:Article11.para.19;KlausVogel,DoubleTaxationConventions,Article11,m.no.56.
223KlausVogel,DoubleTaxationConventions,Article11,m.no.56.
224OECDCommentary:Article11,para.5;KlausVogel:DoubleTaxationConventions,Article11,m.no.15.
225OECDCommentary:Article11,para.21.
226OECDCommentary:Article11,para.19.
227OECDCommentary:Article11,para.21.1.
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Generally,theinterestisdeemedtoariseintheStateofresidenceofthepayerofthe
interest(Article11(5)).Thissourceruledoesnotapplyiftheinterestpaymentisincurred
andbornebyapermanentestablishmentsituatedinaContractingState.Insuchcases,the
sourceistheContractingStatewherethepermanentestablishmentissituated,irrespective
228SeeChapter8(6.2).
229OECDCommentary:Article11,paras.2831.
230OECDCommentary:Article11,para.3236;KlausVogel,DoubleTaxationConventions,Article11,m.no.
231OECDCommentary:Article11,para.6;Article21,para.45.
232OECDCommentary:Article11,paras.3745.
233UNCommentary:Article11,paras.1118.
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USMC
ThereareseveralvariationsfromtheOECDMC:
Article11(1):InterestarisinginaContractingStateandbeneciallyownedbyaresident
oftheotherContractingStatemaybetaxedonly(exclusive)inthatotherState(subjectto
certainexceptionsunderArticle11(3)and11(5)below).Abenecialownerisanyperson
residentinaContractingStatetowhomthatStateattributesthepaymentfortaxpurposes.
Article11(2):TheArticletextspecicallyincludesallincometaxedintheContracting
Stateinwhichtheincomearisesasincomefrommonieslentundertheterminterest,and
excludesallincomedealtwithasdividendsinArticle10.
Article11(3):TheprovisionsunderArticle11(1)donotapplyiftheinterestisattributable
toapermanentestablishmentoraxedbaseinaContractingStateofabenecialowner
whoisaresidentintheotherContractingState.Insuchsituations,Article7applies.(Same
asOECDMCArticle11(4)).
Article11(5)(a):ThetreatyexemptioninthesourceStateisdeniediftheinterestincome
iscontingenton(i)thereceipts,sales,income,protsorothercash-owofthedebtorora
relatedperson;or(ii)anychangeinthevalueofanypropertyofadebtororrelatedperson;
or(iii)anydividend,partnershipdistributionorsimilarpaymentsmadebythedebtortoa
relatedperson.IfthebenecialownerisaresidentoftheotherState,thesourcetaxrateon
theinterestislimitedtothehigherwithholdingratespeciedinArticle10(2)(b).
Article11(5)(b):Interest,whichisanexcessinclusionwithrespecttoaresidualinterest
inarealestatemortgageinvestmentconduit(REMIC),maybetaxedbyeachStateunder
itsdomesticlaw.
Article12:Royalties
OECDMC
TheArticleprovidestwoseparaterulesfortreatyreliefonroyaltyincomearisingina
ContractingStateandbeneciallyownedbyaresidentoftheotherContractingState.
Royaltypaymentsunconnectedwithapermanentestablishmentaretaxableonlyinthe
Stateofresidence(Article12(1)).
Royaltypaymentsmadeforarightorpropertyeffectivelyconnectedwithapermanent
establishmentinaContractingStatearetaxableunderArticle7asbusinessprotsofthe
permanentestablishment(Article12(3)).
Article12(1)providesthattheroyaltiesarisinginaContractingStateandpaidbenecially
toaresidentoftheotherContractingStateshallbetaxableonly(exclusive)intheresidence
Stateofthebenecialowner.TheCommentaryclariesthatthetermbenecialowneris
usedinawidersenseasananti-avoidancemeasureunderthetreaty.Itexcludesnominees
oragents,aswellasconduitcompanieswheretheformalownerhasverynarrowrightsin
realityovertheincome,unlessthebenecialownerisalsoaresidentoftheContractingState
oftherecipient.
Theyareresidentbut,astheydonotowntheincomefortaxpurposes,
arenotliabletopotentialdoubletaxation.
234OECDCommentary:Article12,para.46.
235OECDCommentary:Article12,para.4;KlausVogel,DoubleTaxationConventions,PrefacetoArticles1012,
m.no.11.
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Article12(2)providesatreatydenitionofthetermroyaltiesforpurposesofthis
Itincludespaymentsofanykindreceivedasaconsideration:
fortheuseof,ortherighttouse,anycopyrightofliterary,artisticorscienticwork
includingcinematographlms;or
236KlausVogel,DoubleTaxationConventions,Article12,m.no.38;SeeChapter4(7.3).
237OECDCommentary:Article12,para.11.
238OECDCommentary:Article12,para.810.
239SeeChapter8(2.3).
240OECDCommentary:Article12,paras.1217.
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underArticle7.Ifitisnoteffectivelyconnected,thereisnoforceofattractionruletotax
itastheincomeofthepermanentestablishment.
Article12(4)deniesthebenetsunderthisArticleonexcessiveornon-armslength
241OECDCommentary:Article12,para.2226.
242OECDCommentary:Article12,para.5.
243OECDCommentary:Article12,paras.17.117.4.
244OECDCommentary:Article12,paras.3248.
245UNCommentary:Article12,para.5.
246UNCommentary:Article12,paras.811.
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Article12(3)extendsthedenitionofroyaltiestoincludetheconsiderationfortheuse
of,ortherighttouse(a)lmsortapesusedforradioortelevisionbroadcasting;and
(b)industrial,commercialorscienticequipment.Moreover,theincomefromcontainer
leasingisalsotaxableasroyalties.TheUNCommentaryreferstotheOECDCommentary
onArticle12concerningsoftwarepayments.
Italsomentionsthatliterarycopyrights
includecopyrightsrelatingtointernationalnews.
UnderArticle12(4),theroyaltyincomeeffectivelyconnectedtothepermanent
establishmentthroughsimilarbusinessactivitiesisalsotaxedasbusinessincomeunder
alimitedforceofattractionprinciple(UNMCArticle7(1)).
UnderArticle12(5),theroyaltyisdeemedtoariseintheStateofthepayer,whenthe
payerisaresidentofthatState.Thissourceruledoesnotapplyiftheroyaltypaymentis
incurredandbornebyapermanentestablishmentorxedbasesituatedinaContracting
State.Insuchcases,thesourceistheContractingStatewherethepermanentestablishmentis
situated,irrespectiveoftheresidenceofthepayer.Theremustbeanobviouseconomiclink
247UNCommentary:Article12,para.13.
248UNCommentary:Article12,para.17.
249SeeChapter8(3.3).
250USModelTechnicalExplanation(1996):Article12,paras.175183.
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Article13:CapitalGains
OECDMC
AsaruleunderArticle13,thegainsfromthealienationofpropertyaretaxableonly
(exclusive)intheStateinwhichthealienatorisresident.Thefourexceptionstothis
ruleare:
Article13(1):Thegainsderivedfromimmovablepropertymaybetaxed(nonexclusive)
intheContractingStateinwhichitissituated.ItmayalsobetaxedintheStatewherethe
alienatorisresident.Thisparagraphdealsonlywithcapitalgainsderivedbyaresidentofa
ContractingStatefromimmovablepropertyintheotherContractingState.Itdoesnotapply
topropertyinathirdStateorintheStateofresidence(Article13(5)applies).Immovable
propertyisdenedinArticle6.
Article13(2):Thegainsfrommovablebusinesspropertymaybetaxed(non-exclusive)
251OECDCommentary:Article13,para.28.1.
252OECDCommentary:Article13,paras.28.328.7.
253KlausVogel,DoubleTaxationConventions,Article13,m.no.91.
254OECDCommentary:Article13,para.19.
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expropriation,atransferforshareexchange,asaleofaright,agiftorevenaproperty
255OECDCommentary:Article13,para.5.
256OECDCommentary:Article13,para.321;SeeChapter4(7.4).
257OECDCommentary:Article13,paras.33-51.
258UNCommentary:Article13,para.8.
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USMC
ThereareafewvariationsfromtheOECDMC.Forexample:
Thegainsfromthealienationofships,aircraftorcontainersoperatedorusedin
internationaltrafc,andfromrelatedpersonalproperty,shallbetaxableonly(exclusive)in
theStateofresidenceoftheenterprise(similartoUSMCArticle8).Gainsfromacontingent
259CommitteeonFiscalAffairs:IssuesRelatedtoArticle14oftheOECDModelTaxConvention(OECD,2000);
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theincomefromprofessionalservicesorindependentactivitieseffectivelyconnectedwith
axedbase.
Unlikeapermanentestablishmentwherebusinessmustbeactuallycarried
onfromaxedplace,thereisnosuchrequirementfromaxedbase,whichhasonlytobe
regularlyavailable.Axedbaserequiresalesserdegreeofpermanencethanapermanent
establishment.Thesameprinciplesofprotallocationandexpensedeductionsshouldbe
followedasprovidedunderparagraphs2and3ofArticle7.TheexceptionsunderArticle
5(4)donotapplytoArticle14.
Article14(2)denesthetermprofessionalservicestoincludeespeciallyindependent
scientic,literary,artistic,educationalorteachingactivitiesaswellastheindependent
activitiesofphysicians,lawyers,engineers,architects,dentistsandaccountants.Thelist
isnotexhaustiveandincludesbothindividualsandcompanies.Thetermindependent
activitiesreferstoanyservicerenderedbyanindividualwhoisnotboundtoanyemployer
byalabourcontractandwhofreelyorganiseshisownwork.
Hemustnotbedependent
eitherpersonallyoreconomicallyonthepayer,andheshouldcarryontheactivitybearing
hisownentrepreneurialriskandreward.Someoneotherthananemployeeboundundera
masterandservantrelationshipnormallyperformssuchservices.
UNMC
TheUNMCArticle14appliesonlytoincomefromprofessionalservicesandindependent
activities.Itgrantsnon-exclusive(maybe)taxingrightstotheotherContractingState
(i.e.sourceState)inthefollowingtwocases:
(a)Ifthereisaxedbaseregularlyavailablefortheperformanceoftheactivities,the
incomeattributabletothexedbasemaybetaxed.
(b)Ifthephysicalstayaggregates183daysormoreinanytwelve-monthperiod
commencingorendinginthetaxyear,theincomemaybetaxedevenifthereisno
xedbase.However,onlyincomederivedfromactivitiesexercisedorperformedinthat
countrymaybetaxed.
TheUNCommentarymentionsthatArticle14appliestodirectpaymentstoanindividualfor
independentpersonalservices.UNMCArticles5and7coverthepaymentstoanenterprise
forsimilarservicesperformedbytheenterprisethroughitsemployeesorotherpersonnel.
USMC
TheUSModeltreatyrestrictsthisArticletoindividualsorgroupsofindividuals(e.g.a
partnership);thepersonsotherthanindividualsarecoveredunderArticle7.TheUSMC
alsolimitsthetaxabilityunderArticle14toindependentpersonalservicesperformedinthe
sourceState.
UnderArticle14(1),aContractingStatehastheexclusivetaxingrightsovertheincome
derivedbyaresidentindividualfromtheperformanceofindependentpersonalservices,
263ReferredtoinArticles10(4),11(4),12(3),13(2)and21(2)priortoOECDMCUpdate2000.
264GerardColombe,IFACahiersVol.67B,GeneralReport,1982.
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unlesshehasaxedbaseregularlyavailableforperforminghisactivitiesintheother
ContractingState.Iftheindividualhasaxedbaseregularlyavailableforperforminghis
activitiesintheotherStatethatotherStatemaytaxtheincomeattributabletothexedbase.
TheUSMCArticle14(2)providesthattheincometaxableunderthisArticleshallbe
267UndertheOECDUpdate2000,thetitlehasbeenchangedfromDependentPersonalServicestoIncome
fromEmployment.ThischangedoesnotapplytotheUNandUSMCs.
268KlausVogel,DoubleTaxationConventions,Article15,m.no.11.
269OECDCommentary:Article15,para.1.
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(b)theremunerationispaidby,oronbehalfof,anemployerwhoisnotaresidentinthe
Stateofactivity;and
(c)theremunerationisnotbornebyapermanentestablishmentthattheemployerhasin
theStateofactivity.
TheCommentaryrecommendsthatthedaysunderArticle15(2)(a)bebasedonthe
physicalpresenceinthecountry,andnotthedurationoftheactivity.Daysspentwholly
outsidethecountryareexcluded.Apart-stayduringtheday,howeverbrief,wouldcountasa
dayofpresence.ThephysicalstayinthesourceStateneednotbecontinuousorconsistonly
ofworkingdays.Forexample,itwouldincludethedayofarrivalanddeparture,Saturdays
andSundays,nationalholidays,vacationdaysspentinsidethecountryofactivity,daysof
270ThisconditionextendsthesourcetaxexemptionunderArticle7totheemployees.Theyarenottaxableunless
thereisapermanentestablishment.
271OECDCommentary:Article15,para.5.
272OECDCommentary:Article15,paras.6.16.2.
273OECDCommentary:Article15,para.8.
274Thelattercriterioncoversunintendedsituationswheretheservicesrenderedbytheemployeearemore
integratedtothebusinessofaresidententerprisethanthoseofhisformalemployer.Thedraftmentionsthat
itwouldbecontrarytotheobjectandpurpose(oftheparagraph)toprovideataxexemptionforwhatisin
substancetheordinaryworkforceofresidententerprises.
275CommitteeonFiscalAffairs:ProposedClaricationoftheScopeofParagraph2ofArticle15oftheModel
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booksofaccountofthepermanentestablishment.
Alternatively,itcouldmeanthatthe
permanentestablishmentdoesnotpaytheamountphysically,evenifthepaymentismade
bytheheadofceandchargedtothepermanentestablishment.Itmayalsoimplythatthe
amountmustnotbeclaimedasataxdeductionbythepermanentestablishment.
Sometreatiesusethetermdeductedordeductibleinsteadofborne.The
CIRvJFPEnergyInc
(1990)12NZTC7176(NewZealand):AUScompanywasengagedinoffshoredrilling
operationsfromarig,whichconstitutedapermanentestablishmentinNewZealand.Theemployeesspent
28daysinNewZealandand28daysintheUnitedStates.TheywerepaidabroadbytheUScompany,but
nochargeforthesalaryexpensewasbookedbythebranchinNewZealand.TheNZCourtofAppealheld
thattheremunerationwasnotbornebythepermanentestablishment,andsincetheotherconditionsunderthe
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USMCArticle15(3)mentionsthattheemployeeasamemberofaregularcomplement
ofashiporaircraftoperatedininternationaltrafcshallbetaxableonly(exclusive)inthe
Stateofresidenceoftheemployee.Thisparagraphdoesnotapplytopersonsdealtwithin
Article14(independentpersonalservices).
Article16:DirectorsFees
OECDMC
Directorsfeesandothersimilarpayments(e.g.benetsinkind)
derivedbyaresidentof
aContractingStateasamemberoftheboardofdirectorsofacompanyresidentintheother
ContractingStatemaybetaxed(non-exclusive)inthepayingcountrywherethecompany
isresident.Thus,theStateofthecompanysresidencehastheprimarytaxingrightasthe
sourceState.
Paymentsreceivedbydirectorsnormallyconstituteeitherindependentpersonalservices
(Article7)oremploymentincome(Article15).
ThisArticleprovidesanexceptionforthe
remunerationpaidtoanindividualoralegalperson(e.g.acompany)asaboardmember
fortheoverallmanagementorsupervisionofacompanysmanagement.
Theamount
maybepaideitherasaxedamountorasashareofthecompanysprots,orboth.It
mayalsobepaidinkind.Itdoesnotmatterwheretheservicesareperformed.However,
theArticledoesnotcoverfeesreceivedinanyothercapacity,forexampleasanemployee,
consultantoradvisor,andexcludespaymentsreceivedforotherservices.Remuneration
paidbyacompanyresidentinathirdStatewouldbetaxableintheresidenceStateof
thedirector(Article21applies),unlessitistaxablesimilarlyunderataxtreatywiththat
thirdState.
OECDReservations:
Belgium,Greece,PortugalandtheUnitedStates.
Non-OECDPositions:
Albania,Bulgaria,Estonia,Latvia,Lithuania,Morocco,Slovenia
andThailand.
UNMC
TheUNMCArticle16(2)grantsadditional(non-exclusive)taxingrightstotheContracting
State,inwhichthecompanyisresident,onremunerationpaidtocertaincompanyofcials
whoareresidentintheotherContractingState.Theremunerationpaidtoofcialsintop-level
managerialpositionsisalsotaxableintheContractingStateofthepayingcompany.The
termtop-levelmanagerialpositionreferstopositionsthatinvolveprimaryresponsibility
forthemanagementandgeneraldirectionoftheaffairsofthecompany,apartfromthe
281USModelTechnicalExplanation(1996):Article15,para.217.
282OECDCommentary:Article16,para.3.1;undertheOECDCommentaryUpdate2005,similarprovisionsas
underArticle15applytostockoptionsgrantedtodirectors.
283Thedomesticlawsinseveralcountriestreatdirectorsfeesasincomefromemployment(Examples:Canada,
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activitiesofthedirectors.Thetermwouldincludeapersonactingasbothadirectoranda
top-levelmanager.
USMC
UnderUSMCArticle16,thedirectorsfeesandothercompensationforservicesderivedby
aresidentofaContractingStateasamemberoftheboardofdirectorsofacompanyinthe
otherContractingStatemaybetaxed(non-exclusive)inthecompanysStateofresidence.
UnlikeintheOECDMC,theArticlelimitsthistaxingrighttofeesreceivedforservices
renderedinthecompanysStateofresidence.
Article17:ArtistesandSportsmen
OECDMC
Article17grantsnon-exclusive(maybetaxed)taxingrightsontheincomederiveddirectly
orindirectlybyavisitingartisteorsportsman,whoisaresidentofaContractingState,to
theotherContractingStatewhereheexerciseshispersonalactivitiesasaperformer(State
ofperformance).Itappliestohisincomeeitherasanindependentcontractor,orasa
dependentemployeeofanotherpersonorcompanyorunderanyotherarrangement.The
provisionappliesregardlessofthelengthofthestayandevenifthereisnopermanent
establishment.Itisanexceptiontothenormaltreatyrulesapplicabletobusinessprotsor
personalservicesunderArticles7and15.
ThetaxingrightoftheStateofperformanceunderthisArticleislimitedtothe
incomewhichisattributabledirectlyorindirectlytoapublicorliveperformance
(performanceincome)anddoesnotnormallyextendtootheractivitiesorpropertyrights,
286UNCommentary:Article16.
287JoelNitikman,Article17oftheOECDModelTreatyAnAnachronism(Intertax,August/September2001)
pp.268274.
288OECDCommentary:Article17,para.9;KlausVogel,DoubleTaxationConventions,Article17,m.no.10a.
289OECDCommentary,Article17,para.3.
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Thetermsportsmenisnotdened,butagaintheCommentaryclariesthatitapplies
totheperformanceofpersonsengagedingamesorsportsheldinpublic.Thus,ifthereisno
audience,thereisnotaxunderthisArticle.Thetermsportsmenincludesparticipants
290OECDCommentary:Article17,paras.56.
291KlausVogel,DoubleTaxationConventions,Article17,m.no.20.
292DickMolenaarandHaraldGrams,Rent-a-Star-ThePurposeofArticle17(2)oftheOECDModel(IBFD
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thetreatydoesnotpreventtheuseofgeneralanti-avoidancerulesunderthedomesticlaw
insuchcases.
OECDObservationsorReservations:
Canada,France,SwitzerlandandtheUnited
Non-OECDPositions:
294OECDCommentary:Article17,para11;CommitteeonFiscalAffairs:TaxationofEntertainers,Artistesand
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Article18:Pensions
OECDMC
ThisArticleappliesonlytopaymentsthataremadeunderapastemploymentorservice
relationshipwithaprivateemployerorgovernment,unlessthepensioniscoveredbyArticle
Theincomefromprivatepensionsandothersimilarpaymentsforpastprivate
employmentservicesaretaxable(exclusive)onlyintheStateofresidenceoftheindividual
pensioner.
ThesourceStatehasnotaxingrightsonsuchpayments.Theplacewherethe
pastemploymentwasexercisedandtheresidenceofthepayerdonotaffectthetaxingrights
underthisArticle.
TheArticleincludeswidowsandorphanspensionsandothersimilarpayments,suchas
annuitiespaidinrespectofpastemployment.Annuitiespaidinconsiderationofanalienation
ofpropertyareexcludedfromArticle18.
Italsoexcludespensionpaymentslinkedwith
thepastearningsofindependentpersonalservicesorasanagentofindependentstatus.
299TheOECDCommitteeonFiscalAffairshadpublishedapublicdiscussiondraftinNovember2003toreview
thetaxtreatyissuesarisingfromcross-borderpensions.Thenalversionofthecommentshasbeenincluded
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UNMC
TheUNMCgrantsexclusivetaxingrightstothepayingStateonpublicpensionsandsocial
307UNCommentary:Article18,para.9.
308USModelTechnicalExplanation(1996):Article18,paras.241246.
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Theemployerscontributionsshallalsobeatax-deductibleexpenseoftheemployerinthe
otherState.
Anyaccruedbenetsundertheplanduringtheperiodwillnotbetreatedasthetaxable
incomeoftheemployee.Moreover,theincomeearnedbytheplanwillbetax-exemptuntil
itisdistributed,andthedistributionsfromtheplanwillnotbetaxableiftheyarecontributed
withinaspeciedperiodintoaqualifyingplanintheotherContractingState.
Thesebenetsarenotavailableunlesstheindividualwascontributingtotheplan(ora
309USModelTechnicalExplanation(1996):Article18,paras.251258.
310OECDCommentaryUpdate2005:Article19,paras.5.15.2;the2005OECDamendmentsintheMCandthe
Commentaryclarifythatnon-periodicpayments(e.g.lumpsumpayments),whicharepaidinlieuofperiodic
pensionpayments,arecoveredunderthisparagraph.
311KlausVogel,DoubleTaxationConventions,Article19,m.no.40.
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employeesforservicesrenderedinconnectionwithabusinessactivitycarriedonbythe
governmentoritssubdivisionorauthorityinaContractingState(Article19(3)).Such
employeesaretaxedaccordingtotheappropriateprovisionsunderArticle15(employment
income),Article16(directorsfees),Article17(artistesandsportsmen)orArticle18
OECDReservations:
Belgium,Canada,France,NorwayandtheUnitedStates.
Non-OECDPositions:
MalaysiaandRussia.
UNMC
TheUNMCArticle19correspondstotheOECDMC,asitexistedbefore1995.ThisArticle
appliestopublicemployeesworkingasartistesandsportsmenevenwhentheyareworking
onabusinessventureofaContractingStateoroneofitssub-divisions.
USMC
TheUSMCArticle19appliesbothtogovernmentemployeesandtoindependentcontractors
engagedbythegovernment(unlikeOECDMC),iftheyarepaidfromthepublicfundsof
aContractingStateorapoliticalsub-divisionoralocalauthority.Thepaymentsmust
relate,directlyorindirectly,tothefunctionsordutiestraditionallyorsolelycarriedonbya
government.Therefore,itwouldnotincludefunctionscommonlyfoundintheprivatesector.
TheArticlealsoappliestoagovernmentemployeewhoisaresidentofathirdState.
Article20:Students
OECDMC
ThisArticleprovidesaspecialrulefortaxexemption(shallnotbe)inaContracting
State.Thestudentorbusinessapprenticeisnottaxedonqualifyingoverseaspaymentsfor
thestudentsmaintenance,educationortrainingreceivedintheContractingStatewherehe
isstudyingortraining.Toqualify,theindividualmustbearesidentoftheotherContracting
StateimmediatelybeforehisarrivalandmustbepresentinthatStatesolely(orprimarily)for
educationortraining.TheforeignpaymentmayarisefromsourcesintheotherContracting
StateorathirdState,providedtheultimatepayerislocatedoutsidethehostState.
ThisprovisionisanexceptiontoArticle1ofthetreaty.Theindividualdoesnothave
tobearesidentofoneoftheContractingStatesduringhisstaytobenetfromthistreaty
provision.
Moreover,hedoesnothavetobeastudentorbusinessapprenticeinhishome
countrybeforehisarrival.Althoughthetermsstudentandbusinessapprenticearenot
dened,theywouldincludeindividualsundergoingsomekindofeducationortraining.
312OECDCommentary:Article19,paras.813.
313KlausVogel,DoubleTaxationConventions,Article19,m.no.59a.
314USModelTechnicalExplanation(1996):Article1,para.10.
315KlausVogel,DoubleTaxationConventions,Article20,para.11.
316KlausVogel,DoubleTaxationConventions,Article20,para.14.
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317KlausVogel,DoubleTaxationConventions,Article20,m.no.10.
318OECDCommentaryUpdate2005:Article20,para.2.2.
319OECDCommentary:Article20,para.3.
320PhilipBaker,DoubleTaxationConventionsandInternationalLaw,p.343.
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areresidentsofoneorbothContractingStates(Article1),andtoincome,whichissubject
totaxescoveredbythetreaty(Article2).
ThisArticleprovidesadistributiverulefortheresidualincome(residualrule)under
thetreaty.Itincludesitemsortypesofincomethatareomittedandthesourcesofincome
thatarenotcoveredinthespecicArticles.Forexample,mostdistributiveArticlesunder
theMCdealwithtaxingrightsoverincome,whichhasasourceinoneContractingState
andispaidtoaresidentoftheotherContractingState.
ThisArticlecoversincomewithasourceinoneContractingStatewhenpaidtoaresident
ofthesameState.ItalsodecidesthetaxingrightsonincomefromathirdStatethatispaid
toaresidentofoneoftheContractingStates(e.g.triangularcases).
Theonlyexceptiontotheresidualruleiswhensuchincomeisreceivedbyaresident
ofaContractingStatefromanactivity,whichiseffectivelyconnectedwithhispermanent
establishmentintheotherContractingState.Thetaxingrightsontheincomearethen
giventotheStatewherethepermanentestablishmentislocated(Article7applies).
exceptionincludestheincomeattributabletothepermanentestablishmentthatissourced
fromthirdStates.Italsoapplieswherethebeneciaryandthepayerarebothresidentsof
thesameContractingStateandtheincomeofthebeneciaryisattributedtoapermanent
establishmentintheotherContractingState.Thisexceptiondoesnotapplytoincomefrom
immovablepropertyastheStateof
alwayshastheprimary(non-exclusive)taxing
TheCommentaryproposesadditionalprovisionstodealwithtransactionsinvolving
323KlausVogel,DoubleTaxationConventions,Article21,m.no.32.
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USMC
UndertheUSMCArticle21,theexclusivetaxingrightsovertheincome,notdealtwithin
theotherArticles(Articles6to20),areassignedtotheStateofresidenceofthebenecial
owneroftheincome.TheTechnicalExplanationclariesthatanitemofincomeis
considereddealtwithinanotherArticleifitisofthetypeofincomedescribedinthe
ArticleandithasitssourceinaContractingState.
Thesameexceptionsasunderthe
OECDMCapply.
Article22:Capital
OECDMC
Article22appliestotaxesoncapitalfromthepossessionorownershipofcapital,andnot
totheincomeorthegainsfromcapital.TheArticleissimilartoArticle13oncapitalgains.
UnderthisArticle,theStateofresidencehastheexclusivetaxingrights(shallbetaxed)
onallitemsofcapital
withthefollowingexceptions:
ImmovablepropertyownedbyaresidentofaContractingStateandsituatedintheother
ContractingStatemaybetaxed(non-exclusive)wheresituated.
Movablepropertyformingpartofthebusinessproperty(i.e.servesthebusinessactivities)
ofapermanentestablishmentofanenterpriseofaresidentinaContractingStatemaybe
taxed(non-exclusive)intheotherStatewherethepermanentestablishmentislocated.
Capitalrepresentedbyshipsoraircraftininternationaltrafcorboatsengagedininland
waterwaystransport,andbymovablepropertypertainingtotheiroperation,shallbetaxed
only(exclusive)intheStatewheretheplaceofeffectivemanagementoftheenterprise
issituated.
TheCommentarymentionsthattheArticledoesnotapplytotaxesonestatesand
inheritancesandongifts.ThesetaxesarecoveredunderaseparateOECDModelDouble
TaxationConventiononEstatesandInheritancesandonGifts(1982).
OECDReservations:
Denmark,Finland,France,NewZealand,Norway,Portugal,Turkey,
Spain,SwedenandGreece.
Non-OECDPositions:
Argentina,Bulgaria,China,Estonia,Malaysia,Thailandand
328USModelTechnicalExplanation(1996):Article21,para.273.
329ThisexclusivetaxingrightsoftheStateofresidenceappliestocapitallocatedinthirdStatesaswell.
330OECDCommentary:Article22,paras.914.
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onBenetsunderthetreaty.
ThereisnosimilarArticleundertheOECDorUNModel
UnderUSMCArticle22(1),aresidentofaContractingStateisentitledtotreatybenets
onlytotheextentprovidedinthisArticle.Article22(2)mentionsthatthefollowingresident
personsareentitledtotreatybenets:
(a)Individuals:AnindividualresidentinaContractingStateisentitledtotreatybenets.
(b)Qualiedgovernmentalentity:Aqualiedgovernmentalentityisentitledtotreaty
(c)Publicly-tradedcompanyorasubsidiaryofapublicly-tradedcompany:
Acompanyqualiesfortreatybenetsifallthesharesintheclassorclassesofshares,
whichrepresentmorethan50%ofthevotingpowerandvalueofthecompany,areregularly
tradedonarecognisedstockexchange(asdened)ineitherContractingState.Lower-tier
subsidiariesofsuchpubliclylistedcompaniesalsoqualifyifthelistedcompanyowns,
directlyorindirectly,atleast50%ofeachclassoftheirequity.Inthecaseofindirect
ownership,eachintermediateownermustbeapersonentitledtothetreatybenetsunder
thisparagraph.
(d)Tax-exemptorganisation:Atax-exemptorganisationexclusivelymaintainedfora
religious,charitable,educational,scienticorsimilarpurposequaliesfortreatybenetsas
aresident.Thereisnorequirementforaspeciedpercentageofbeneciariestoberesidents
oftheContractingStates.
(e)Pensionfund:Atax-exemptorganisationthatprovidespensionsandotherbenetsto
employeesisentitledtotreatybenets.Morethan50%ofthebeneciaries,membersor
participantsmustbeindividualswhoaretaxresidentsofeitherContractingState.
(f)Apersonotherthananindividual:Thissub-paragraphprovidesageneraltwoparttest
basedonownershipandbaseerosionforanyformoflegalentitythatisaresidentofa
331USModelTechnicalExplanation(1996):Article22,paras.281329.
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activityisbanking,insuranceorsecuritiesbusinessconductedbyabank,aninsurance
companyoraregisteredsecuritiesdealer.
(ii)TheincomefromtheotherStatemustbederivedinconnectionwith,orbeincidental
to,thattradeorbusiness.Incomeisincidentalifitfacilitatestheconductofthetradeor
businessintheotherState.TheincomeisconnectediftheactivityintheotherStateisina
lineofbusinessthatformsapartof,oriscomplementaryto,thetradeorbusiness.
(iii)Thetradeorbusinessmustbesubstantial(asdened),
inrelationtotheactivityin
theotherStategeneratingtheincome.
332ThetermsubstantialisdenedinArticle22(3)(c).
333OECDCommentary:Article23,para.1.
334SeeChapter3(1.3).
335Articles8(1)and8(2),13(3)and22(3)refertotheplaceofeffectivemanagement,whileArticle19(1a)and
19(2a)grantsthetaxingrightstotheStatewhichmakesthepayment.
336OECDCommentary:Article23,paras.78.
337OECDCommentary:Article23,para.17.
338R.DoernbergandK.Raad,The1996UnitedStatesModelIncomeTaxConvention1996,p.191.
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whichmay,inaccordancewiththeConvention,betaxedbytheotherContractingState.
OndividendsandinterestincomeunderArticles10and11,itprovidesforordinarycredit
relief.Thus,theStateofresidencetax-exemptsotheritemsofincomeorcapitalthatare
339OECDCommentary:Article23,para.34.
340OECDCommentary:Article23,m.no.62;KlausVogel,DoubleTaxationConventions,Article23,m.no.166.
341OECDCommentary:Article23,paras.32.132.7.
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342OECDCommentary:Article23,paras.56.156.3.
343OECDMC:Article23Apara.4.
344Theaboveprovisionsintroducedin2000arestillnotwidelyacceptedorfollowedinmanycountriesforseveral
reasons(forcountrycomments,readthegeneralandnationalreportsin2004IFACahiersVol.89AonDouble
345OECDCommentary:Article23,paras.8082.
346UNCommentary:Article23,paras.112;thepossibleinclusionofaclauseontaxsparingcreditswasdiscussed
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and23(2)grantdirectcredittoacitizenoraresidentofaContractingStatefortheincome
taxpaidoraccruedintheotherContractingState.Moreover,anindirecttaxcreditisgiven
ondividendincomereceivedbyacorporateshareholderinaContractingState,ifitowns
atleast10%votingsharesinacompanyresidentintheotherContractingState.Forthe
purposesoftheforeigntaxcreditunderthisArticle,thetaxeslistedunderArticle2are
consideredasincometaxes.
USMCArticle23(3)containsaspecialorderingrulewhenaUScitizenisaresident
intheotherContractingState.BesidesthefulltaxliabilityintheStateofresidence,heis
alsotaxableintheUnitedStatesunderUSMCArticle1(4),asifthetreatydidnotexist.
Thus,heistaxableintwojurisdictionsonhisworldwideincome.Thisparagraphprovides
therulesforrelievingthedoubletaxationintheUnitedStatesundersuchcircumstances.
Article24:Non-discrimination
OECDMC
Article24ensuresnon-discriminationforthepurposesoftaxationofnationalsandresidents
oftheotherContractingState.TheArticleappliestotaxesofeverykindanddescription
347USModelTechnicalExplanation(1996):Article23,paras.330341
348ThetermnationalisdenedinArticle3(1)(g).ItincludesanindividualwhoisanationalofaContracting
State,andalsoanylegalperson,partnershiporassociationderivingitsstatusfromtheprevailinglawsina
ContractingState.
349OECDCommentary:Article24,para.10.
350PhilipBaker,DoubleTaxationConventionsandInternationalTaxLaw,p.388.
351BrianArnoldandMichaelMcIntyre,InternationalTaxPrimer,pp.113114.
352KlausVogel,DoubleTaxationConventions,Article24,m.no.37.
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fortaxpurposessolelyduetotheirnationality.
TheArticleforbidstaxdiscrimination
ofresidentswhenbasedonnationalityonly,butitdoesnotprohibitdiscriminationagainst
foreignersforotherreasons.Nonresidentforeignersarenotinthesamecircumstancesas
residentnationalsandforeigners.Thisparagraph,therefore,doesnotentitlethemtoclaim
thesametaxtreatmentasgiventoresidentsofthetaxingState.However,itdoesensurethat
theyarenottreateddifferentlyfromnonresidentnationalsofthatState.
Article24(2)extendssimilartaxprotectiontostatelesspersons,whoareresidentina
ContractingState.Thetermstatelesspersonmeansanindividualwhoisnotconsidered
anationalbyanyStateunderitslaw.
AstatelesspersonineitherContractingStatecan
invokethenon-discriminationprovision.Unlikeanational(whomaybenonresident),a
statelesspersonmustbearesidentinoneofthetwoContractingStates.TheCommentary
excludesfromthisparagraphthespecialtaxprivilegesgrantedbyaStatetoitsownpublic
bodiesorservicesandprivateinstitutionsthatarenot-for-protorganisations.
(b)Discriminationofpermanentestablishments:
Article24(3)providesfornon-
discriminationofapermanentestablishmentofanenterprise.Thepermanentestablishment
thatanenterpriseofaContractingStatehasintheotherContractingStateshallnotbe
lessfavourablytaxedthananenterpriseoftheotherContractingStatecarryingonthesame
activities.UnlikeArticle24(1),thisparagraphprohibitsdifferentialtaxation,whichismore
onerousonthepermanentestablishment.Itmay,however,bethesameormorefavourable.
Thereisnorequirementthatthetaxtreatmentisnototherormoreburdensome,thereisno
referencetoany(taxation)requirementsconnectedtherewith,andthereisnocomparison
ofnationalsinthesamecircumstances.
353OECDCommentary:Article24,para.4.
CommissionerofInlandRevenuevUnitedDominionsTrustLtd
(1973)NZTC61,028:ANewZealandresident
company,whichwasowned80%byaUKresidentcompany,paidinteresttoitsparentcompany.Theinterest
wassubjecttoahighertaxrateapplicabletononresidents.TheNZCourtofAppealheldthatthedifferenttax
treatmentwasjustiedduetoitsresidencestatus.
355ConventionontheStatusofStatelessPersons1954,Article1(1).
356KeesvanRaad,1992AdditionstoArticles3(2)and24ofthe1992OECDModelandCommentary(Intertax
1992/12)pp.674-675;OECDCommentary:Article24,paras.58.
357KlausVogel,DoubleTaxationConventions,Article24,m.no.121126.
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structureandrateoftax;
withholdingtaxondividends,interestandroyaltiesbypermanentestablishment;
creditforforeigntax;and
extensiontopermanentestablishmentofthebenetofdoubletaxtreatiesconcludedwith
thirdcountries.
(c)Discriminationinexpensedeductions:
Article24(4)providesfornon-discrimination
(d)Discriminationofforeignownershiporcontrol:
Article24(5)preventsthetax
discriminationofaresidententerprise,whosecapitaliswhollyorpartlyownedorcontrolled,
directlyorindirectly,byoneormoreresidentsoftheotherContractingState.Anenterprise
residentinaContractingStatebutownedorcontrolledbynonresidentsshallnotbe
subjecttotaxoranyconnectedrequirementsthatareotherormoreburdensomethana
similarenterpriseownedorcontrolledbyresidentsofthetaxingState.
LikeArticle
24(4),thisparagraphprotectsaforeign-ownedorforeign-controlledenterprisefromtax
discriminationintheContractingStateinwhichitisresident.
Theobjectiveistoprohibittaxdiscriminationduetotheforeigncapitalownershipor
controlofanenterprise.Itmustbetreatedonparwithadomesticallyownedenterprise,
whichisresidentinthesameStateinsimilarcircumstances.Itdoesnotpreventotherforms
ofdiscriminationunconnectedwiththeownershiporcontrolbyforeigners.Theprovision
appliesonlytotheenterpriseandnottothepersonsowningorcontrollingit.Thus,itdoes
notrequirethesametaxtreatmenttobeappliedtoforeigncapitalanddomesticcapital.
TheCommentaryconrmsthattherequestforadditionalinformationandthereversalof
theburdenofproofintransferpricingcasesdoesnotamounttodiscriminationunderthis
Moreover,itdoesnotprohibitthincapitalisationrulesunderthearmslength
358OECDCommentary:Article24,Paras.2454.
359SeeArticles9(1),11(6)and12(4).
360KlausVogel,DoubleTaxationConventions,Article24,m.no.148.
361KlausVogel,DoubleTaxationConventions,Article24,m.no.166.
362OECDCommentary:Article24,para.57.
363OECDCommentary:Article24,para.59.
364OECDCommentary:Article24,para.56.
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OECDObservationsorReservations:
Australia,Canada,France,Germany,Greece,
365OECDCommentary:Article24,paras.6172.
366R.DoernbergandK.Raad,The1996USModelIncomeTaxConvention,Article24,p.204;KlausVogel,
DoubleTaxationConventions,Article24,m.no.38
367TheCommitteeonFiscalAffairsiscurrentlyconductingaprojecttoimprovetheeffectivenessofthetax
disputeresolutionunderthisArticle.ItplanstoproduceaManualonEffectiveMutualAgreementProcedures
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resolutionunderthisArticle:
DisputesaffectingataxpayerresidentinaContractingStateduetotaxationwhichisor
islikelytobeinconsistentwiththetreatyprovisions(Article25(1)and25(2)).
369KlausVogel,DoubleTaxationConventions,Article25,m.no.35.
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thetaxpayer.
UndertheViennaConventionontheLawofTreaties,theymaybeconsidered
373KlausVogel,DoubleTaxationConventions,Article25,m.no.105.
374PhilipBaker,DoubleTaxationConventionsandInternationalTaxLaw,Article25,para.18.
375OECDMCCommentary:Article25,para.34.
376OECDMCCommentary:Article9,para.11.
377OECDCommentary:Article25,para.26.
378PhilipBaker,DoubleTaxationConventionsandInternationalTaxLaw,Article25,paras.2730.
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UNMC
382UNCommentary:Article25,paras.1036.
383USModelTechnicalExplanation(1996):Article25,para.382.
384ThisArticleanditsCommentarywereamendedinJune2004.Thewrite-upincorporatessomeofthemajor
changesandrecommendations.Accordingtothe2004Commentary,thesechangesareconsistentwiththe
2002ModelAgreementonExchangeofInformationinTaxMatters,whichwasdevelopedbytheOECD
jointlywithanumberofnon-Membereconomiescommittedtotheprinciplesoftransparencyandeffective
exchangeofinformation(SeeChapter6(7.1)).TherevisedArticleandtheCommentaryareincludedinthe
OECDMCUpdate2005anditsCommentary.
385KlausVogel,DoubleTaxationConventions,Article26,m.no.18.
386OECDCommentary:Article26,para.3(nowcoveredinArticle27).
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OECDMCArticles1and2donotrestrictthescopeofthisArticle.Thus,theauthorities
canalsoexchangetaxinformationonnonresidents(andnon-nationals)andevenrequest
informationonindirecttaxes.
withintheotherContractingStatethroughothermeans.
387OECDCommentary:Article26,paras.11.111.2.
388OECDCommentary:Article26,para.5.
389OECDCommentary:Article26,para9.1.
390ThecondentialityrulesinArticle26havebeenchangedunderthe2005Updatetopermitdisclosureof
informationtooversightauthorities.Oversightauthoritiesareauthoritiesthatsupervisetaxadministrationand
enforcementauthoritiesaspartofthegeneraladministrationofthegovernmentofaContractingState.
391OECDCommentary:Article26,para.1113.
392OECDCommentary:Article26,para.12.
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aremodied.Anyrequirementtonotifythetaxpayershouldnotpreventorundulydelay
effectiveexchangeofinformation.
Article26(3)placescertainrestrictionsontheexchangeofinformation,asfollows:
(a)AContractingStateisnotobligedtotakeadministrativemeasuresthatgobeyondthe
lawsandadministrativepracticeofeitheritsownortheotherContractingState.Therefore,
therequestforinformationmustcomplywiththelawsandadministrativepracticesofboth
States.Administrativemeasuresareactsthataregeneratedbytherequestforinformation.
(b)AContractingStateisnotobligedtosupplyinformation,whichisnotobtainable
underthelawsorinthenormalcourseofadministrationofeitheritsownortheother
ContractingState.Normalcourseofadministrationimpliesthateithertheauthoritieshave
theinformationortheycanobtainitthroughthenormalprocedureoftaxadministration,
includingspecialinvestigationsorspecialexaminations.
SincearequestingStatecannotdemandinformationthatisneitherpermittednor
obtainableinitsowncountry,theCommentaryclariesthataContractingStatecannottake
advantageoftheinformationsystemoftheotherContractingStateifitiswiderthanitsown.
Thisprincipleofreciprocityshouldnotbeappliedwherethelegalsystemoradministrative
practiceofonlyonecountryprovidesforaspecicprocedure,e.g.arulingregime.
otherwiseagreed,theotherContractingStatecanassumethattherequestedinformation
couldbeobtainedbytherequestingStateinsimilarsituations.
(c)Thereisnoobligationtosupplyanyinformation,whichwouldrevealatrade,business,
393OECDCommentary:Article26,paras.1415.
394OECDCommentary:Article26,para.1419.5.
395OECDCommentary:Article26,paras.1515.1.
396OECDCommentary:Article26,para.18.1.
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information.Finally,anyclaimbylawyersforclientprivilegeshouldbebasedsolelyon
thelawsoftheContractingStatewhereitarises.
Theproposed2005changesalsoincludetwonewparagraphsunderthisArticle:
(i)Article26(4):Thisparagraphpreventsdomestictaxinterestrequirementsfrom
hinderingexchangeofinformation.Adomestictaxinterestrequirementreferstolawsor
practicesthatwouldprohibitonetreatypartnerfromobtainingorexchangingrequested
informationunlesstheothertreatypartnerhadaninterestinsuchinformationforits
owntaxpurposes.ThenewparagraphclariesthatContractingStatesshouldobtainand
(ii)Article26(5):Thisparagraphmentionsthattheprovisionsofparagraph3cannotbeused
byaContractingStatetodeclinethesupplyofinformationheldbybanks,othernancial
institutions,nominees,agentsandduciariesorbecauseitrelatestoownershipinterests
inaperson.AccordingtotheCommentary,althoughthisadditionmerelyreectscurrent
practiceitsinclusionexplicitlyoverridestheuseofArticle26(3)byaContractingState
todenyinformationongroundsofbanksecrecy.Moreover,informationheldinaduciary
400OECDCommentary:Article26,para.19.3-19.4.
401OECDCommentary:Article26,paras.19.6-19.8.
402OECDCommentary:Article26,paras.19.1019.15.
403OECDCommentary:Article26,paras.2026.
404TheUNMCArticle26doesnotincludetheproposedchangesundertheOECDMCupdate2005.
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Therestrictionondisclosureofinformationonlytopersonsorauthorities(including
nomineesorpersonsactinginanagencyorduciarycapacity,orrespectinginterestsin
aperson,including(aninterestthroughownershipof)bearershares,regardlessofanylaws
andpracticesoftherequestedState
....
Moreover,iftheinformationisrequestedbya
ContractingStateunderthisArticle,theotherContractingStatemustobtaintheinformation
asifitwasdealingwithitsowntaxes.Itmustalsoprovidethedocumentaryevidence,as
specicallyrequested,thatcanbeobtainedunderitsownlawsandinternaladministrative
practicesontaxmatters.
Article26(4):ThisparagraphobligeseachContractingStatetotrytocollectthetaxes
onbehalfoftheotherContractingStatewherepersonswhoarenotentitledtothebenets
enjoythetreatyreliefs.TheparagraphdoesnotimposeoneitherContractingStateany
obligationcontrarytoitssovereignty,securityorpublicpolicy.
405UNCommentary:Article26,paras.629.
406UNCommentary:Article26,para.5.
407OECDCommentary:Article27,paras.69.
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Article27(1)mentionsthattheContractingStatesshall(i.e.areobligedto)assistin
collectingtheirmutualrevenueclaims.Article27(2)denesthetermrevenueclaimas
anamountowedinrespectoftaxesofanykindanddescriptionimposedonbehalfofa
ContractingStateoroftheirpoliticalsubdivisionsorlocalauthorities.Astheassistance
isnotrestrictedbyArticles1and2,itmayincludeallkindoftaxes,aswellasrelated
interest,penaltiesandcollectioncosts,andapplyeventononresidents.Theonlyrestriction
UnderArticle27(6),nolegaloradministrativeactioncanbebroughtbeforetherequested
Statescourtsandadministrativebodiesinrespectoftheexistence,validityortheamount
ofarevenueclaimoftherequestingState.
Article27(7)mentionsthattherequestingStatemustinformtherequestedStatepromptly
iftherevenueclaimceasestoqualifyunderparagraphs3and4oftheArticle,andalso
suspendorwithdrawitsrequestattheoptionoftherequestedState.
Article27(8)limitstherightsoftherequestingStateincertaincases.Underthis
paragraph,therequestedStateisnotobliged:
Tocarryoutadministrativemeasuresagainstthelawsandadministrativepracticesof
eitherContractingState;
Tocarryoutmeasureswhichwouldbecontrarytopublicpolicy(
ordrepublic
408OECDCommentary:Article27,para.16.
409OECDCommentary:Article27,para.27.
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TosatisfytherequestiftherequestingStatehasnotpursuedallreasonablemeasuresof
collectionorconservancyunderitslawsoradministrativepractices;
Torejecttherequestforpracticalconsiderationswheretheadministrativeornancial
costsexceedthebenetsundertherevenueclaim.
UNMC
ThisArticleisexcluded.
USMC
ThisArticleisexcluded.
Article28:MembersofDiplomaticMissionsandConsularPosts
OECDMC
TheOECDMCdoesnottakeprecedenceoveroraffectthetaxprivilegesgrantedtothe
membersofdiplomaticmissionsandconsulates.Article27ensuresthattheyreceiveunder
thetaxtreatynolessfavourabletreatmentthanthattowhichtheyareentitledunder
internationallaworunderspecialinternationalagreements.
ManyOECDcountries
410Similarruleappliestotaxprivilegesunderinternationallawgiventocertaininternationalorganisations(e.g.
UnitedNations)andtheirpersonnel.
411OECDCommentary:Article28,para.5;KlausVogel,DoubleTaxationConventions,Article27,m.no.1120.
412TheArticleistitledDiplomaticAgentsandConsularOfcers.
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Article29:TerritorialExtension
OECDMC
ThisArticleisusedbycountrieswithoverseasterritoriesorwithresponsibilityforthe
internationalrelationsofotherterritoriesorStates.ItpermitsaContractingStatetoextend
thenegotiatedtreaty,infullorinpart,atanytimethroughnecessaryconstitutionalsteps
toitsoverseasterritories.UnderArticle29(1),ataxtreatymaybeextendedtooverseas
territoriesorotherStatesprovideditstaxesaresubstantiallysimilarincharactertothoseto
whichthetreatyapplies.ThesetaxesmaybeimposedbytheotherterritoryorStateorby
theContractingStateitself.
IfincludedunderthisArticle,theterminationofthetreaty
underArticle30alsoappliestosuchterritoriesorStates(Article29(2)).
Non-OECDPositions:
ChinaandThailand.
UNMC
ThisArticleisexcluded.
USMC
ThisArticleisexcluded.
Article30:EntryintoForce
OECDMC
ThisArticlementionsthatthetwoContractingStatesmustratifythetreatyaccordingto
theirrespectiveconstitutionallaws.Thetreatycomesintoforcewhentheyexchangethe
instrumentsofratication.Italsospeciesthedateswhenthevariousprovisionsunderthe
413ThisArticledoesnotexistintheUNandUSModelConventions.
414KlausVogel,DoubleTaxationConventions,Article28,m.no.6.
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Article31:Termination
OECDMC
Article31grantseachContractingStatetheoptiontocancelthetreatyafteracertainyear
(asspecied)bygivinganoticeofterminationthroughthediplomaticchannelsatleastsix
monthsbeforetheendofacalendaryear.ThisArticlesuggeststhatitshouldbeprovided
whenthetreatyprovisionswouldceasetohaveeffectineachState.
UNMC
(Article29)
USMC
(Article29)
UndertheUSMCArticle29,theterminationnoticecanbegivenatanytimebyeither
ContractingState.TheArticlespeciesthedatesonwhichthetreatyprovisionsceaseto
haveeffect,asfollows:
withholdingtaxessixmonthsafterthedatewhenthenoticewasgiven.
othertaxesthetaxableperiodsbeginningaftertheexpiryofthesix-monthperiodfrom
thedateofthenotice.
5.B
ILATERAL
REATIES
Nearlyalltaxtreatiesarebilaterallynegotiatedarrangements,
basedontherelative
bargainingstrengthsandpeculiaritiesofthedomestictaxsystemsineachContracting
Stateandtheunderlyingeconomicrelationships.
Therefore,despitethecommon
internationallyacceptedModels,taxtreatiesvarywidelyduetomodicationsagreedby
theContractingStates.Unlikethenegotiatedtaxtreaties,theMCanditsCommentariesare
notlegallybinding.
Thenegotiatedtaxtreatiesusuallymakelittleornovariationinthewordingofcertain
Articles,suchasArticle1(personalscope),Article6(immovablepropertyincome),Article
9(adjustmentoftransferprices),Article16(directorsfees),Article21(otherincome)
415SeeChapter2(6)forareviewofselectedmultilateraltreaties.
416PhilipBaker,DoubleTaxationAgreementsandInternationalTaxLaw,pp.512.
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6.S
URTHER
Aigner,Hans-JorgenandZuger,Mario(ed.),
PermanentEstablishmentsinInternationalTaxLaw
(LindeVerlag
Wien,2003).
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CHAPTER4
IMPACTOFDOMESTICTAXSYSTEMS
Note:Thepurposeofthischapteristoreviewsomeofthekeyprinciplesofdomestictax
systemsthataffectinternationaltaxationofcompanies.Itisbasedonsecondarydata
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Whatarethetaxcomplianceandwithholdingrequirements?Whenisthetaxpayable?
Canthetaxbedeferred?Dothetaxauthoritiesgiveadvancerulingsonapreorpost
transactionbasis?Howistaxcomplianceenforced?
Howisdoubletaxrelievedunilaterallyunderdomesticlaw?Howarethereliefprovisions
underthedomesticlawandtaxtreatiesapplied?Whataretherulesforcomputingforeign
taxcredits?
Howdoesthetaxtreatymodifythedomestictaxlaw?Doesthetreatyoverridedomestic
law?Arethebenetsunderthedomesticlawmorebenecialthanthetreatybenets?
1SeeChapter2(1.3).
2LeeBurnsandRichardKrever,IndividualIncomeTax(TaxLawDesignandDrafting,2000)p.500.
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ImpactofDomesticTaxSystems
Normally,countriestaxbothresidentsandnonresidentsonthedomestic-source
incomederivedfromtheirtaxjurisdiction.Taxresidencerulesextendthetaxationof
residentstoforeign-sourceincome(residencebasedtaxation).Asanexception,certain
countriesfollowtheterritorialtaxregimeanddonottaxtheforeign-sourceincomeof
residents.Insuchcountries,thetaxresidencebecomeslargelyirrelevant,exceptfortreaty
Ataxresidentisdenedunderthedomestictaxrules.Bydenition,apersonwhois
notataxresidentunderthedomesticlawisanonresident.Anonresidentnormallypays
taxontheincome(actualordeemed)derivedfromthatcountryonly.Histaxliabilityis
limitedtotaxontheincomederived,arisingoraccruingfromdomesticsources(source
basedtaxation).
Nonresidentsmayalsobetreateddifferentlyfromresidentsinotherrespects.
For
example:
(i)Theymaybetaxedonadifferentbasisfromresidents,e.g.higherorlowertaxrateor
3J.S.PhillipsandM.H.Collins,IFACahiersVol.70A,GeneralReport,1985,pp.5255.
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countryofcitizenshiparethereasonsfortaxingthem.(Examples:Ecuador,SouthKorea,
Liberia,theUnitedStates).
Thereareexceptionstotheworldwidetaxationofresidents,suchas:
(a)Niltaxregime
Thereareseveralcountries,whichdonotimposedirecttaxesonincome.Forexample:
Personaltax:Andorra,Anguilla,AntiguaandBarbuda,Bahamas,Bahrain,Bermuda,
Brunei,CaymanIslands,CookIslands,FrenchPolynesia,Kuwait,Maldives,Monaco,
Nauru,Nevis,Oman,Paraguay,Qatar,SaudiArabia,Seychelles,TurksandCaicosIslands,
StKittsandNevis,theUnitedArabEmirates,Uruguay(exceptagriculturalincome),
Vanuatu.
Corporatetax:Anguilla,Bahamas,Bahrain(exceptoilcompanies),Bermuda,Cayman
Islands,Kuwait(localowned),Maldives(exceptbankprots),Nauru,Nevis,Qatar(local
owned),SaudiArabia(localowned),Turks&CaicosIslands,theUnitedArabEmirates
(exceptoilandgascompaniesandforeignbanks),Vanuatu.
(b)Territorialregime
(i)Fullterritoriality:Thecountries,whichfollowthefullterritorialtaxregime,taxtheir
residentsonlyonthetaxableobjectssourcedordeemedsourcedintheirjurisdiction.Country
examplesinclude:
Personaltax:Bolivia,Botswana,Cambodia,CostaRica,Djibouti,DominicanRepublic,
Ecuador(non-nationals),ElSalvador,Ghana,Guatemala,Guyana(earnedincome)
HongKong,Iran(non-nationals),Jordan,Lebanon,Lesotho,Macau,Malawi,Malaysia,
Mauritius,Mozambique,Namibia,Nicaragua,Panama,Philippines(non-nationals),
Singapore,Swaziland,Taiwan,Thailand,Zambia,Zimbabwe.
Corporatetax:Albania,Brunei,Bolivia,Botswana,Cambodia,Cameroon,Congo,Costa
Rica,DominicanRepublic,Djibouti,ElSalvador,France,Gabon,Guatemala,Guinea,
HongKong,IvoryCoast,Jordan,Kenya,Malawi,Lebanon,Lesotho,Libya,Macau,
Malaysia,Monaco,Morocco,Mozambique,Namibia,Nicaragua,Oman,Panama,Paraguay,
Qatar,Senegal,Seychelles,Singapore,SouthAfrica(pre2001),Swaziland,Uruguay,
(ii)Partialterritoriality:Somecountriesapplyapartialterritorialtaxregimeon
individuals,whoareresidentbutnotordinarilyresident.Theymaynotbetaxedonall
orcertainforeign-sourceincome,unlesstheyareordinarilyresident.Ordinaryresidence
denotesresidenceinaplacewithsomedegreeofcontinuityandpermanenceduetoasocial
oreconomicattachment.Itisdenedasamansabodeinaparticularplaceorcountry
LevenevCIR
(1928)13TC486(UK).
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Examples:BritishVirginIslands,Cyprus,Guernsey,Guyana(unearnedincome),India,
Japan(non-permanentresident),Jersey,Lesotho,Malta,StLucia,theUnitedKingdom,
(c)Receivedorremittanceregime
(i)Somecountriesthatfollowthefullterritorialregimealsotaxcertainoralltheforeign-
sourceincomethatisreceivedby,orremittedto,residents.
Examples:Ghana,Guyana(earnedincome),Lesotho,Malaysia,Mauritius,Singapore,
Thailand,Zambia.
(ii)Residentandordinarilyresidentindividuals,whoarenotdomiciledundercommonlawin
certaincountries,aretaxedontheirforeign-sourceincomeonareceivedorremittancebasis.
Examples:Barbados,BritishVirginIslands,Cyprus,Guyana,Ireland,Malta,Trinidad
andTobago,theUnitedKingdom.
SaiyidAlivCrown
ITC402(India);
KeshavMillsvCIT
23ITR230(India).
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countryor(b)thefactsandcircumstancesthatproveresidenceinacountry.Unlikethe
formertest,whichisobjectiveandrelativelyeasytoapply,factsandcircumstances,such
6CommitteeonFiscalAffairs:183DayRule(OECD,1992).
7UScountsapartofadayasadayofpresence.UKallowsfractionsofadayunderthelegaldecisionin
CIRv
Wilkie
(1951),32TC495(UK).
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Philippines,Poland,Portugal,PuertoRico,Romania,StLucia,Senegal,SlovakRepublic,
SouthAfrica,Spain,Switzerland,Taiwan,Tanzania,Tunisia,Turkey,Uganda,theUnited
Kingdom,theUnitedStates,Uzbekistan,Zambia,Zimbabwe.
Thephysicalstaydoesnotaffectthetaxresidence.
Examples:Belgium,Brazil,Cameroon,France,Gabon,Guatemala,Italy,IvoryCoast,
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Papua,Philippines,Poland,Portugal,Romania,Senegal,Singapore,SlovakRepublic,
SouthAfrica,Taiwan,Tanzania,Turkey,theUnitedKingdom.
Intentiontoresidepermanently:theintentiontoresidepermanently,ornotonatemporary
basis,isusedbyseveralcountries.Examples:Barbados,Chile,Ghana,Greece,Guyana,
Indonesia,Ireland,Japan,Luxembourg,Norway,Philippines,Singapore,Turkey,the
UnitedKingdom,Zambia,Zimbabwe.
Ofcialregistration:somecountriesregardpersonswhosenamesareintheirpopulation
registers(e.g.forvotingpurposes)astaxresidents.Examples:Belgium,Italy,
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havetheirtaxresidencewheretheirhouseholdislocated,i.e.thefamilyhomeandcentre
offamilylife.
Acitizenisdeemedtobeataxresidentunlessheleavesthecountryonapermanentbasis.
Thetaxresidenceforforeignersisbasedonthetypeofvisa.Besidesatouristvisa,avisa
canbeatemporary(twoyears)orapermanentvisa.Aforeignerisconsideredataxresident
fromthedateofarrivalifheentersthecountryonatemporaryorpermanentvisa.However,
atemporaryvisaholder,whoisnotunderalabourcontractwithaBraziliancompany,
isconsideredasaresidentonlyifheremainsinBrazilformorethan183daysduringa
12-monthperiod.Apermanentvisaisrequiredforaforeignertoholdamanagerialposition
ordirectorshipinaBraziliancompany.
Thereisnostatutorydenitionofataxresidentforanindividual.Anindividualmaybe
resident,part-yearresidentornonresident.Anindividualisdeemedresidentforthewhole
yearifhesojournsorstaystemporarilyinCanadaforatleast183daysinacalendaryear.
Residencemayalsobebasedonfactsandcircumstances.Thetaxauthorities(theCanada
RevenueAgency)consideranindividualasataxresidentifCanadaistheplacewhere
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Chapter4
remainsataxresidentforthreeyearsunlesshecanprovethathehasbrokenallessential
tieswiththecountry(3-yearrule).
France
AnindividualisataxresidentinFranceif(i)hishomeorprincipalabodeisinFrance,or
(ii)heisengagedinaprofessionalactivityinFrance(unlessitisancillarytoforeign-source
activities),or(iii)thecentreofhiseconomicinterestsisinFrance,or(iv)hisstayinFrance
exceeds183daysinacalendaryear.Thehomeisdenedasthehabitualresidencewherehis
familyusuallylives,evenifheisabroadforlongperiodsduringtheyear.Theabodetestis
basedonthelengthofthephysicalpresenceinFrance.Theprofessionalactivitiesmaybe
carriedoneitherasaself-employedpersonwithaxedbaseorasanemployedindividual.
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residentforthefulltaxyearintheyearofarrivalordeparture.Adaycountsforresidence
purposesonlyifthepersonispresentinIrelandatmidnight.
Anindividualmustbea
residentforthreesuccessiveyearstobecomeordinarilyresidentinyearfour.Heceasesto
beordinarilyresidentifheisnotresidentforthreeconsecutiveyears.
AnindividualisresidentifhiscentreoflifeisinIsrael.Thecentreoflifeincludesthe
permanenthomeoftheindividual,theactualplaceofabode,theplaceofhisoccupation
orpermanentemployment,thelocationofactiveandmaterialnancialinterestsandthe
placeofassociationsandorganisationsofwhichthetaxpayerisanactivemember.Themere
passiveownershipofnancialinvestmentsoraninactivemembershipofanorganisation
isnotadequate.Itispresumedthatanindividualisresidentifhestaysatleast183daysin
Israelorspends30daysormoreinIsraelduringthetaxyearand425daysormoreduring
thecurrentandprevioustwotaxyears.
CesenaSulphurCo.vNicholson
1TC88,103(1876)(UK):Anindividualispresentwherehesleepsand
lives.
13Resident,ordinarilyresidentanddomiciled(commonlaw)individualsaretaxedontheirworldwideincome.
Ifresidentbutnotdomiciled,theypaytaxondomestic-sourceincomeandremittancesofforeign-source
incomeonly.Nonresidentindividualswhoareordinarilyresidentpaytaxonworldwideincomeotherthan
fromemployment,tradeorprofessionexercisedwhollyoutsideIreland.Nonresidentswhoareneitherordinarily
residentnordomiciledpaytaxondomestic-sourceemploymentonlyiftheirremunerationispaidinIreland.
14Asfrom2003,Israeliresidentsaretaxedonaworldwidebasis(previouslyterritorialbasis).Nonresidentsare
taxedontheirIsraelisourceincomeonly;notaxisleviedontheirforeignincomereceivedinIsrael.
15Permanentresidentspaytaxontheirworldwideincome.NonresidentsaretaxedonJapanesesourceincome
only.Anon-permanentresidentistaxedonJapanesesourceincomeandonforeign-sourceincomepaidin,or
remittedto,Japan.AforeigneronashortassignmentuptoayearinJapanisusuallyconsideredanon-permanent
resident(notnonresident).
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Luxembourg
Anindividualistaxresidentifhisdomicileorcustomaryplaceofresidenceisin
Luxembourg.Aplaceofdomicileistheplacewhereapersonhasaccommodationthat
16Thepersonisconsideredastaxresidentafterhefullseithercondition,andnotfromthebeginningofthestay.
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Asfrom2004,adomiciledpersonremainsresidentevenif(a)heisabsentforfouryears
ormore,or(b)heisataxresidentinacomparablytaxedcountryoverseas.Aresidentmay
claimtaxexemptiononhisforeignsalaryifhestaysabroadbecauseofhisemploymentfor
atleasttwelvemonths.Thistaxexemptiondoesnotapplyifthesalarycanonlybetaxedin
Norwayunderataxtreaty.
Peru
APeruviancitizenisataxresidentifheisdomiciled(i.e.permanentlyresident)inthe
country.AforeignindividualisaresidentonlyafteracontinuousstayinPeruofatleast
twoyears,orathisrequestafteraninitialstayofsixmonthsinthecountry.Temporary
absencesupto90daysineachyearareignored.Thetaxdomicileislostaftertwoyears
ofresidenceabroad,orwhentheindividualobtainsaforeignresidentvisaoracontractto
17Onlyresidentsareentitledtoclaimpersonaltaxrelief.Anon-resident(otherthanadirector)istaxedonhis
employmentincomeataatrateof15%ortheprogressivepersonaltaxratesvaryingfromnilto22%,whichever
ishigher.Onotherincome,thetaxisimposedatthe22%rate.
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SouthAfrica
AsfromthetaxyearbeginningMarch2001,SouthAfricataxesresidentindividualsontheir
worldwideincome.Anindividualisresidentifeither(i)heisordinarilyresidentinSouth
18AresidentindividualwhostaysoutofSouthAfricaforanaggregateperiodexceeding183fulldaysinany
12-monthperiodcommencingorendinginanassessmentyearofwhichthereiscontinuousperiodofatleast
60days,andworksabroadduringthatperiodwillnotbetaxedonhisforeignemploymentincomeforthat
taxyear.
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UnitedKingdom
Thereisnostatutorydenitionofresidence.Itisbaseduponamixtureofstatutes,case
lawsandtaxpractices.Apersonmaybeeitheraresidentorordinarilyresidentorboth.
(a)Apersonisaresidentinataxyearifhesatisesoneofthefollowingrequirements:
(i)Heintendstostayasatemporaryvisitor(lessthantwoyears)andhisphysicalpresence
exceedsanaggregateof183daysormoreinthatyear.Ifthestayislikelytolastfortwo
yearsormore,theindividualisaresidentfromthedateofarrival.
(ii)IftheannualvisitstotheUnitedKingdomaverage91daysormoreoverfourconsecutive
taxyears,heisresidentfromthefthyear.Ifthevisitsareplanned,theindividualmaybe
regardedasresidentfromthestartofthevisits.
(b)Apersonisordinarilyresident,ifheintendstoresideorresideshabituallyintheUnited
Kingdom.Theordinaryresidencedependsontheintentionwhenenteringthecountry,the
typeofaccommodation(permanentortemporary)andtheactualperiodofhisstay.Heis
ordinarilyresidentfromthedateofarrivalifheintendstostayinthecountryforthreeyears
ormore.Otherwise,heisordinarilyresidentinthetaxyearafterthethree-yearperiodin
thecountryisover,providedhelivesintemporaryaccommodation.Apersonwillalsobe
ordinarilyresidentifhemakesannualvisitstotheUnitedKingdomaveragingthreemonths
ormoreoverafour-yearperiod.
UnitedStates
AllUScitizensandpermanentresidentaliens(greencardholders)aretreatedastax
residents,regardlessoftheiractualresidence.Inaddition,anindividualisaresident,if
heisphysicallypresentforeither(i)183daysormoreinacalendaryear,or(ii)spends
atleast31daysinacalendaryearand183daysbasedonaweightedaverageovera
three-yearperiod(substantialpresencetest).Thepresenceisbasedonthephysicalstay
atanytimeduringtheday.Aresidentindividualistaxedonhisworldwideincome.The
substantialpresencetestdoesnotapplyifthepresenceislessthan183daysinthe
currentyear,andtheindividualhasataxhome(asdened)withwhichhehasacloser
connectioninaforeigncountry.Therearealsoexceptionstothistestforforeigngovernment
19Anindividualwhoisresident,ordinarilyresidentanddomiciledpaystaxonhisworldwideincome.Non-
domiciledornotordinarilyresidentindividualsareliabletotaxontheirUKsourceincomeandremittances
offoreignincome.NonresidentspaytaxonlyontheirearningsderivedfromdutiesperformedintheUnited
Kingdom.TheInlandRevenueisreviewingthecurrenttaxtreatmentofnon-domiciledUKresidentindividuals.
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Chapter4
administration.Mostcommonly,itisdecidedbyeither(i)theplaceofincorporationorlegal
seat,or(ii)thelocationofmanagementorrealseat.
DeBeersConsolidatedMinesLimitedvHowe(SurveyorofTaxes)
AC455(1906)(UK).Inthiscase,thejudge
held:acompanyresidesforthepurposesofincometaxwhereitsrealbusinessiscarriedon...Iregardthat
asthetruerule;andtherealbusinessiscarriedonwherethecentralmanagementandcontrolactuallyabides.
Thedecisionreferstotheplacewherethedefactocontrolisexercisedandrealbusinessis,infact,conducted.
Managementandcontrolisconsideredacompositetest.Itdoesnotimplyeitherday-to-daymanagement
ofthebusinessbyexecutivesorcontrolbyshareholdersthroughtheirvotingpower.Thismanagementand
controlshouldbecentral(i.e.highestlevelofcontrol)tothebusinessasawhole.SeeRobertCouzin,Corporate
ResidenceandInternationalTaxation(IBFDPublications,2002)pp.3847.
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day-to-dayactivitiesortheplacewherethemanagementdecisionsaretaken.InGermany,
aplaceofmanagementistheplacewheremanagementactuallymakesitsimportantpolicy
decisions.Itisthecentreoftoplevelmanagement.Aplacewhereabusinessismerely
supervisedwouldnotqualify.
Dualtaxresidencecanariseif(a)thesamecriterionleadstoresidenceinbothcountries;
SwedishCentralRailwayCompanyLimitedvThompson(InspectorofTaxes)
(192325)9TC342(UK):The
companywasincorporatedinEnglandin1870toconstructarailwayinSweden.Aftertheconstructionperiod,
thearticlesofthecompanywereamendedandthemanagementandcontrolmovedtoSweden.Thecompany
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Chapter4
centralauthorityisdivided.InCanada,theCourtshaveheldthat,exceptinvery
unusualcircumstances,acorporationmayonlyhaveitscentralmanagementandcontrol
inasinglejurisdiction.
Dualscalresidencedoesnotonlyoccurwhenthecriterionofincorporationandthetest
ofcentralmanagementandcontrolareusedsimultaneously.Asmentionedabove,residence
mayalsobebasedonothertests.Acompanyincorporatedunderforeignlawthatcarrieson
businessinAustraliaandhasitsvotingpowercontrolledbyshareholderswhoareresidents
ofAustraliamaybedualresident.Theseconictingrulesunderthedomestictaxlawlead
tocompaniesthataretaxresidentinmorethanonetaxjurisdictionornotresidentin
anyjurisdiction.TheOECDMCArticle4(3)providesatie-breakerbasedontheplaceof
effectivemanagementfordualresidentcompanies.
ThetermeffectivemanagementintheModeltreatyisnowdenedintheOECD
CommentaryUpdate2000.(SeeChapter3(4-Article4))TheCommentarymentionsthatit
istheplacewherekeymanagementandcommercialdecisionsthatarenecessaryforthe
conductoftheentitysbusinessareinsubstancemade.Moreovertheplaceofeffective
managementwillordinarilybetheplacewherethemostseniorpersonorgroupofpersons
(forexample,aboardofdirectors)makesitsdecisions,andtheplacewheretheactionsto
26OECDCommentary:Article4,paras2124.
27SeeDiscussionPaperonPlaceofEffectiveManagementasaTieBreakerRule(OECD,February2001)
andthesubsequentdraftproposalsissuedinMay2003;SeealsoJohnF.AveryJones,PlaceofEffective
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SouthAfrica(effectivemanagement),Spain(placeofadministration),SriLanka
(managementandcontrol),Suriname,Switzerland(effectiveorday-to-daymanagement),
Tanzania(managementandcontrol),TrinidadandTobago,Turkey,theUnitedKingdom,
Yemen(whollymanagedandcontrolled),Zambia,Zimbabwe.
(c)Othercriteria
Headofceormainofce:Belgium,Brazil,China,Greece,Indonesia,Italy,Japan,
MalayanShippingCo.LtdvFederalCommissionersofTaxation
(1946)71CLR156;Inthiscase,theCourt
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Thetaxresidencefollowsthelocationoftheheadofce.UnderBraziliancivillaw,a
domesticcompanymustbeincorporatedandhaveitsadministrativeheadofceinBrazil.
Theheadofceistheplacewherethemanagementexercisesitsduties,eitheratthelevelof
theboardofdirectorsorattheadministrativelevel,orasdenedbyitsbylaws.Acompany
withitsheadofceabroadisnonresident.
AcompanyistaxresidentinCanadaifitiseitherincorporatedinCanada,orifthecentral
managementandcontrol(mindandmanagement)isinCanada.Itdoesnotdependonthe
day-to-daymanagementorprincipalbusinessorresidenceofshareholders.Itisgenerally
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administrationofthecompanyareexecuted.Aforeigncompanymanagedandcontrolled
inGermanywouldbetaxedasacorporation.
AcompanyistaxresidentinIndiaifitiseitherincorporatedinIndia,orwhollymanaged
andcontrolledinIndia.
Thetaxresidenceofacompanyisbasedon(i)centralmanagementandcontrol,or(ii)
incorporationinIreland.Thecentralmanagementandcontrolistheplacewheretheultimate
directingauthorityofthecompanyisexercised.Normally,itwillbetheplacewherethe
33MaryWalsh,Irelands1999FinanceBillChangesCorporateResidenceRules(TaxAnalysts,February22,
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Luxembourg
Acompanyisresidentifitsregisteredofce(i.e.legalseat)orprincipalplaceofmanagement
isinLuxembourg.
AcompanyistaxresidentifeitheritisincorporatedinMexico,oritsadministration
orprincipalplaceofmanagementislocatedinMexico.Theadministrationorplaceof
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Portugal
Thecorporatetaxresidenceisbasedonitsheadofce(legalseat)ortheplaceofeffective
LegalentitiesestablishedunderRussianlawaretaxedontheirworldwideincomeeffectively
asresidentcorporations.
AcompanyistaxresidentonlyifitsmanagementandcontrolisexercisedinSingapore.
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fromwithinSwitzerland.Theplaceofeffectivemanagementmaybeeithertheplacewhere
importantdecisionsaretaken,ortheplaceofday-to-daymanagement.
Acompanyistaxresidentif(i)itisincorporatedinThailandor(ii)itcarrieson
businessinThailandasaforeigncompany.Thecarryingonbusinessincludesthe
presenceofanemployee,representativeorotherpersonstoderiveincomeorgainsin
Turkey
Acompanyistaxresidentifit(i)hasitslegalseatorbusinessheadquartersunderitsstatutes
or(ii)theplaceofcentralmanagementinTurkey.Theplaceofmanagementreferstothe
highestlevelofmanagement(i.e.policy-makingmanagement).
UnitedKingdom
Acompanyistaxresidentifitis(i)incorporatedintheUnitedKingdomor(ii)thecentral
managementandcontrolisbasedintheUnitedKingdom.TheUnitedKingdomstillfollows
35AdecisionoftheSwissFederalSupremeCourtonDecember4,2003heldthattheplacewherethemanaging
bodiesarelocated,theplacewherethemanagementoperationsarecarriedoutandwherethecompany
documentsarekept.Ifactivitiesarecarriedoutinseverallocations,itiswheretheactivitiesarepredominantly
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UnitedStates
39Somecountriesdonotpermitnon-individualsaspartners(Examples:Italy,Switzerland).
40A.EssonandV.Thuronyi,FiscalTransparency(TaxLawDesignandDrafting,2000)pp.961965;Philip
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2.5.DomicileunderCommonLaw
Thetermdomicileisusedinseveralcountries.
Thisconceptofdomicileunderthe
commonlawdiffersfromthetermasusedincivillawcountries,whereitusuallyrefersto
theplaceofpermanentresidenceorhome.
Domicileundercommonlawisdifculttodene.AnoldUKcaselawheldthataplace
isproperlythedomicileofapersoninwhichhishabitationisxedwithoutanypresent
intentionofremovingtherefrom.
Thus,thetermdomicilesigniesapermanenthome
orplacewhereapersonisapermanentresidentwiththeintentionofremainingtherefor
41ManyBritishCommonwealthcountriesgivecertaintaxconcessionstonon-domiciledindividuals,whose
foreignincomeandgainsmaybetaxedonlyonaremittanceorreceivedbasis.
CraignishvCraignish
(1892)2Ch.180(UK).
43E.I.SykesandM.C.Pryles,AustralianPrivateInternationalLaw(TheLawBookCompanyLtd.,1987)pp.
44RamonJ.Jeffery,TheImpactofStateSovereigntyonGlobalTradeandInternationalTaxation(KluwerLaw
International,1999)pp.5051.
45LordCranworthin
WhickervHume
7H.L.C.(1859)(UK).
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anadoptedchildtakesupthedomicileoftheadoptingparents,whilethedomicileofthe
wifeisthatofherhusband.IntheUnitedKingdom,awifeacquiredthehusbandsdomicile
ifmarriedbeforeJanuary1,1974.Ifmarriedafterthatdate,herdomicilestatusisdependent
onheroriginorchoice.
3.S
OURCEOF
NCOMEOR
3.1.General
Theconnectingfactorsforthetaxobjectsarethesourcerules.Thesourcerulesidentify
(a)wheretheincomearisesand(b)whichcountryhasthetaxingrightsoverit.Acountry
NathanvFederalCommissionerofTaxation
,(1918)25CLR183;24ALR286(Australia):Sourceisnotalegal
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applicablesourcerulesonthatincome.Theycanchangethebasicsourceassignedtoan
itemofincomeandtherelatedtaxingrights.Forexample,asaleofcomputersoftwaremay
beclassiedasbusinessorserviceincome,saleofacopyrightorknow-how,orasaleof
48ThetitlepassageruleintheUnitedStatesappliestotradedinventoryandcertaindepreciablepersonalproperty.
Inothercases,thesalesincomeisdeemedtoariseinthesellerscountryofresidence,unlesseither(i)substantial
salesactivityiscarriedoutinthecountrywherethesaleismadeor(ii)thegoodsaresoldfortheuse,consumption
ordispositionintheothercountry,andatleastasignicantamountofactivityiscarriedoutthroughaxedplace
ofbusinessinthatcountry.(SeeKlausVogel,WorldwidevSourceTaxationofIncomeIntertax1988/89,
p.225).
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whereanyactivitiesgivingrisetotheroyaltywereperformed,orwherethepayeris
Thus,therearewidevariationsinthebasicsourcerulesappliedunderthedomestic
wheretheloancontractisentered
wherethemoneyislent
wheretheborrowedfundsareused(OECDMCArt.11)
wheretheincomearisesfromwhichitispaid
wherethedebtcanbeenforced
WestminsterBankExecutor&TrusteeCo.(ChannelIslands)Ltd.vNationalBankofGreeceSA
(1970)46
TC472(UK):interestissourcedintheUnitedKingdomifthereissufcientnexus.Therelevantfactors
includetheplacewherethedebtclaimcanbeenforced,theplacewheretheinterestispaid,thesource
fromwhichthedebtispaid,howthedebtissecured,thecurrencyofthedebt,thegoverninglawofthe
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wheretheintangiblerightsaretransferable
wheretheagreementismade
(f)Equipment
movablepropertyrentals
wherethepermanentestablishmentissituated(OECDMCArt.7)
gainsotherthanfromimmovableproperty,shipsandaircraftandpermanent
establishment:thestateofresidence(OECDMCArt.13).
(i)Incomefromagriculture
50RobertJ.Patrick,IFACahiersVol.65B,GeneralReport,1980,pp.1518;J.S.PhillipsandM.H.Collins,IFA
CahiersVol.70A,GeneralReport,1985,pp.2326.
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Asmentioned,thetaxingsourcerulesnormallyrefertotheincomederivedfrom
51Similarprovisionsexistinseveralcountries.(Examples:India,Indonesia,Malaysia,Portugal,Singapore,
theUnitedStates);HarGovind,BusinessConnectionandPermanentEstablishment(IBFDAsiaandPacic
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Similarly,technicalservicesperformedathomemaybetaxableathomeandinanother
countryifpaidby,orusedin,thatcountry.
Thus,twoormorejurisdictionsmaytaxthesameincomeassourcedintheircountry.
Moreover,theresidenceStatemayrefusetograntrelieffortheforeigntaxespaiddueto
sourceconicts.Manyoftheseconictsareminimisedthroughtheexplicitorimplicit
rulesagreedunderthesourceandassignmentrulesintaxtreaties.Thetreatiesclassifyor
characterisetheitemsofincome,providethebasicsourcerules,andthenassignthetaxing
rightstooneorbothContractingStates.
Asthetreatyrulesnormallyoverridedomesticlaw,theyaredefactosourcerules.
However,theydonotavoidallsourceconicts.Forexample,atreatyusuallyleavesthe
characterisationofincometothedomesticlaw.Asaresult,twoStatesmayclassifythe
sameincomeorcapitaldifferentlyandapplydifferenttreatyprovisions.Forexample,
equipmentrentalsmaybeclassiedasroyaltiesinthesourcestateandbusiness
incomeintheresidenceState.Similarly,loaninterestpaidtoapartnermaybetreated
asinterestinoneStateandashareofpartnershipprotsintheotherState.These
conictsofqualication(i.e.classication)oftenleadtodoubletaxationordoublenon-
taxationevenwhenbothContractingStateshaveactedinaccordancewiththetreaty
provisions.
53SeeChapter2(3.6).
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Althoughthetaxliabilityisacombinationofthetaxbaseandthetaxrate,theirdenitions
varywidely.
Thedomestictaxsystemsintheworldmaybegroupedintoeightbroadfamiliesof
incometaxlaws.
Underthesesystems,certaincountrieshaveasingletaxsystemforall
taxpayers(globalsystem),whileothercountriesprovideseparatetaxlawsfordifferent
taxpayersanddifferentitemsofincome(schedularsystem).Manyofthemfollowahybrid
54Thereareeightgroupsofcountriesbasedoncommoncharacteristics,namelyBritish,American,French,Latin
American,EastEuropean(i.e.transitioncountries),NorthernEuropean,SouthernEuropeanandMiscellaneous.
(SeeVictorThuronyi,ComparativeTaxLaw(KluwerLawInternational,2003)pp.2344.
55LeeBurnsandRichardKrever,IndividualIncomeTax(TaxLawDesignandDrafting,2000)pp.495500.
56VictorThuronyi,ComparativeTaxLaw(KluwerLawInternational,2003)pp.4559.
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mayapplydependingonthecharacteroftheincome,thetypeofactivityorthenatureof
ownership.Insomecountries,thetaxableincomebelowacertainminimumlevelorcapital
baseissubjecttoalowertaxrate.
Forexample,theUnitedKingdomappliesalower
smallincomerateof19%ifthetaxableprotofacompanyislessthanUK300,000,
withataperedreliefuptoUK1,500,000.Japanappliesaatrateof30%tocompanies
withacapitaloverJPY100million,whilesmallandmedium-sizedcompaniespay22%on
therstJPY8millionoftaxableincome.Afederaltaxrateof12%appliestosmallprivate
companiesinCanadaontherstCan.$300,000ofactivebusinessincome.
(b)Progressiveratesoranincreaseintaxratesathigherslabs:
Progressivetaxratesor
ahigherrateastaxableincomeincreasesarecommonlyusedforpersonaltaxestomaintain
theverticalequitybasedontheabilitytopay.Certaincountriesalsocomputetheircorporate
taxesonaprogressivetaxsystem.
Thetaxleviedonthehigherincomemaybeeitheratthe
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thecorporatetax.
Theyaregenerallyimposedasshort-termsupplementstothenational
taxes,oraslocalormunicipaltaxes.Somecountriestreatthesurtaxorsurchargeforlocal
ormunicipaltaxesasatax-deductibleexpenseforcorporatetax.
Othercountriesadjust
thetaxbaseforlocaltaxes.Forexample,Canadagrants10%federalrateabatementonthe
taxableincomesubjecttoprovincialtaxes.TheUnitedStatescalculatestheUSstatetaxes
60Examples:Belgium,Botswana,Brazil,Cameroon,Canada,France,Germany,Honduras,India,Japan,
Luxembourg,Portugal,SouthKorea,Turkey.
61Examples:Bulgarianmunicipaltax,Germanymunicipaltradetax,Japaneseenterprisetax,Luxembourg
municipaltax.
62Examples:Canada,Finland,Greece,Iceland,India,Jamaica,Japan,Lebanon,Liechtenstein,Luxembourg,
Mexico,Russia,SaudiArabia,Switzerland,Uruguay.
63Examples:CostaRica,Colombia,Guatemala,Honduras,Mexico,Peru,Venezuela.
64Examples:Bangladesh,Finland,France,Germany,Guyana,Italy,India,Israel,Liechtenstein,Luxembourg,
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72AsimilartaxregimehasbeenintroducedbytheUnitedKingdomforsmalltaxpayingcompanies.Therst
UK10,000istax-freebutsubjectto19%taxondistribution.
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Estoniataxesonlyincomethatisdistributed.Thedistributiontaxisleviedonthegross
amountofthedistributionofcertainspeciedpayments.
Liechtensteinleviesagraduatedratevaryingfrom7.5%to15%basedonthe
73Distributiontaxbasedonthegrossed-upamountisleviedonpaymentsofdividends,employeefringebenets,
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subjectsthemtodifferenttaxrates.Inpractice,allglobalsystemscontainsomeschedular
77LeeBurnsandRichardKrever,IndividualIncomeTax(TaxLawDesignandDrafting,2000)p.497.
78Calendaryear-end:Albania,Angola,Austria,Azerbaijan,Barbados,Brazil,Brunei,Bulgaria,Chile,China,
Colombia,Congo,Indonesia,Ireland,IvoryCoast,Croatia,Cyprus,CzechRepublic,Ecuador,Estonia,
Fiji,Germany,Greece,Ghana,Guernsey,Guyana,Hungary,Iceland,Indonesia,Ireland,Israel,Jamaica,
Jersey,Kazakhstan,Kuwait,Lebanon,Lithuania,Luxembourg,Macao,Macedonia,Malaysia,Malta,Mexico,
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4.3.3.TimingRules
Thetaxbasemaybecomputedonthecashoraccrualbasisofaccounting,orsome
82LeeBurnsandRichardKrever,IndividualIncomeTax(TaxLawDesignandDrafting,2000)pp.534537.
83Ination-adjustedaccountsmayalsobepreparedincountriesthatexperiencehighinationrates,e.g.incertain
countriesinSouthAmerica.
84Consolidatedaccountsfortaxpurposesdifferfromconsolidatednancialstatements.Veryfewcountriespermit
worldwidetaxconsolidation;SeeChapter4(5.5)andChapter5(6).
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Someoftheothersignicantdifferencesintaxaccountsinclude(a)therealisation
principle,whichenablestaxestobepaidonlywhenfundsarerealisedoravailable,(b)the
equityprinciple,whichensuresthattaxespayablearefairlyimposedondifferentclasses
oftaxpayers,and(c)thetimingrulesthatgoverntherecognitionofincomeandexpenses,
losscarryoversfromotheryearsandothertaxrules.
Theunderlyingprinciplesofnancialaccountingarenotalwayscompatiblewiththe
basicprinciplesandpracticesusedintheeldoftaxation.
Therefore,thetaxableprot,ascomputedinthetaxaccounts,isusuallynotthesameas
thecommercialprots,asshowninthenancialstatements.Thenancialorcommercial
85HughAult,ComparativeIncomeTaxation(KluwerLawInternational,2004),pp.243250.
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91Examples:France,Germany,Luxembourg,Norway,Spain.
92Examples:Angola,Argentina,Austria,Bangladesh,Barbados,Belgium,Bolivia,Botswana,Bulgaria,
Cameroon,Canada,Chile,China,Congo,CostaRica,Croatia,Cyprus,CzechRepublic,Denmark,Dominican
Republic,Djibouti,Ecuador,Egypt,Estonia,Finland,Gabon,Ghana,Gibraltar,Guatemala,Guernsey,Guinea,
Guyana,HongKong,Hungary,Iceland,India,Ireland,IsleofMan,Israel,Italy,IvoryCoast,Jamaica,Jersey,
Kenya,Kuwait,Latvia,Lebanon,Lesotho,Macau,Macedonia,Malaysia,Malta,Mauritius,Mexico,Monaco,
Morocco,Mozambique,Myanmar,Nicaragua,Nigeria,Norway,Oman,Pakistan,Paraguay,Philippines,
Poland,Portugal,PuertoRico,SaudiArabia,Seychelles,Senegal,Singapore,SlovakRepublic,Slovenia,
SolomonIslands,SriLanka,Sweden,Switzerland,Taiwan,Tanzania,Thailand,TrinidadandTobago,Tunisia,
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98LeeBurnsandRichardKrever,TaxationofIncomefromBusinessandInvestment(TaxLawDesignand
Drafting,2000)pp.673681.
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(b)Thetermcostnormallyincludestherelatedexpensesandchargesdirectlyand
101Examples:CostaRica,CzechRepublic,Egypt,Finland,SouthAfrica,theUnitedStates.
102AccordingtotheDutchtaxcourt,HogeRaad,onlythedirectcostsshouldbeinventoriedundersound
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Therearewidevariationsincountrypractices.Forexample:
(a)Thebasisfordepreciationisthepurchaseormanufacturingcost,buttheratesmaybe
107Examples:Austria,Brazil,Chile,China,Congo,Ecuador,Fiji,Gabon,Greece,Guatemala,Guinea,Honduras,
Iceland,Italy,Lebanon,Libya,Mauritius,Mexico,Morocco,Mozambique,Namibia,Nigeria,Paraguay,Peru,
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acquisitioncost.
Insomecountries,thetaxrulesgrantthetaxpayerstheoptiontoclaim
thetaxdeductionfordepreciation(Examples:Canada,Italy,Portugal,theUnitedKingdom),
othersrequirethattheminimumdepreciationmustbechargedfortaxpurposeseveninloss-
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Generally,leasetransactionsgivethetaxbenetstothelessorasthenancier,andnot
tothelesseeastheuseroftheproperty.Thelessorisentitledtothedepreciationandother
taxallowancesastheowner,whomaythenpassthetaxadvantagestothelesseeinlower
leaserentals.
Thelesseemayclaimtheleaserentalasatax-deductibleexpense.
However,certaincountriestreatanancingleasedifferentlyfromanoperatinglease
fortaxpurposes.Theylookatthesubstanceandnottheform.Anancingleaseistreated
asasalebythelessoratthepresentvalueofthefutureleasepaymentsduetohim.The
118Examples:Argentina,Brazil,France,India,Italy,Portugal,SouthAfrica,SpainandtheUnitedKingdom.
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performscertainbusinessactivities.
OECDMC1977includedleasesundertheroyalty
article,subjecttotaxintheStateofresidenceonly,unlessitwasattributabletoapermanent
establishmentinthehostState.TheOECDMChasnowclassiedequipmentleaseincome
122Examples:Malaysia,Luxembourg,Norway,theUnitedKingdom,theUnitedStates,Uruguay.
123Examples:Bangladesh,Cyprus,Guernsey,India,Ireland,Israel,Jamaica,Jersey,Kenya,Lebanon,
Luxembourg,Malaysia,Mauritius,Malta,Myanmar,Namibia,Nigeria,Pakistan,Panama,Singapore,
Tanzania,TrinidadandTobago,Uganda,theUnitedKingdom.
124Examples:Belgium,Canada,China,Denmark,Finland,Ireland,Italy,Japan,Jordan,Malaysia,Mozambique,
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Therefore,royaltiesandinterestpaymentstotheheadofcebyanoverseasbranchare
disallowed.Similarly,headofcechargesmaybedisallowed,whollyorpartly,inthe
branchaccounts.Actualexpensesincurredorpaidtothirdpartiesforthebranchareusually
(f)Generally,nodeductionsareallowedfortheincometaxespaid,interestonlate
125Examples:Australia,Argentina,Belgium,Brazil,Canada,Denmark,France,Germany,Greece,Indonesia,
Kenya,Luxembourg,Mexico,Portugal,Spain,theUnitedKingdom.
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specialskillsoropportunities;or
off(Examples:Australia,Brazil,Egypt,Fiji,Hungary,India,Israel,Lebanon,
Uruguay,Uzbekistan,Venezuela);othersallowgeneralorspecicbaddebt
provisions.
Theprovisionforinventoryobsolescenceisdenied,whollyorpartly,incertain
countries(Examples:Angola,Argentina,China,Ecuador,Venezuela).
Somecountriespermit,orevenrequire,variousspecialprovisionsastax-free
reserves(Examples:Bangladesh,Finland,
France,Germany,Italy,
Korea,
128IntheUnitedKingdom,provisionsarenormallytaxdeductibleifmadeunderUKgenerallyaccepted
accountingprinciples(GAAP).
129Examples:Austria,Bangladesh,Canada,Colombia,CostaRica,Djibouti,Egypt,Fiji,Indonesia,Jordan,
Kenya,Kuwait,Lebanon,Mauritius,Mexico,Namibia,Poland,PuertoRico,Qatar,SlovakRepublic,
Seychelles,SlovakRepublic,SolomonIslands,SriLanka,Swaziland,Thailand,Uganda,Uruguay,Venezuela.
130Examples:Angola,Argentina,China,CzechRepublic,DominicanRepublic,Ghana,Greece,Guatemala,
Honduras,Ireland,Indonesia,Italy,Jamaica,Kazakhstan,Korea,Macau,Macedonia,Myanmar,Namibia,
Pakistan,Panama,Peru,Portugal,Qatar,Romania,Singapore,Taiwan,TrinidadandTobago,Tunisia,Turkey,
theUnitedKingdom,theUnitedStates.
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4.6.TaxIncentives
4.6.1.General
Incentivesaremeasuresthatmakeoneinvestmentmoreattractivethananotheralternative
investment.
Theyaremeanttoprovideamorefavourableregimetoinvestors.Inmany
133Veryfewcountriesdonotgivetaxandotherincentives.Examples:Austria,Croatia,CzechRepublic,
DominicanRepublic,Guernsey,HongKong,Macau,Malawi,Monaco,NewZealand.
134DavidHollandandRichardVann,IncomeTaxIncentivesforInvestment(TaxLawDesignandDrafting,2000)
pp.10081020;AlexEasson,TaxationofForeignDirectInvestment,pp.1924,pp.5465.
135Forexample,Frenchcompaniesmaycreateatax-deductiblereserveforveyearstocoverthecostsofa
foreignsubsidiaryorbranch.
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ofholdingcompaniesandvariousgroupservicecentres
ofmultinationalcompaniesin
theirjurisdiction.
Amajoruseofincentivesistoencourageexport-relatedoperations.Manycountries
providespecialzonesorFreeportfacilitieswithconcessionaryornilcustomsdutiesand
taxes.
Atleast800suchzonesexistaroundtheworldinover100differentcountries.
136Examples:operationalorregionalheadquarters,nancecentres,co-ordinationcentres,distributionor
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Intheviewofsometaxcommentators,taxincentiveshavenotbeenveryeffectivein
attractingforeigninvestmentsortechnologies,andleadtovarioustaxavoidanceschemes.
Moreover,theybelievethatiftheinvestmentwereeconomicallyjustied,itwouldhave
141DavidHollandandRichardVann,IncomeTaxIncentivesforInvestment(TaxLawDesignandDrafting,2000)
pp.9861008.
142ReportoftheCommitteeofIndependentExpertsonCompanyTaxationChairman,Mr.OnnoRuding
(EuropeanCommunities,Luxembourg,1992)
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146Examples:Argentina,Brazil,Chile,Cyprus,Finland,Gabon,Guatemala,Guernsey,Guinea,Honduras,
Indonesia,IvoryCoast,Japan,Jersey,Mozambique,Taiwan,Turkey,Venezuela.
147DavidWWilliams,IFACahiersVol.83B,GeneralReport,1998.
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Thewithholdingtaxmayormaynotbethenaltax.Thenaltaxsimpliesthecollection
oftax,particularlywhenduefromnonresidents.However,ifitbearslittleornorelationship
withthetaxcircumstancesofthetaxpayer,itmaybeexcessiveorinadequate.Ifitisnot
thenaltax,anyexcesswithholdingtaxcanbereclaimedbutonlyonanassessmentata
laterdate.Asimilarsituationalsoarisesifthetaxisnotwithheldatthereducedtreatyrate
butatthefullrate,subjecttorefund.Inbothcases,thereisacash-owdisadvantagewith
relatedcostsastherefundprocedurescanbeoftendifcultandslow.Theseprocedures
148Examples:Australia,Austria,Finland,Germany,HongKong,Luxembourg,Norway,Portugal,Switzerland,
theUnitedKingdom.
149J.S.PhillipsandM.H.Collins,IFACahiersVol.70A,GeneralReport,1985,pp.2628.
150Sincethewithholdingtaxisoftenleviedonthegrosspaymentwithoutanyallowanceforexpensesincurred
inthehomeState,therecipientmaysufferfromexcessforeigntaxcredits.
151ReportoftheCommitteeofIndependentExpertsonCompanyTaxationChairman,OnnoRuding(European
Communities:Luxembourg,1992).
152A.Michelsen,IFACahiersVol.83A,GeneralReport,1998.
153JulianS.Alworth,TheFinance,InvestmentandTaxationDecisionsofMultinationals(BasilBlackwell,1988)
p.47.
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154Timingdifferencelossesariseduetothetreatmentofincomeandexpenseindifferingtaxyearsforbookand
taxpurposes.
155Examples:Argentina,Australia,Belgium,Brazil,Canada(capitallosses),Denmark,Norway,Germany,Hong
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Arelosscarry-forwardsaffectedbyachangeofownershipoftheenterprise?Does
thetaxlawprovidespecialrulesforlossutilisationthataffecttransferofsharesor
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Somecountrieshavedifferentlosstreatmentforoperatinglossesandtaxlossesdueto
timingdifferences.Thelattermaybecarriedforwardindenitely.(Examples:Bangladesh,
Belgium,Cameroon,Congo,India,Malta,Monaco,Morocco,Pakistan,Senegal,SriLanka).
Mostcountriesrequirethatthetaxlossesbeusedasearlyaspracticable.Fewcountriesallow
thetaxpayertodeferthelosscarry-forwardsforuseinalatertaxyear(Examples:Belgium,
Certaincountriesgrantalongerorindeniteperiodforlossesincurredduringthestart-
upperiod.
Forexample,inItalyandSurinamethelossesduringtherstthreeyearsof
operationsmaybecarriedforwardindenitely.Thelosseswithintherstveyearsmay
becarriedforwardforsevenyearsinJapan.Indiaallowsthestart-upcoststobecapitalised
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controlorachangeinthenatureorconductofthetradeduetoareorganisation,such
asamerger,divisionorliquidation.Severaljurisdictionsalsohavespecialrulesforthe
transferoflossesonmergersandacquisitions.
Certaincountriesrestrictthecarry-over
oflosseswhenacompanyisliquidated,
oritsdebtisrestructured.
Thereareveryfew
countriesthatdonotinsistonsomecontinuityofownershiportrade(Examples:Austria,
(b)Carry-backperiodfortradinglosses:
Oneyear-Germany,Guernsey,Ireland,IsleofMan,Japan,theUnitedKingdom
Twoyears-Guam,Jersey,theUnitedStates
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165GerhardLaule,IFACahiersVol.64B,GeneralReport,1979.
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branchbecomesprotable(Examples:Austria,Belgium,Denmark,France,
Germany,
168France:Thestart-uplossesofforeignbranchesduringtherstveyearsmaybedeductedwithclaw-back
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172Asfrom2005,Austriaprovidesforfullscalunityforresidentsubsidiariesandgroupreliefforforeign
173Asubventionpaymentisanintercompanypaymentspecicallymadeforthetransferofcompanylosses.
174CommitteeonFiscalAffairs:ConsolidatedApplicationNoteGuidanceinapplyingthe1998Reportto
PreferentialTaxRegimes(OECD,2004)pp.4760.
175D.Sandler,TheInternationalGuidetoAdvanceRulings(IBFDPublicationsBV,1997).
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Privaterulingsprovidetaxcertaintytotaxpayersintheirtaxplanning.Onlatter
transactions,theyavoidadditionaltaxcostsfromlitigation,penaltiesandinterest.The
taxauthoritiesalsobenetthroughreducedcomplianceworkloadandimprovedtax
administration.Suchrulingsmaybebindingonthetaxauthoritiesforaspecictaxpayer,
providedalltherelevantfactsarefullydisclosed,andthetransactionsfollowtheruling
request.Sincetheyarepersonalrulings,theymaynotbedirectlyapplicabletoother
taxpayersbutmayprovideguidancetotheminsimilarcircumstances.
Aneffectiveprivaterulingsystemshouldcontainseveralfeatures.Forexample,the
taxpayershouldbeofferedanopportunitytoobtainanadvancerulingonthetax
consequencesofbonadetransactionswithinareasonabletime.Itshouldbegivenat
leastincasesofgenerallegalimportanceoriftheyareofmaterialsignicancetothe
taxpayer.Thetaxpayershouldbeabletonegotiatewiththeauthoritiesandeitheramend
thetransactionorwithdrawtheapplicationbeforeanegativerulingisissued.Thescal
authorities(andthecourts)shouldbeboundbytheadvancerulinguponwhichataxpayer
hasreliedingoodfaith.Anysubsequentchangeinthelawshouldbeappliedasfaras
problemsnortocertaintaxes,butbeprovidedonalltaxesandtaxissues.
Thus,somequestionstoaskonadvancetaxrulingsystemsare:
Istherearulingpractice?Whocanapplyforaruling?Whatisthescopeandlegalbasis
fortherulings?Whattaxareasandissuesortypesoftransactionscantheycover?Inwhat
circumstancesmustarulingbegranted?Inwhatcircumstancescanarulingberefused
ornotgiven?Canthetaxpayerappealagainstarefusaltogivearuling?
Whataretheproceduresforrequestingaruling?Whoshoulditbesubmittedto,andin
whatform?Whenshoulditbemade(preorposttransaction)?Arethereanycharges
levied?Whatisthetimelimitforobtainingaruling?Canataxpayerappealagainsta
delayinthegrantofarulingoradecisionnottogivearuling?
Istherulinglegallybindingonthetaxauthorities?Isitbindingonthetaxpayer?Towhat
extent,isitbinding?Isthereatimelimitforthebindingperiod?Arelegalrulingsbinding
onthecourts?
Canataxpayermodifyorwithdrawarequestforaruling?Whencanarulingbe
withdrawn?Whatistheeffectofjudicialdecisionsorchangesintaxlaws?Canthe
authoritiesrevokeormodifyarulingpreviouslygiven?Isthereanyprotectiongivento
thetaxpayerinsuchcases?Canataxpayerappealagainstanadverseruling?
Inwhatcircumstancesarerulingsmadepublicorpublished?Cantheybereliedupon
byothertaxpayersastaxprecedentsonothertransactions?Cantheybindsimilaror
continuingtransactionsbythesametaxpayerorsimilartransactionbyothertaxpayers?
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Areadvancerulingsgivenontransferpricingissues,e.g.advancepricingarrangements?
Privaterulingsmaynotbeworthwhileinallcases.Theynormallyrequirefulldisclosure
oftheproposedtransactionortransactions,andcouldinvolvetime-consumingpreparation
oftheapplicationandnegotiationswiththeauthorities.Insituationsinvolvingcontentious
176MaartenEllis,IFACahiersVol.84B,GeneralReport,1999,pp.4849;SeeChapter6(6.6).
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Advanceprivaterulingrequestswillonlybeconsideredif:
(i)therelevantpartiestoaproposedtransactionareidentiedbynameandaddress;
177NatWestCase(AdvanceRulingNo.P9(1995),220ITR377)(India):TheAuthoritydidnotgiveanadvance
rulingsincetheuseofintermediaryentitiesbyaUKbankinMauritiuslackedcommercialsubstanceandthe
transactionsappearedtobeundertakenprimafacietoavoidtax.
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authorities,unlessthereisachangeinthelaworfacts.Thereisnorightofappeal.Moreover,
178HansPijlandWobkeHahlen,theNewAdvancePricingAgreementandAdvanceTaxRulingPracticeinthe
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informationwiththesourceStateoftheinterestandroyalties.The2004amendmentstates
thattherulingonconduitnancingstructureswillonlybegrantedincombinationwithan
advancedpricingagreement.
ThenewDecreesalsoproviderulesgoverningunilateral,bilateralandmultilateral
APAs.
NewZealand
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UnitedKingdom
Thereisnostatutoryorpublishedadministrativeprocedureontaxrulings.Inpractice,the
Thereisalackofabonadebusinesspurposeortheprimemotiveistoreducefederal
tax;moreover,therulingisnotgrantedwheretheissueisfactualinnature.
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181RobertJ.Patrick,IFACahiersVol.65B,GeneralReport,1980,pp.2223.
182MarjaanaHelminen,TheDividendConceptinInternationalTaxLaw(KluwerLawInternational,1999).
183Thelistofdistributionsspecicallyincludestheissueofredeemablepreferencesharesunlesspaidbynew
consideration,interestpaymentsoncertainsecuritiesthecostofwhichisbornebythecompany,transfers
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companylawofthecountry.Thesedifferencescanleadtobothdoubletaxationanddouble
Notalldistributionsaredividends.Toqualifyasadividend,theremustbea
(SeeChapter8(8.2))
Thetaxationrulesondividendsvary.Generally,countrieseitherprovidelowertax
ratesorexemptthedividendsfromqualifyingdirect(i.e.non-portfolio)participations
orshareholdings.Taxtreatiesalsoimposealowermaximumwithholdingtaxonsuch
dividends(MCArticle10).TheEUParent-SubsidiaryDirectiveprovidesfortaxexemptions
onqualifyingdividendreceiptsandpaymentstoencourageinvestmentcapitalowswithin
theEuropeanUnion.(SeeChapter5(5.3))
Taxsystemsaffectthetaxationofdividends.Undertheclassicalorseparatetax
system,corporateprotssufferfromeconomicdoubletaxation.Theyarersttaxedin
thehandsofthedistributingcompanyandthetaxedprotsarethentaxedagainon
theshareholderswhendistributed.Thisdoubletaxationisavoidedinseveralcountries
usingvariousformsofshareholderreliefsystems.Theyeitherfullyorpartlyattribute
thetaxespaidbythecompanytotheshareholdersunderanimputationsystem,or
grantthempartialorfulltaxexemptiononthedividends.Theseshareholderrelief
systemsincludedividendexemption,halfinclusion,atrateanddualincometax
7.1.2.ConstructiveDividends
184SeeChapter5(5);RichardVann,IFACahiersVol.88A,GeneralReport,2003,pp.2835.
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dependontheprotabilityofthecompany)orloansthatexceedacertainxedproportion
(thedebt/equityratio)ofthetotalcapitalofthecompany.
Thedeemeddividendprovisionsunderthetaxrulesareappliedunderseveralanti-
avoidancemeasures.Interestpaymentsmayberegardedashiddenprotdistributionsunder
185Examples:Argentina,Brazil,Estonia,Greece,Hungary,India,Myanmar,Namibia,Nicaragua,Qatar,Saudi
Arabia,Singapore,SlovakRepublic,SouthAfrica,Seychelles,Tunisia.
186Examples:Aruba,Austria,Australia,Barbados,Bolivia,Botswana,Brunei,Canada,Colombia,CostaRica,
Croatia,Cyprus,Ecuador,Egypt,Estonia,Fiji,Germany,Greece,Guatemala,Ghana,Hungary,Iceland,
Ireland,Israel,Italy,Jamaica,Japan,Latvia,Lebanon,Lesotho,Macau,Mauritius,Mexico,Morocco,
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Severalcountriesdonotwithholdtaxundertheirdomesticlawondividendspaidto
Fewcountriestaxdeferorexemptthedividendpaymentiftheamountisreinvestedin
thecountry:(Examples:Colombia,Hungary)
QualifyingdividendpaymentstoparentcompanieswithintheEuropeanUnionarenot
subjecttowithholdingtaxundertheEUP-SDirective.
FewcountrieshaveextendedthewithholdingtaxexemptionondividendsundertheEU
P-SDirectivetoqualifyingcompaniesresidentinnon-EUtreatycountries.(Examples:
Denmark,Ireland,Luxembourg)
7.1.5.DividendsReceivedfromNonresidents
Countrieswithaworldwidetaxsystemusuallytaxtheforeigndividendincomeoftheir
residents.However,severalofthemprovideforreliefoftheeconomicdoubletaxationon
thedividendincome.Forexample:
Severalcountrieshaveextendedtheexemptionundertheirdomesticparticipation
exemptionrulestoqualifyingforeigndividendincomeorgrantedexemptionundertax
Manycountriesgiveanindirectcreditfortheunderlyingtaxpaidbythedistributing
company,usuallyundertaxtreaties.
ForeigndividendsfromMemberStatesintheEuropeanUnionareeithertax-exemptor
grantedindirecttaxcreditundertheEUParent-SubsidiaryDirective.
Economicdoubletaxationofdividendsinthehandsoftheindividualshareholdermay
berelievedthroughshareholderreliefsystems.
7.1.6.DividendSourceRules
Thesourceofthedividendisgenerallythecountryofresidenceofthepayingcompanyor
thecountrywherethesharesareregistered.Theoriginoftheincomepaidasdividendsby
thecompanyisusuallyirrelevant.However,thereareafewcountries(Example:Australia),
whichtreatdividendspaidoutofthebranchprotsofaforeigncompanyasdomestic-source
andapplyawithholdingtax.Thissecondarywithholdingtaxisnotpermittedunderthe
OECDMCArticle10(5).
192Examples:Albania,Argentina,Aruba,Australia(franked),Brazil,BritishVirginislands,Brunei,Cambodia,
China,Cyprus,Ecuador,Egypt,Greece,HongKong,India,Jersey,Korea,Kuwait,Malaysia,Malta,Mauritius,
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7.2.InterestIncomeandExpense
7.2.1.General
debtcapital.Debtcapitalnormallyreferstocapitalraisedthroughdebtorloaninstruments
onxedoroatinginterestpayments.Italsoincludeshybriddebtinstrumentssuchas
includingbondsanddebentures.Interestonparticipatingorconvertiblebondsremainsas
interestuntilactuallyconvertedintoshares,unlessthedebtorsharesthebusinessrisks.
Anenterprisecanselecteitherequityordebt,orgenerallyacombinationofthetwo,
tonancehisbusinessactivities.Althoughthenancingmixisdictatedbycommercial
considerations,debtispreferabletoequityfromataxviewpoint.Normally,theinterest
paymentsaretaxdeductiblewhiledividendsarenot.Thus,acompanynancedbyaloan
hasataxadvantageoveracompanyprovidedwithequitycapital.Moreover,theinterestpaid
toanonresidentinvestorareoftensubjecttoalowerwithholdingtaxinthesourceState
thanadividendunderatreaty.Theuseofloancapitalratherthanequitycan,therefore,
reducethetaxliability.
Anexcessiveuseofdebtcanleadtotheproblemofthincapitalisation.Variousapproaches
havebeenadoptedtodealwiththisproblem.(SeeChapter6(5)).
7.2.2.WhatisDebtandEquity?
Equitycapitalsharesintherewardsofthebusinessbutalsobearstheentrepreneurialrisks.
Thecompanydoesnotowetheshareholderthemoneyandcannotrepaythecapitalinvested
exceptonsharereductionorliquidation.Asashareholder,hereceivesincomeonlywhen
thecompanydistributesittohim.Heisentitledtohisshareofthedistributableprotsas
dividendswithoutanylimit,butonlyifthecompanymakesaprot.Hecanlosehisentire
capitalinbusinesslosses.Equitycapitalmayalsobeofdifferentclassesortypes,suchas
ordinaryorpreferredshares.Thepreferencesharesmayormaynotberedeemable.The
sharesmayhaveequalorunequalrightsovervotingcontrol,and/ordistributionofprots,
instruments.Loancapitalcantaketheformofdifferenttypesofdebtclaimswithvarying
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termsthatdependontheinterestpayments,repaymentperiodsandthenancialrisks
involved.Theymayalsohavethecharacteristicsofbothdebtandequityandmaybetreated
asdebtinonetaxingjurisdictionandasequityinanother,suchasinhybridorderivative
nancialinstruments.
thetermsoftheloan;
thecurrencyoftheloan
alistingonaforeignstockexchange;
thenatureofthesourceoftheinterest;
theapprovaloftax,exchangecontrolorotherauthority;
198SeeChapter8(7).
199Foradiscussiononfactorsaffectingtheinterestwithholdingtaxrateundertaxtreaties,seeUNCommentary
Article11,paras.1118.
200Examples:Aruba,BritishVirginIslands,Cyprus,Finland,Kuwait,Luxembourg,Malta,Mauritius,Monaco,
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Theinterestoncertainbankdeposits,bondsanddebenturesisalsotax-exempt
inseveralcountries.
TheUnitedStatesgrantsanexemptionfromwithholdingtaxonportfoliodebtobligations
andbankinterestpaidtononresidents.Switzerlanddoesnottaxtheinterestoncommercial
loans,includingloansfromaforeignparenttotheSwisssubsidiaries,buttaxesbankand
bondinterest.NowithholdingtaxispaidontheinterestpaidtononresidentsinGermany,
exceptoncertainbankloans.SpainexemptstheinterestonloansfromEuropeanUnion
countries(unlesslistedasataxhaven),orifapublicbodyorgovernmentisthepayeror
(c)TheresidenceStategrantseitheracreditoranexemptionrelieffortheforeign
withholdingtaxsufferedbythelender.Thisreliefmaynoteliminatethedoubletaxation
fullyduetoconictingsourcerules,theamountofforeigntaxessufferedorthelimitations
imposedonthetaxcreditsanddeductions.
Forexample,severalsourcecountriesapply
thewithholdingtaxonthegrossinterestpayment.Theforeigntaxcreditisgivenin
203Examples:Austria,France,Germany,Ireland,Switzerland.
204Examples:Belgium,France,Greece,Guernsey,Ireland,IsleofMan,Jersey,Norway,Spain,Thailand,the
UnitedKingdom,theUnitedStates.
205ErnstHohn,IFACahiersVol.67A,GeneralReport,1982.
206KlausVogel,IFACahiersVol.69A,GeneralReport,1984,p.123124.
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Thetaxonthepaymenthasnotbeenwithheldbythepayerandpaidovertothe
oritreectsanon-armslengthtransaction(e.g.excessiveinterestrate)
principle):Argentina,Brazil,France,India,Mexico,Peru,Turkey.
wheretheloanorborrowedfundsareused(userprinciple):Argentina,Brazil,France,
India,Mexico,Peru,Turkey.
207Examples:Argentina,Australia,India,Mexico,Singapore,SriLanka,theUnitedKingdom.
208Examples:Belgium,Canada,Denmark,France,Germany,Italy,Ireland,Japan,Luxembourg,Mexico,Norway,
Spain,Sweden,Switzerland,theUnitedKingdom,theUnitedStates.
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wherethemoneyislent:Australia,NewZealand,SouthAfrica.
wherethedebtcanbeenforced:theUnitedKingdom.
7.3.RoyaltyIncomeandPayments
7.3.1.General
Aroyaltyisnormallyapaymentreceivedfortheuseortherighttouseanyintangibleright
orknow-howunderlicence.
However,thetermroyaltiescoversawiderangeofpaymentsunderthedomesticlaw
ofdifferentjurisdictions.Thetermnormallyreferstopaymentsfortheuse,ortherightto
use,intellectualproperty,know-howorcopyrights.Severalcountriesregardincomefrom
equipmentleasingasroyalties.Theincomefrompre-packagedcomputersoftwareistaxed
bymanycountriesasroyaltiesfromacopyright,andnotasaleofacopyrightedproduct.
Royaltiesarealsopaidfortheexploitationofnaturalresourcesconnectedwithland,most
commonlymineralresources,gravelortimber.
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databasesaretechnicalservicesorassistance.Thepaymentsforinformationconcerning
computerprogrammingareknow-howpaymentswhenmadetoacquireinformation
constitutingideasandprinciplesonconditionofcondentiality.
Taxtreatiesusuallylimitthedomesticdenitiontopaymentsfortheuseof,ortheright
touse,intellectualproperty.Asthetreatydenitioniscomprehensive,theuseofdenitions
underdomesticlawmaynotbeappropriate.TheOECDCommentarymentionsthatincome
fromequipmentleasingshouldnotbetaxedasroyalties,butasbusinessincome.
saleofcomputersoftwareandrelatedservicesisabusinessincomeandnotroyaltyincome.
TheCommentaryonsoftwarepaymentsrecommends:
(i)Thesaleofshrink-wrappedorcannedsoftwareshouldbetreatedasasaleofa
copyrightedarticle.
217OECDCommentary:Article7,para.37;SeeChapter3(4-Article12).
218OECDCommentary:Article12,paras.1219.
219OECDCommentary:Article12,para.11;SeeChapter8(3.3).
220Foradiscussiononfactorsaffectingtheroyaltywithholdingtaxrateundertaxtreaties,seeUNCommentary
Article12,paras.811.
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Severalsourcecountriesdonottaxroyaltiespaidtononresidents.
Certaincountries
limitthetaxationtospecicroyaltiesonly.Forexample,theUnitedKingdomdoesnotlevy
withholdingtaxonlmcopyrightroyaltiesandequipmentroyaltiespaidtononresidents.
Denmarkexcludesallcopyrightroyaltypaymentstononresidentsfromthewithholding
tax.Theroyaltyincomefromtheexploitationofartistic,musicalandculturalworkswholly
developedandproducedinIrelandistax-exempt.Chinaexemptstheroyaltypaymentson
advancedtechnology,oriftechnologyisprovidedonpreferentialterms.
Asfrom2004,qualifyingroyaltypaymentswithintheEUMemberStatesarenotsubject
towithholdingtaxundertheEUInterest/RoyaltyDirective.
7.3.3.RoyaltyIncome
RoyaltiesaregenerallytaxedasincomeofthelicensorinhisresidenceState.Creditor
exemptionreliefisgivenforanywithholdingtaxpaidinthesourceState.Whenroyalties
aretaxableinthesourceState,thetaxisusuallycollectedfromthelicenserbyawithholding
221Examples:Aruba,Brunei,Croatia,Kuwait,Liechtenstein,Malta,Mauritius,Monaco,Mozambique,
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Germany:Germanydoesnotdeneroyaltiesseparatelyunderitsdomesticlaw.Royalty
incomeisclassiedundertheexistingtypesofincome(e.g.businessincome,rental
income,independentpersonalservicesorotherincome)and,therefore,maybetaxed
underdifferentsourcerules.Theincomefromapatent,copyrightorknow-howofthe
person,whodevelopsorinventsthem,isdeemedasanincomefromindependentpersonal
India:RoyaltyincomeisfromadomesticsourceinIndiaifitispayablebytheIndian
government(payrule).Forotherresidentornonresidentpayers,itisfromadomestic
sourceifthepaymentfortheright,propertyorinformationisforitsuseinabusinessor
professioninIndiaorforearninganyincomeinIndia(userule).
Japan:Royaltiesaredomesticincomeifaperson,whoisengagedinabusinessinJapan,
paysthemforhisbusinessuseinJapan.TheJapanesesourcerulesuseamixtureofthe
useruleandthepayrule,withtheemphasisontheplaceofuseprinciple.
UnitedStates:TheUnitedStateshasspecicsourcerulesforroyaltiesunderitsdomestic
law.Royaltyincomeisdomestic-sourceifthepropertyislocatedwithintheUnitedStates,
oriftheintangiblerightsareusedintheUnitedStates.
Theroyaltypaymentsmaybetaxedunderthepayruleinonecountry,andunderthe
useruleintheothercountry.Thedenitionandsourceconictscanleadtodouble(or
multiple)taxationforthelicenser.Anexampleofmultipletaxationistheroyaltyreceived
fortechnicalservicesperformedathomebutpaidabroadfortheuseinathirdcountry.
Royaltiesmaybetaxableinthecountrywheretheservicesareperformed,thecountry
wherethepayerresidesandthecountrywheretheyareused.Suchmultipletaxesinthe
sourcecountriesmaynotberelievedinthecountryofresidenceunderthedomesticlawor
taxtreaties.
7.4.CapitalGains
7.4.1.General
224SeeChapter4(4.5).
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Somecountriesapplytheintentionatthetimewhen,andthecircumstancesinwhich,
thepropertywasoriginallyacquired(Examples:Brazil,Canada,Denmark,Israel,the
UnitedKingdom).
225Examples:Barbados,Bolivia,Brunei,Cambodia,CostaRica,Fiji,Gibraltar,Guernsey,HongKong,Isle
ofMan,Jamaica,Jersey,Kenya,Macau,Malaysia,Mauritius,Namibia,NewZealand,PapuaNewGuinea,
Seychelles,Singapore,SolomonIslands,SouthAfrica,Swaziland,Tanzania,Zambia.
226Examples:Albania,Angola,Aruba,Argentina,Australia,Austria,Azerbaijan,Belgium,Brazil,Cameroon,
Chile,China,Colombia,Congo,Croatia,CzechRepublic,Denmark,DominicanRepublic,Ecuador,Egypt,
Estonia,Finland,Gabon,Germany,Greece,Guinea,Honduras,Hungary,Iceland,Indonesia,Italy,Ivory
Coast,Japan,Jordan,Kazakhstan,Korea,Kuwait,Latvia,Lesotho,Liechtenstein,Lithuania,Luxembourg,
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toeachgain,ortothetotalgainsofthetaxpayer.Theratemayvaryforindividualand
corporatetaxpayers.Theremayalsobespecialrulesforthecarry-overofcapitallosses,
229Examples:Bangladesh,Belgium,Chile,France,Greece,Guyana,India,Macedonia,Morocco,Nigeria,
Pakistan,SriLanka,Tanzania,Zimbabwe,theUnitedStates.
230Examples:PuertoRicosixmonths;Pakistan,Trinidad-oneyear;France-twoyears;theUnitedStates:
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236Examples:Australia,Belgium,Canada,Germany,India,Norway,theUnitedKingdom,theUnitedStates.
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Theforeignincomeistaxablebutthetaxespaidontheincomearecreditedagainst
thetaxdue(foreigntaxcredit);
Acreditisgivenforcertainnotionaltaxesthatarenotactuallypayableinthesource
country(tax-sparingcredit);and
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Theforeign-sourceincomeisexempttopreventjuridicaldoubletaxation.
Theforeign-sourceincomeisexempttoavoideconomicdoubletaxation.
Countriesthatfollowtheterritorialtaxregimeexempttheforeign-sourceincomefrom
taxationunderthedomesticlaw.Severalcountrieswiththeworldwidetaxregimealso
exempt,eitherfullyorpartly,allorcertainforeignincome.Theexemptionmaybewithor
withoutprogressionforratepurposes.
Manyofthemrequirethattheforeignincomeis
subjecttotax(ortaxableatacomparablerate)inthesourceState.Normally,nodeduction
isgivenforthecostsrelatedtotheforeignincome,whichistax-exempt.Ifthesourcetaxis
lowerthantheresidencetax,thetaxexemptioninthehomeStateispreferabletoaforeign
taxcredit.
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inthesameaccountingperiod.Therefore,thetaxpayerpaysthedecitastaxifthehome
equivalenttaxexceedstheforeigntaxpaidonthesameincome,buttheexcesstaxisnot
refundediftheforeigntaxexceedsthehometax.Heendsuppayingthehigherofthesource
andresidencetaxes.
244KlausVogel,IFACahiersVol.69A,GeneralReport,1984,pp.107108.
245Examples:Argentina,Aruba,Australia,Austria,Azerbaijan,Bangladesh,Belgium,Brazil,Brunei,Bulgaria,
Canada,Chile,China,Colombia,Croatia,Cyprus,Denmark,Estonia,FaeroesIslands,Finland,Germany,
Greece,Guyana,Hungary,Iceland,India,Indonesia,Iran,Ireland,IsleofMan,Italy,Japan,Kazakhstan,
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paidbytheforeigndistributingcompany.Itiscomputedasapercentageofthecorporate
taxpaidbythecompanythatthegrossdividenddistributionbearstotheafter-taxprots.
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250Examples:Bangladesh,Barbados,Belgium,Botswana,Brazil,China,Cyprus,Egypt,Fiji,France,Germany,
Ghana,Greece,Hungary,India,Indonesia,Ireland,Israel,Italy,Jamaica,Japan,Kenya,Luxembourg,
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investmentindevelopingcountriesandleadtodoublenon-taxation.Moreover,byreducing
thetaxcostofrepatriatingprotstothehomecountry,theydiscouragereinvestmentof
theprotsinthehostcountry.
Taxsparingisstillrequiredbymostdevelopingcountries
toprotectthebenetsoftaxincentivesgiventoforeigninvestorsandispermittedunder
theUNMC.
TheOECDCommitteeonFiscalAffairsalsoacceptsthattheymaybe
appropriatefordevelopingcountries.TheCommentaryUpdate2000statestaxsparing
shouldbeconsideredonlyforStateswhoseeconomiclevelisconsiderablybelowthelevel
inOECDMemberStates.
8.4.5.LimitationsonForeignTaxCredit
Undertheordinarycreditrules,thetotalcreditableforeigntaxislimitedtothedomestic
taxonthesameincomeintheresidencecountry.Thislimitationmaybecomputedona
per-itembasisthatrestrictsthetaxrelieftotheforeigntaxpaidonthatitemonly.Aslight
variationincludesaper-sourcelimitationwheretheincomefromthesamesourceina
253CommitteeonFiscalAffairs:TaxSparing-AReconsideration(OECD,1998).
254SeeChapter2(5.5).
255OECDCommentary:Article23,para.78.1.
256IntheUnitedStates,thedividendsfromuncontrolledforeigncompanieswhereatleastaUScorporation
(10/50companies)holds10%sharesaretreatedonaper-itembasis.
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257AccordingtoVogel,per-countrylimitationnormallyappliesunderatreaty,unlessthedomesticlaworthe
treatyprovidesforoveralllimitation.Theper-itemorper-sourceisusedonlyinexceptionalcases.(Klaus
Vogel,DoubleTaxationConventions,Article23,m.no.167168).
258CommitteeonFiscalAffairs:AttributionofIncometoPermanentEstablishments(OECD,1994)pp.2628.
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8.4.6.ExcessForeignTaxCredit
Excessforeigntaxcreditrepresentstheexcessofforeigntaxespaidforwhichthehome
Statehasnotgrantedthetaxcredit.Asmostcountrieslimitthetotalcreditfortheforeign
taxestothedomesticequivalenttaxliabilityundertheirowntaxrules,excessforeigntax
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ImpactofDomesticTaxSystems
Shouldacreditbeallowedfortheunderlyingand/orsparedforeigntaxesontheincome
outofwhichthedividendispaid?Howshouldthetimingofthedividendreceivedbe
matchedwiththeunderlyingforeignprots?
Whataretherulesforthecarry-forwardorcarry-backofexcessforeigntaxcredits?Can
theyberelievedundergroupreliefortaxconsolidation?
8.5.CountryExamples
Argentinagrantsdirectandindirectforeigntaxcreditsondividends.Toqualify,the
Argentinecompanymustowndirectly25%ofthesharesoftherst-tiersubsidiary.Credit
isalsogivenforthesecondtiersubsidiary,iftheindirectownershipisatleast15%.
Australia
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Chapter4
whichtheforeigntaxispaid.Incaseofforeignincomefromproperty(otherthanreal
estateincome),thetaxcreditislimitedto15%forindividuals,andanyexcesscredit
maybeclaimedonlyasadeduction.Thereisnocarry-overoftheexcessforeigntax
credits.Non-businessincomeexcludestheincomeofacorporatetaxpayerfromshares
ofaforeignafliate.
SpecialcreditrulesapplytoincomefromforeignafliatesreceivedbyCanadian
corporations.AforeignafliateisanonresidentforeigncorporationinwhichaCanadian
264Toqualify,theafliatemustberesidentinadesignatedtreatycountryforpurposesoftherelevanttreatyand
undercommonlaw.Underthecommonlawofresidency,acompanyisresidentinthecountrywherethe
centralmanagementandcontrol(mindandmanagement)resides.Aforeignafliatethatisdeniedtreaty
benetsisnotconsideredasresidentinthatcountryforsurplusaccountpurposes.However,thedomesticlaw
providesforcertainexemptiontotheserulesunderReg.5907(11.2)c).
265Certainbusinessesarespecicallyexcludedfromthelistofactivebusiness.Forexample,aninvestment
businessdoesnotqualifyunlesstheforeignafliateisaregulatednancialservicesproviderwithmorethan
vefull-timeemployeesandthetransactionsareconductedonanarmslengthbasis.
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ImpactofDomesticTaxSystems
foreigntaxcreditscannotbecarriedbackorforward.Thecompanycanclaiman
expensedeductionforexcesscredits.Allforeign-sourcerelatedexpensesareallocated
totheincomeincalculatingtheforeigntaxcredit.Theseexpensesincluderelatedtrade
tax,directandindirectfundingcostsandcostsrelatingtoexchangeordefaultrisks.
Germantaxtreatiesusuallyexemptincomefromforeignrealestateandpermanent
Theforeigntaxcreditisusuallygivenundertaxtreatiesforeachcountryonaper-source
basis.Inothercases,theunilateralreliefislimitedtoanexpensededuction.However,Ireland
allowsdirectandunderlyingtaxcredit(includingstateandmunicipaltaxes)unilaterallyon
dividendincomefromforeignsubsidiariesprovideditowns,directlyorindirectly,atleast
5%votingrights.Thiscreditisalsograntedforlower-tiercompaniesiftheyaresimilarly
relatedtotheirimmediateparent.andconnectedwiththeIrishcompany.Acompanyis
connectedifatleast5%ofitsvotingrightsarehelddirectlyorindirectlybytheultimate
Irishparentcompany.
Asfrom2001,doubletaxationreliefisavailabletoIrishbranchesofcompanies
residentinothermemberstatesoftheEuropeanUnion.Thistaxreliefwasextended
in2002tocompaniesresidentincountrieswithanIrishtreatywithintheEuropean
EconomicArea.
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Chapter4
Thetaxpayercannotelectforordinarycreditandclaimanexpensedeductionfortheexcess
taxcredits.
Foreigntaxcreditsaresubjecttoseverallimitations.Forexample:
thetotalforeign-sourceincomemaynotexceed90%oftheworldwideincome;
two-thirdsofthetax-freeorexemptforeignincomeisdeemedtobedomestic-source
iftheeffectivetaxrateinaparticularforeigncountryis50%ormore,theexcessis
notcreditablebutallowedasadeduction;
266Examples:Brazil,China,Greece,Morocco,SouthKorea,Singapore,Spain.
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ImpactofDomesticTaxSystems
(iii)Maltagrantsunilateraltaxreliefthatextendstotheunderlyingtaxpaidonforeign
dividendincome,ifthetaxpayerhasproofoftheforeigntaxsuffered.
(iv)Ifnoevidenceofforeigntaxespaidisavailable,acompanymayelectforadeemedat-
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Chapter4
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ImpactofDomesticTaxSystems
UnilateralreliefisgivenasdirectcreditfortaxespaidinBritishCommonwealth
countrieswhenthereisnotaxtreaty,providedtheothercountrygrantsreciprocalrelief
(Commonwealthrelief).Thisreliefislimitedto50%oftheSingaporerate,buta100%
creditisgiveniftheeffectiveforeigntaxrateislessthanhalftheSingaporerate.Therefore,
thetaxcreditisusuallylimitedtotheloweroftheforeigntaxpaidorone-halfofthe
Singaporetaxpayablebeforeforeigntaxrelief.
Aunilateraldirectcreditisgivenforthedividendwithholdingtax.Inaddition,
indirectcreditisgrantedondividendspaidbya25%(ormore)ownedforeign
subsidiary.Theforeigntaxcreditsdonotextendtosecond-tiersubsidiaries.The
unilateraltaxreliefisalsogivenforforeigntaxespaidonincomederivedfrom
professional,consultancyandotherservicesrenderedinanoverseasterritory,income
remittedfromcertaincountries,ontheforeignemploymentincomeofSingaporecitizens,
andonremittancesofroyalties(effectivefromassessmentyear2004)andbranch
Singaporetaxtreatiesnormallyprovideforordinarycreditfordirectandunderlying
taxes,andoftencontaintax-sparingprovisions.
SouthAfrica
SouthAfricagrantsordinarytaxcreditforforeigntaxespaidbyresidentsunderthe
worldwideoroverallbasis.
Directordinarycreditisnormallygivenfortheforeign
withholdingtax.Wheretheholdingintheequitysharecapitalexceeds25%thedividend
isexemptandnocreditisgivenfortheforeigntaxonthatdividend.Iftheholdingis
271Foreigntaxcreditsareconvertedintodomesticcurrencyattheaverageexchangeratefortheassessmentyear.
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Chapter4
Toqualifyforlumpsumtaxcredit,theforeign-sourceincomemustbefullytaxablein
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ImpactofDomesticTaxSystems
foreignincome,thetaxcreditsaresubjecttofurtherlimitations,basedonseparatelimitations
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Chapter4
Masui,Yoshihiro,
GroupTaxation
,IFA
Cahiers
,Vol.89B,GeneralReport(SduFiscale&FinancieleUitgevers,
Michelsen,Aage,
TaxTreatmentofCorporateLosses
,IFA
Cahiers
,Vol.83A,GeneralReport(KluwerLaw
International,1998).
Neeman,Yaakov,
TheDenitionofCapitalGainsinVariousCountries
,IFA
Cahiers
,Vol.61B,GeneralReport
(KluwerLawInternational,1976).
Patrick,RobertJ.,
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GLOSSARYOFINTERNATIONALTAXTERMS
Note:Thisglossaryprovidesbriefdefinitionsofselectedtermscommonlyusedin
internationaltaxation.Itisnotmeanttobecomprehensive.
ABUSEOFLAWDOCTRINE(Chapter6(2.2))
Itisacivillawconceptsimilartothesubstanceoverformdoctrinefoundinthecommon
lawsystems.Theabuseoflawdoctrinepermitsthetaxauthoritiestodisregardatransaction
intheformusedbythetaxpayerandrecharacteriseitwiththenormalŽtransaction.
ACCELERATEDDEPRECIATION(Chapter4(4.4))
Taxrelief,whichallowstaxpayerstoclaimahigherdepreciationdeductioninthefirstyear
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ADVANCEPRICINGAGREEMENT(Chapter4(6.1))
transactionfromthetaxauthorities,providedalltherelevantfactsaregiventothem.In
somecountries,anadvancerulingbindsthetaxauthoritiesifthetaxpayerusestheruling.
AFFILIATEDPRIVILEGE(Chapter5(5.3))
Thetaxrelieforexemptiongivenondividenddistributionsmadebyasubsidiarytoitsparent
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GlossaryofInternationalTaxTerms
AMALGAMATION(Chapter5(3.2))
Thetermamalgamationisusedwhenacompanymergeswithanothercompany,orboth
mergetoformathirdcompany,toformamergedoramalgamatedcompany.Taxrules
generallyprovidefortaxexemptionontransactionsarisingfrombusinessamalgamationor
ANSTALT(Chapter7(6.1-xii))
AlthoughthetermAnstalt,asusedinsomeGerman-speakingcountries,means
establishment,itisagenerallyusedtorefertoaspecialentitywithlimitedliability
inLiechtenstein.Oneormorepersons,eithernaturalorjuridical,canestablishit.Thelegal
entityhassomefeaturesofatrustwithcorporatepersonality.Itscapitalmayormaynot
bedividedintoshares.TheAnstaltcancarryonnormalbusinessactivitiesandissubject
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ARTISTECOMPANY(Chapter3(4-Article17))
Ataxavoidancedevice(alsoknownasarent-a-starcompany)underwhichanentertainer
orsportsmanentersintoacontractwithanotherperson,typicallyacompany,whichgrants
therighttoprovidetheentertainersservices.Ifthecompanydoesnothaveapermanent
establishmentinthecountrywheretheservicesareperformed,theprofitsaretax-free.The
OECDMCcontainsaprovisiontocountersuchpracticesunderArticle17.Theincome
derivedbyanentertainer,whichaccruestotheartistecompany,maybetaxedinthecountry
wheretheactivitiesareexercised.
ASSOCIATEDENTERPRISE(Chapter3(4-Article9))
Tworelatedenterprisesareassociatediftheyaredirectlyorindirectlyorunderathird
enterpriseconnectedthroughmanagement,controlorcapital.
BACK-TO-BACKLOAN(Chapter6(5.3))
Back-to-Backloansmaybeusedtosolveafinancingorexchangecontrolproblem.They
involvetheuseofanintermediaryentity.Thelendermakesaloantoanintermediarywho
inturnlendsthemoneytotheborrower.WhereAandCarerelatedcompaniesandBis
anindependententity(e.g.abank),thestructuremayenableAtoeffectivelypayinterest
toCwithouteitherpartybeingaffectedbythincapitalisationrules,i.e.rulesthattreatthe
interestpaidtoshareholdersortorelatedpartiesasdividendsfortaxpurposes.Back-to-back
loansarealsousedfortreatyshoppingtolowerwithholdingtaxratesoninterestundertax
BADGESOFTRADE(SeeChapter4(4.5))
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GlossaryofInternationalTaxTerms
declarationofsecrecyasregardsthebusinessoftheclients.Wherenumberedaccountsare
used,theylimitthenumberofpersonswhoknowtheidentityoftheclient.Generally,this
dutyofbanksecrecydoesnotapplywherefraud,moneylaunderingordrugsareinvolved.
TheupdatedexchangeofinformationclausecontainedintheOECDMCallowsthetax
authoritiestoobtaintax-relatedinformationfrombanksintheothercountryunderatreaty,
incertaincircumstances(SeeArticle262005Update).
BASEEROSION(Chapter3(4-Article22(US))
Atermusedforerosionorreductioninthetaxableincomei.e.thetaxbase.
BASICRELIEF(Chapter4(4.5))
Anytaxreliefavailabletoalltaxpayersregardlessoftheirpersonalcircumstances.
BEARERSHAREorBOND(Chapter7(3.2))
Sharesorbondsissuedwithoutthenameoftheholderandtransferablebydeliveryofthe
certificate.Theydifferfromregisteredsharesorbondswherethenameoftheholderis
specifiedandtransferrequiresatransferinstrument.
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BOARDOFDIRECTORS(Chapter4(2.3))
Thecompanystopbodythattakesdecisionsonpolicyissueswhicharebeyondthe
day-to-dayresponsibilityofthecompanymanagement.Theyowetheshareholdersa
dutyofordinarycare,goodfaithandloyaltytothecompany.Thedirectorsappointthe
executiveteamorofficersofthecompany.Theyareresponsibleasanoversightbody
withfiduciaryresponsibilitiestowardstheshareholders,whoelectthem.Thecompanys
bylaws(e.g.Articlesofassociation)specifytheirresponsibilitiesandoperatingprocedures
governingthem.Theymaybeheldliablefornegligenceiftheyfailtoperformtheirduties.
ManyEuropeancountrieshaveasupervisoryboardcomprisingtopmanagementanda
managementboardresponsiblefortheday-to-dayrunningofthecompany.
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GlossaryofInternationalTaxTerms
CIVILLAW(Chapter2(4.1))
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CLASSICALSYSTEMOFTAXATION(Chapter5(5.1))
Theclassicalsystemtreatsthecompanyasadistinctandseparateentityfromthe
shareholders.Theshareholdersareliablefortaxondividendspaidoutofincomealready
taxedonthecompany.Unlesstheshareholderisentitledtoacreditforthetaxpaidonthe
corporateincome,thereisdoubletaxationofprofitswhendistributed.Thisdoubletaxation
isavoidedundertheimputationsystemandothershareholderreliefsystems.
COMMENTARIES(Chapter3(1.2))
TheCommentariestotheOECDorUNModelConvention(MC)explaintheprovisionsof
theModelTreaty.TheOECDMCalsoprovidestheReservationsandObservationsofthe
OECDMemberStatesandthePositionsofseveralnon-OECDcountriesontheArticlesin
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GlossaryofInternationalTaxTerms
CONSTRUCTIVEDIVIDEND(Chapter6(5.3))
Constructivedividendsarenon-dividendpaymentsmadebycompaniestoshareholdersor
associatedpersonsthataretreatedfortaxpurposesasiftheyweredividends.Ashiddenprofit
distributions,suchpaymentsmaybedisallowedasdeductibleexpensesfortaxpurposes.
Thetaxauthoritiesmayalsoclaimanywithholdingtax,whichwouldhavebeendue,from
thepayingcompany,ondividends.Thepayingcompanymaybesubjecttopenaltiesforlate
paymentoftaxorfortaxevasion.Examplesofconstructivedividendincludeamountspaid
toanassociatedcompanyinexcessofanarmslengthpriceforgoodsorservices,excessive
paymentsofinteresttoshareholders,andloansoradvancestoshareholders.
CONTRACTINGSTATES(Chapter1(2))
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Debtcapitalnormallyreferstocapitalraisedthroughdebtorloaninstrumentsonfixed
oroatinginterestpayments.Hybriddebtinstrumentsincludeconvertiblebonds,profit
306
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GlossaryofInternationalTaxTerms
DEBT/EQUITYRATIO(Chapter6(5.3))
debtmayberecharacterisedasequity,resultinginadisallowanceoftheinterestdeduction
andtaxationasdividends.
DECLARATIONOFTRUST(Chapter8(9.1))
Atrustmaybecreatedincertainjurisdictionsthroughadocumentofdeclarationmadeby
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DERIVATIVEFINANCIALINSTRUMENT(Chapter8(8.3))
Financialcontractswhosevaluesarebasedon,orderivedfrom,thepriceofan
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GlossaryofInternationalTaxTerms
DOMICILE(Chapter4(2.5))
Incivillawcountriesdomicilemeansapermanenthomeunderthetaxresidencerules.
Themeaningincommonlawcountriesdiffers.Itistheplacewherethepersonbelieveshe
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EARNINGSSTRIPPING(Chapter6(5.6-UnitedStates))
Thepracticeofreducingthetaxableincomeofacorporationbypayingexcessiveamounts
ofinteresttorelatedthirdparties.Suchthirdpartiesmaybetaxexemptwithrespecttothe
interestorsubjecttoalowerrateoftax.
E-BUSINESS(Chapter8(1.1))
E-Businessisanumbrellatermthatreferstoanytypeofbusinesstransactiononthe
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GlossaryofInternationalTaxTerms
EUROPEANECONOMICAREA(Chapter2(7.5))
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GlossaryofInternationalTaxTerms
FLAGOFCONVENIENCE(Chapter7(5.9))
Theagofanothercountry,whichischosenforshipregistrationtotakeadvantageofthe
taxbenefitsandothernon-taxadvantagessuchaslowerlabourcosts,manningscaleand
otherrequirementsrelatingtoofficersandcrewandtradeunionpractices.Thetermisused
whentheagofacountrydiffersfromtheStatewherethecompanyowningtheshipis
FORCEOFATTRACTION(Chapter3(4-Article7))
Underthisprinciple,apermanentestablishmentorbranchistaxedonnotonlyitsown
incomebutalsocertainotherincomederivedbyitsforeignheadofficefromsourcesinthat
country.TheOECDModeltreatydoesnotallowtheuseofthistaxingprinciple.TheUN
Modelprovidesforlimitedforceofattraction.
FORCEDHEIRSHIP(Chapter8(9.5))
Therights,whichapersonhastotheestateorpartofanestateofadeceasedperson
underthelawofthedomicileofthepersonorwherethepropertyissituated.Insome
jurisdictions,theserulesaremandatory,andknownasforcedheirshiprules.Apartofthe
estateisawardedtooneormoreofthedeceasedsheirsunderthelaw.
FOREIGN-SOURCEINCOME(Chapter4(3.3))
Generally,thisreferstoincomederivedfromcountriesoutsidethecountryofresidenceof
thetaxpayer.Inmanycountriesincomeofaresidenttaxpayerarisinginanothercountryis
taxedsubjecttospecialreliefsorexemptionsunderdomesticlaworunderataxtreatywith
theothercountry.Suchreliefusuallytakestheformofataxcredit,taxexemptionortax
FOREIGNTAXCREDIT(Chapter4(8.4))
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FOUNDATION(Chapter8(9.5))
equityratio.Acompanyishighlygeared
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GlossaryofInternationalTaxTerms
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HEDGINGTRANSACTION(Chapter8.3))
Inahedgingtransaction,apersonprotectshimselfagainstfuturepriceorcurrency
uctuationsbybuyingorsellingcommoditiesorcurrenciesforward.
HIDDENRESERVES(Chapter6(5.3))
316
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GlossaryofInternationalTaxTerms
IMPUTATIONSYSTEM(Chapter5(5.2))
Asystemunderwhichatleastpartofthetaxpaidbyacompanyonitsprofitsiscredited
againstthetaxliabilityofshareholdersondividendspaidoutofthoseprofits.Imputation
reducesoreliminatesthedoubletaxationofdistributedprofitsthatarisesundertheclassical
systemoftaxation.Manycountrieshaveadoptedanimputationsysteminoneformor
another.
INITIALALLOWANCE(Chapter4(4.4))
Deductionfordepreciationgiveninthefirstyearforwhichataxdeductionisdueinrespect
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INTERNATIONALTAXPLANNING(Chapter5(1.1))
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GlossaryofInternationalTaxTerms
areas(e.g.backwardregionsordesignatedareasaspartofadecentralisationpolicy).
Theseincentivesmaybeofvarioustypes,suchasgrants,interest-freeloans,factorysites,
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LEASE(Chapter4(4.4))
Aleaseisacontractinrespectoffixedormovableproperty,underwhichtheownergrants
toanothertherighttopossess,useandenjoythepropertyforaspecifiedperiodinexchange
forperiodicrentalpayments.Mostleasesareeitherfinanceleasesoroperatingleases.Ina
financelease,theeconomicownershipiseffectivelytransferredtothelesseeandtheleasing
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GlossaryofInternationalTaxTerms
intheprofits.Limitedpartnersgenerallycannottakeanactivepartinthemanagementof
thebusinessofthepartnershiporallowtheirnametobeusedforitsbusiness.
LOANBONUSSCHEME(Chapter5(4.4))
Loan-bonusschemecomprisesofaloanprovidedbytheemployertopaysomeorallthe
taxliabilityofanexpatriateduringhisoverseasassignment.Theloanisrepaidthrougha
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MULTILATERALTAXTREATIES(Chapter2(6.1))
Treatiesfortheavoidanceofdoubletaxationwithrespecttotaxesonincomeandcapital,
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GlossaryofInternationalTaxTerms
Norway,Poland,Portugal,SlovakRepublic,Spain,Sweden,Switzerland,Turkey,theUnited
KingdomandtheUnitedStates.
OFFSHORE(Chapter7(1))
Abroaddefinitionincludesanycountry,otherthanonesown,whereonehasnonresident
status.Thetermisnormallyusedforoperationsoutsidethecountrywhereisitincorporated
ororganised.
OFFSHOREBANKINGUNITorOBU(Chapter7(5.7))
Abankinanoffshorefinancialcentre,notallowedtoconductbusinessinthedomestic
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PARENT-SUBSIDIARYDIRECTIVE(Chapter5(5.4))
ADirectiveissuedbytheEuropeanCommissionin1990toprovideforpaymentofdividends
withintheEUMemberStatesfreeofwithholdingtaxinthepayingStateandreceivingthe
dividendseffectivelytax-freeinthereceivingState.
PARTICIPATIONEXEMPTION(Chapter5(5.3))
Underparticipationexemption,dividendincomefromsubstantialparticipation(i.e.
shareholding)isexemptfromcorporatetaxsincetheyhavealreadybeentaxedinthehands
ofthepayingcompany.Insomecountries,capitalgainsonthesaleoftheparticipationare
alsoexemptfromtax.Theparticipationexemptionisalsoknownasaffiliationprivilege
orsubstantialholdingprivilege.
PARTNERSHIP(Chapter8(7.1))
Apartnershipisanassociationoftwoormorepersons(individualsorcompanies)formed
formakingaprofit.Suchanassociationmaybebasedonanoralorwrittenagreement.A
partnershipcanbeageneralpartnershiporalimitedpartnershipdependingontheextent
ofeachpartysliability.Ageneralpartnershipischaracterisedbytheunlimitedliabilityof
thegeneralpartnersforpartnershipdebts.Alimitedpartnershipiscomprisedofatleastone
generalpartnerwhohasunlimitedliabilityforpartnershipdebtsandoneormorelimited
partnerswhoareonlyliabletotheextentoftheircapitalcontribution.Limitedpartners,
however,maynotparticipateinthemanagementofthebusiness.
PASS-THROUGHENTITY(Chapter8(7.1))
Pass-throughorow-throughentityreferstoanentity,whichisfiscallytransparent.An
exampleisapartnershipwhichisnotitselftaxableandthetaxispayablebythepartners.
PATENTS(Chapter4(7.3))
Mostcountriesprovideforpatentlawsunderwhichaninventorcanregisterhisinvention.
Theregistrationprotectshisrightandentitleshimtoexclusiveexploitationofhisinvention
foralimitedperiod.Theinventormay,however,sellorlicensetheuseofhispatentwhile
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GlossaryofInternationalTaxTerms
PLACEOFEFFECTIVEMANAGEMENT(Chapter3(4-Article4))
PlaceofeffectivemanagementisthetestusedasthetiebreakerruleintheOECDMCto
investorwithsubstantialinuenceinthemanagementoftheinvesteecompanies.Anequity
ownershipinterestoflessthan10percentoftheoutstandingsharesofacompanyisusually
treatedasaportfolioinvestment.
PREFERENCEINCOME(Chapter5(5.2))
Preferenceincomeisdefinedasincomethatisnottaxedatthefullrate(alsocalledheadline
rate).Itcomprisesincomeexcludedfromtax,ortaxedatlowerratesduetoratereductions
ortaxcredits.Theymaybetemporarypreferencesandgrantadeferraloftaxduetotiming
differences.Permanentpreferencespermanentlyreducethetaxburdenforwhichtheyare
grantedwhencomparedwithincomesubjecttofulltaxation.
PREFERENCESHARES(Chapter5(2.3))
Sharesthatcarryarighttoapriorandusuallyfixeddividend,aheadofdividendspaid
toordinaryshareholders.Theyoftencarryapriorclaimtorepaymentofcapitalupon
PREFERENTIALTAXREGIME(Chapter2(8.2))
AtermusedbytheOrganisationforEconomicCo-operationandDevelopmentfortax
havenpracticesofitsMemberStates.Somecommentatorsalsocallthemnon-traditional
taxhavens.
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PRESUMPTIVETAX(Chapter4(4.2))
Taxleviedonanestimatedtaxablebase.Thetaxpayerissubjecttotaxonapresumptive
incomeorpresumedturnover,whichiscomputed,basedongrossreceipts,expenses
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GlossaryofInternationalTaxTerms
REGISTEREDCOMPANY(Chapter5(2.3))
Acompanyregisteredwiththeauthoritiesofthecountryinwhichitisestablished
orincorporated.However,acompanymaynotalwaysberegisteredinitscountryof
incorporation.Inmostcountries,itisillegaltooperateasacompanywithoutbeing
registered.
REGISTEREDOFFICE(Chapter5(2.3))
Theregisteredofficeistheplacewheretheregisteredagentcanbefound.Itmaybethe
corporateoffice,oritmaybetheofficeofthecorporationsattorney.
REMITTANCEBASIS(Chapter4(1.4))
Undertheremittancebasisoftaxation,foreign-sourceincomeistaxedonlywhenitis
actuallyremittedtoacountry.Remittanceisusuallygivenanextendeddefinitiontoinclude
constructiveremittance,forinstance,whenanamountiscreditedtoataxpayersaccountor
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ROLLOVERRELIEF(Chapter4(7.4))
Rolloverreliefisgivenbymanycountriestodeferthecapitalgainstaxwhentheproceeds
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GlossaryofInternationalTaxTerms
SERVER(Chapter8(1.1))
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SOURCEOFINCOME(Chapter4(3.1))
Theplace(orcountry)whereaparticularitemofincomeisdeemedtooriginateoris
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GlossaryofInternationalTaxTerms
STEPPING-STONECOMPANY(Chapter7(3.3))
and/orcurrencies.
Inacurrencyswap,thepartiescontracttoexchangecashows(orequalvalue)ofspecific
samematurityandwiththesamepaymentdates.Basisswaps(oatingrateswapsbased
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ondifferentindices,e.g.primeagainstLIBORandcombinedinterestrateandcurrency
swaps)arealsocommon.Therearenumerousvariationsresultinginhighlycomplexswap
transactionsinvolvingmanycounterparties.
TAINTEDINCOMEChapter6(4.2))
Incomeofacontrolledforeigncorporationthatistaxedtotheresidentshareholdersofthe
corporationwhenearnedbytheforeigncorporationratherthanwhendistributed.Generally,
taintedincomeconsistsofpassiveinvestmentincomeandcertainrelatedcompanyincome.
TAXASSESSMENT(Chapter4(4.7))
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GlossaryofInternationalTaxTerms
TAX-EXEMPTCOMPANY(Chapter7(3.2))
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GlossaryofInternationalTaxTerms
THINCAPITALISATION(Chapter6(5.1))
Thincapitalisationruleslimitthedeductionofinterestexpensewhencompaniesarehighly
gearedorleveraged.Acompanymaybefinancedintwoways:byequitycapitalorbydebt
capital.Generally,itwillbefinancedbyacombinationofdebtandequity.Acompanyis
saidtobethinlycapitalisedwhenitsequitycapitalissmallincomparisontoitsdebt
TIE-BREAKERRULE(Chapter3(4-Article4))
Taxtreatyprovisiondesignedtopreventanindividualfrombeingdeemedresidentinboth
treatycountriesforpurposesofthetreaty.
TOTALISATIONAGREEMENT(Chapter5(4.6))
Intheabsenceofinternationalsocialsecurityagreements,anindividualmightcontribute
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entityisknownasaconduit.TransparententitiesincludeScorporations(US),partnerships,
trusts,andlimitedliabilitycompaniestaxableasapartnership.Theadvantageofafiscally
transparententityformingatransparentorconduitentityisthepass-through(alsocalled
ow-through)oftheprofitandlossandrelatedtaxliabilitydirectlytotheinvestorsor
TRAVAUXPREPARATOIRES(Chapter2(3.2))
Article32oftheViennaConventionontheLawofTreatiespermitstheuseofpreparatory
materialsor
travauxpreparatoires
,eithertoconfirmthemeaningofthetextorto
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GlossaryofInternationalTaxTerms
countriesItalsoprovidesformoretaxingrightsforthesourceStatecomparedtothe
residenceStateunderthetreaty.
UNCONTROLLEDTRANSACTION(Chapter6(6.4))
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USUFRUCT(Chapter3(4-Article6))
Usufructistherightforapersontousecertainpropertyandtheincomederivedfromit
evenwhenthepropertyisownedbyanotherperson.However,thepersononlyhastheright
ofuseofthepropertyanditsincome;hecannotchange,damageorselltheproperty.
VALUEADDEDTAXorVAT(Chapter2(7.1))
Anindirecttaxchargedonthevalueaddedateachstageintheproductionanddistribution
processonsuppliesofgoodsandservices.Althoughitisleviedontheperson,whoconsumes
thegoodsorservices,theliabilityisonthesupplierofgoodsorservices.VATisrecovered
asapercentageonthepricechargedbythesellerofthegoodsorservices.
VIENNACONVENTIONS(Chapter2(1.1))
TheViennaConventionscodifyexistingrulesofinternationallawratherthancreatenew
provisions.TherearefourmultilateralViennaConventionsthatarerelevantfortax
purposes,namely:
theConventionof18April1961onDiplomaticRelations;
theConventionof24April1963onConsularRelations;
theConventionof23May1969ontheLawofTreaties;
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GlossaryofInternationalTaxTerms
WORLDWIDEWEBorWWW(Chapter8(1.1))
July21,2005Time:15:22Project:appendix.tex
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EXHIBITS…MODELTREATIES
1.OECDM
ONVENTIONON
NCOMEANDON
APITAL
(updatedasofJanuary28,2003,andincludingthechangesproposed
inthe2005UpdateonArticles19and26)
CopyrightOECD(Publicationdate2003):ThetextoftheOECDModelConvention
iscopyrightmaterial.Ithasbeenincludedinthebookwiththewrittenpermissionof
theOrganisationforEconomicCo-operationandDevelopment.
TitleoftheConvention
1Stateswishingtodosomayfollowthewidespreadpracticeofincludinginthetitleareferencetoeitherthe
avoidanceofdoubletaxationortoboththeavoidanceofdoubletaxationandthepreventionoffiscalevasion.
2ThePreambleoftheConventionshallbedraftedinaccordancewiththeconstitutionalprovisionsofboth
ContractingState.
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ChapterIIDefinitions
Article3:GeneralDefinitions
1.ForthepurposesofthisConvention,unlessthecontextotherwiserequires:
(a)thetermpersonincludesanindividual,acompanyandanyotherbodyofpersons;
(b)thetermcompanymeansanybodycorporateoranyentitythatistreatedasabody
corporatefortaxpurposes;
(c)thetermenterpriseappliestothecarryingonofanybusiness;
(d)thetermsenterpriseofaContractingStateandenterpriseoftheotherContracting
StatemeanrespectivelyanenterprisecarriedonbyaresidentofaContractingState
andanenterprisecarriedonbyaresidentoftheotherContractingState;
(e)theterminternationaltrafficmeansanytransportbyashiporaircraftoperatedbyan
enterprisethathasitsplaceofeffectivemanagementinaContractingState,exceptwhen
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establishmentinthatStateinrespectofanyactivitieswhichthatpersonundertakesforthe
enterprise,unlesstheactivitiesofsuchpersonarelimitedtothosementionedinparagraph4
which,ifexercisedthroughafixedplaceofbusiness,wouldnotmakethisfixedplaceof
businessapermanentestablishmentundertheprovisionsofthatparagraph.
6.AnenterpriseshallnotbedeemedtohaveapermanentestablishmentinaContracting
StatemerelybecauseitcarriesonbusinessinthatStatethroughabroker,generalcommission
agentoranyotheragentofanindependentstatus,providedthatsuchpersonsareactingin
theordinarycourseoftheirbusiness.
7.ThefactthatacompanywhichisaresidentofaContractingStatecontrolsoriscontrolled
byacompanywhichisaresidentoftheotherContractingState,orwhichcarriesonbusiness
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accruedtooneoftheenterprises,but,byreasonofthoseconditions,havenotsoaccrued,
maybeincludedintheprofitsofthatenterpriseandtaxedaccordingly.
2.WhereaContractingStateincludesintheprofitsofanenterpriseofthatStateand
taxesaccordinglyprofitsonwhichanenterpriseoftheotherContractingStatehasbeen
chargedtotaxinthatotherStateandtheprofitssoincludedareprofitswhichwouldhave
subjectedtothesametaxationtreatmentasincomefromsharesbythelawsoftheStateof
whichthecompanymakingthedistributionisaresident.
4.TheprovisionsofparagraphsIand2shallnotapplyifthebeneficialownerofthe
dividends,beingaresidentofaContractingState,carriesonbusinessintheotherContracting
Stateofwhichthecompanypayingthedividendsisaresident,throughapermanent
establishmentsituatedtherein,orperformsinthatotherStateindependentpersonalservices
fromafixedbasesituatedtherein,andtheholdinginrespectofwhichthedividendsarepaid
iseffectivelyconnectedwithsuchpermanentestablishment.Insuchcasetheprovisionsof
Article7shallapply.
5.WhereacompanywhichisaresidentofaContractingStatederivesprotsorincome
fromtheotherContractingState,thatotherStatemaynotimposeanytaxonthedividends
paidbythecompany,exceptinsofarassuchdividendsarepaidtoaresidentofthatother
Stateorinsofarastheholdinginrespectofwhichthedividendsarepaidiseffectively
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connectedwithapermanentestablishmentsituatedinthatotherState,norsubjectthe
companysundistributedprotstoataxonthecompanysundistributedprots,evenif
thedividendspaidortheundistributedprotsconsistwhollyorpartlyofprotsorincome
arisinginsuchotherState.
Article11:Interest
1.InterestarisinginaContractingStateandpaidtoaresidentoftheotherContractingState
maybetaxedinthatotherState.
2.However,suchinterestmayalsobetaxedintheContractingStateinwhichitarisesand
accordingtothelawsofthatState,butifthebeneficialowneroftheinterestisaresident
oftheotherContractingState,thetaxsochargedshallnotexceed10percentofthegross
bondsordebentures,includingpremiumsandprizesattachingtosuchsecurities,bonds
ordebentures.Penaltychargesforlatepaymentshallnotberegardedasinterestforthe
purposeofthisArticle.
4.TheprovisionsofparagraphsIand2shallnotapplyifthebeneficialowneroftheinterest,
beingaresidentofaContractingState,carriesonbusinessintheotherContractingStatein
whichtheinterestarisesthroughapermanentestablishmentsituatedthereinandthedebt-
claiminrespectofwhichtheinterestispaidiseffectivelyconnectedwithsuchpermanent
establishment.InsuchcasetheprovisionsofArticle7shallapply.
5.InterestshallbedeemedtoariseinaContractingStatewhenthepayerisaresident
bornebysuchpermanentestablishment,thensuchinterestshallbedeemedtoariseinthe
Stateinwhichthepermanentestablishmentissituated.
bythepayerandthebeneficialownerintheabsenceofsuchrelationship,theprovisions
ofthisArticleshallapplyonlytothelast-mentionedamount.Insuchcase,theexcesspart
ofthepaymentsshallremaintaxableaccordingtothelawsofeachContractingState,due
regardbeinghadtotheotherprovisionsofthisConvention.
Article12:Royalties
1.RoyaltiesarisinginaContractingStateandbeneficiallyownedbyaresidentoftheother
ContractingStateshallbetaxableonlyinthatotherState.
2.ThetermroyaltiesasusedinthisArticlemeanspaymentsofanykindreceivedas
aconsiderationfortheuseof,ortherighttouse,anycopyrightofliterary,artisticor
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scientificworkincludingcinematographfilms,anypatent,trademark,designormodel,
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2.Notwithstandingtheprovisionsofparagraph1,remunerationderivedbyaresidentof
aContractingStateinrespectofanemploymentexercisedintheotherContractingState
shallbetaxableonlyinthefirst-mentionedStateif:
(a)therecipientispresentintheotherStateforaperiodorperiodsnotexceedinginthe
aggregate183daysinanytwelvemonthperiodcommencingorendinginthefiscal
yearconcerned,and
(b)theremunerationispaidby,oronbehalfof,anemployerwhoisnotaresidentofthe
otherState,and
(c)theremunerationisnotbornebyapermanentestablishmentwhichtheemployerhasin
theotherState.
3.NotwithstandingtheprecedingprovisionsofthisArticle,remunerationderivedinrespect
ofanemploymentexercisedaboardashiporaircraftoperatedininternationaltraffic,or
aboardaboatengagedininlandwaterwaystransport,maybetaxedintheContractingState
inwhichtheplaceofeffectivemanagementoftheenterpriseissituated.
Article16:DirectorsFees
DirectorsfeesandothersimilarpaymentsderivedbyaresidentofaContractingStatein
hiscapacityasamemberoftheboardofdirectorsofacompanywhichisaresidentofthe
otherContractingStatemaybetaxedinthatotherState.
Article17:ArtistesandSportsmen
1.NotwithstandingtheprovisionsofArticles7and15,incomederivedbyaresidentofa
ContractingStateasanentertainer,suchasatheatre,motionpicture,radioortelevision
artiste,oramusician,orasasportsman,fromhispersonalactivitiesassuchexercisedin
theotherContractingState,maybetaxedinthatotherState.
2.Whereincomeinrespectofpersonalactivitiesexercisedbyanentertainerorasportsman
inhiscapacityassuchaccruesnottotheentertainerorsportsmanhimselfbuttoanother
person,thatincomemay,notwithstandingtheprovisionsofArticles7and15,betaxedin
theContractingStateinwhichtheactivitiesoftheentertainerorsportsmanareexercised.
Article18:Pensions
Subjecttotheprovisionsofparagraph2ofArticle19,pensionsandothersimilar
remunerationpaidtoaresidentofaContractingStateinconsiderationofpastemployment
shallbetaxableonlyinthatState.
Article19:GovernmentService
(Note:Thechangesproposedinthe2005Updateareshowninitalics.)
1.(
)Salaries,wagesandothersimilarremunerationpaidbyaContractingStateora
politicalsubdivisionoralocalauthoritythereoftoanindividualinrespectofservices
renderedtothatStateorsubdivisionorauthorityshallbetaxableonlyinthatState.
)However,suchsalaries,wagesandothersimilarremunerationshallbetaxableonlyin
theotherContractingStateiftheservicesarerenderedinthatStateandtheindividualisa
residentofthatStatewho:(
)isanationalofthatState;or(
)didnotbecomearesident
ofthatStatesolelyforthepurposeofrenderingtheservices.
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2.(
Notwithstandingtheprovisionsofparagraph1,a
orothersimilar
remuneration
paidby,oroutoffundscreatedby,aContractingStateorapoliticalsubdivision
oralocalauthoritythereoftoanindividualinrespectofservicesrenderedtothatStateor
subdivisionorauthorityshallbetaxableonlyinthatState.
)However,suchpension
orothersimilarremuneration
shallbetaxableonlyintheother
ContractingStateiftheindividualisaresidentof,andanationalof,thatState.
3.TheprovisionsofArticles15,16,17,and18shallapplytosalaries,wages,pensions,
othersimilarremuneration
inrespectofservicesrenderedinconnectionwithabusiness
carriedonbyaContractingStateorapoliticalsubdivisionoralocalauthoritythereof.
Article20:Students
Paymentswhichastudentorbusinessapprenticewhoisorwasimmediatelybeforevisiting
aContractingStatearesidentoftheotherContractingStateandwhoispresentinthefirst-
mentionedStatesolelyforthepurposeofhiseducationortrainingreceivesforthepurpose
ofhismaintenance,educationortrainingshallnotbetaxedinthatState,providedthatsuch
paymentsarisefromsourcesoutsidethatState.
Article21:OtherIncome
1.ItemsofincomeofaresidentofaContractingState,whereverarising,notdealtwithin
theforegoingArticlesofthisConventionshallbetaxableonlyinthatState.
2.Theprovisionsofparagraph1shallnotapplytoincome,otherthanincomefrom
immovablepropertyasdefinedinparagraph2ofArticle6,iftherecipientofsuchincome,
beingaresidentofaContractingState,carriesonbusinessintheotherContractingState
throughapermanentestablishmentsituatedthereinandtherightorpropertyinrespectof
whichtheincomeispaidiseffectivelyconnectedwithsuchpermanentestablishment.In
suchcasetheprovisionsofArticle7shallapply.
ChapterIVTaxationofCapital
Article22:Capital
1.CapitalrepresentedbyimmovablepropertyreferredtoinArticle6,ownedbyaresident
ofaContractingStateandsituatedintheotherContractingState,maybetaxedinthatother
2.Capitalrepresentedbymovablepropertyformingpartofthebusinesspropertyofa
permanentestablishmentwhichanenterpriseofaContractingStatehasintheother
ContractingStatemaybetaxedinthatotherState.
3.Capitalrepresentedbyshipsandaircraftoperatedininternationaltrafficandbyboats
engagedininlandwaterwaystransport,andbymovablepropertypertainingtotheoperation
ofsuchships,aircraftandboats,shallbetaxableonlyintheContractingStateinwhichthe
placeofeffectivemanagementoftheenterpriseissituated.
4.AllotherelementsofcapitalofaresidentofaContractingStateshallbetaxableonly
inthatState.
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samecircumstances,inparticularwithrespecttoresidence,areormaybesubjected.This
provisionshall,notwithstandingtheprovisionsofArticle1,alsoapplytopersonswhoare
notresidentsofoneorbothoftheContractingStates.
2.StatelesspersonswhoareresidentsofaContractingStateshallnotbesubjectedineither
ContractingStatetoanytaxationoranyrequirementconnectedtherewith,whichisother
ormoreburdensomethanthetaxationandconnectedrequirementstowhichnationalsof
theStateconcernedinthesamecircumstances,inparticularwithrespecttoresidence,are
ormaybesubjected.
3.ThetaxationonapermanentestablishmentwhichanenterpriseofaContractingState
hasintheotherContractingStateshallnotbelessfavourablyleviedinthatotherState
thanthetaxationleviedonenterprisesofthatotherStatecarryingonthesameactivities.
ThisprovisionshallnotbeconstruedasobligingaContractingStatetogranttoresidents
oftheotherContractingStateanypersonalallowances,reliefsandreductionsfortaxation
purposesonaccountofcivilstatusorfamilyresponsibilitieswhichitgrantstoitsown
4.Exceptwheretheprovisionsofparagraph1ofArticle9,paragraph6ofArticle11,or
paragraph4ofArticle12,apply,interest,royaltiesandotherdisbursementspaidbyan
enterpriseofaContractingStatetoaresidentoftheotherContractingStateshall,forthe
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andshallbedisclosedonlytopersonsorauthorities(includingcourtsandadministrative
bodies)concernedwiththeassessmentorcollectionof,theenforcementorprosecutionin
oftheadministrationofthatoroftheotherContractingState;
)tosupplyinformationwhichwoulddiscloseanytrade,business,industrial,commercial
requestedinformation,eventhoughthatotherStatemaynotneedsuchinformationfor
itsowntaxpurposes.Theobligationcontainedintheprecedingsentenceissubjecttothe
limitationsofparagraph3butinnocaseshallsuchlimitationsbeconstruedtopermita
ContractingStatetodeclinetosupplyinformationsolelybecauseithasnodomesticinterest
insuchinformation.
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5.Innocaseshalltheprovisionsofparagraph3beconstruedtopermitaContracting
Statetodeclinetosupplyinformationsolelybecausetheinformationisheldbyabank,
otherfinancialinstitution,nomineeorpersonactinginanagencyorafiduciarycapacity
orbecauseitrelatestoownershipinterestsinaperson.
Article27:AssistanceintheCollectionofTaxes
1.TheContractingStatesshalllendassistancetoeachotherinthecollectionofrevenue
3Insomecountries,nationallaw,policyoradministrativeconsiderationsmaynotalloworjustifythetypeof
assistanceenvisagedunderthisArticleormayrequirethatthistypeofassistanceberestricted,e.g.tocountries
thathavesimilartaxsystemsortaxadministrationsorastothetaxescovered.Forthatreason,theArticle
shouldonlybeincludedintheConventionwhereeachStateconcludesthat,basedonthefactorsdescribedin
paragraph1oftheCommentaryontheArticle,theycanagreetoprovideassistanceinthecollectionoftaxes
leviedbytheotherState.
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6.Proceedingswithrespecttotheexistence,validityortheamountofarevenueclaimof
aContractingStateshallnotbebroughtbeforethecourtsoradministrativebodiesofthe
otherContractingState.
7.Where,atanytimeafterarequesthasbeenmadebyaContractingStateunderparagraph
3or4andbeforetheotherContractingStatehascollectedandremittedtherelevantrevenue
claimtothefirst-mentionedState,therelevantrevenueclaimceasestobe
(a)inthecaseofarequestunderparagraph3,arevenueclaimofthefirst-mentionedState
thatisenforceableunderthelawsofthatStateandisowedbyapersonwho,atthat
time,cannot,underthelawsofthatState,preventitscollection,or
(b)inthecaseofarequestunderparagraph4,arevenueclaimofthefirst-mentionedState
inrespectofwhichthatStatemay,underitslaws,takemeasuresofconservancywitha
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Article,theapplicationoftheConvention[toanypartoftheterritoryof(StateA)orof
(StateB)or]toanyStateorterritorytowhichithasbeenextendedunderthisArticle.
ChapterVIIFinalProvisions
Article30:EntryintoForce
1.ThisConventionshallberatifiedandtheinstrumentsofratificationshallbeexchanged
at..........assoonaspossible.
2.TheConventionshallenterintoforceupontheexchangeofinstrumentsofratification
anditsprovisionsshallhaveeffect:
(a)(inStateA):.................,...
(b)(inStateB):.....................
Article31:Termination
ThisConventionshallremaininforceuntilterminatedbyaContractingState.Either
ContractingStatemayterminatetheConvention,throughdiplomaticchannels,bygiving
noticeofterminationatleastsixmonthsbeforetheendofanycalendaryearaftertheyear
......Insuchevent,theConventionshallceasetohaveeffect:
(a)(inStateA):....................
(b)(inStateB):....................
TERMINALCLAUSE
4Theterminalclauseconcerningthesigningshallbedraftedinaccordancewiththeconstitutionalprocedureof
bothContractingStates.
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2.U
ATIONS
AXATION
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(d)Theterminternationaltrafficmeansanytransportbyashiporaircraftoperatedby
anenterprisethathasitsplaceofeffectivemanagementinaContractingState,except
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Article5:PermanentEstablishment
1.ForthepurposesofthisConvention,thetermpermanentestablishmentmeansafixed
placeofbusinessthroughwhichthebusinessofanenterpriseiswhollyorpartlycarriedon.
2.Thetermpermanentestablishmentincludesespecially:
(a)aplaceofmanagement;
(b)abranch;
(c)anoffice;
(d)afactory;
(e)aworkshop;
(f)amine,anoilorgaswell,aquarryoranyotherplaceofextractionofnaturalresources.
3.Thetermpermanentestablishmentalsoencompasses:
(a)abuildingsite,aconstruction,assemblyorinstallationprojectorsupervisoryactivities
inconnectiontherewith,butonlyifsuchsite,projectoractivitieslastsmorethansix
(b)thefurnishingofservices,includingconsultancyservices,byanenterprisethrough
employeesorotherpersonnelengagedbytheenterpriseforsuchpurpose,butonly
ifactivitiesofthatnaturecontinue(forthesameoraconnectedproject)withina
ContractingStateforaperiodorperiodsaggregatingmorethansixmonthswithinany
twelve-monthperiod.
4.NotwithstandingtheprecedingprovisionsofthisArticle,thetermpermanent
establishmentshallbedeemednottoinclude:
(a)Theuseoffacilitiessolelyforthepurposeofstorageordisplayofgoodsormerchandise
belongingtotheenterprise;
(b)Themaintenanceofastockofgoodsormerchandisebelongingtotheenterprisesolely
forthepurposeofstorageordisplay;
(c)Themaintenanceofastockofgoodsormerchandisebelongingtotheenterprisesolely
forthepurposeofprocessingbyanotherenterprise;
(d)Themaintenanceofafixedplaceofbusinesssolelyforthepurposeofpurchasinggoods
ormerchandiseorofcollectinginformation,fortheenterprise;
(e)Themaintenanceofafixedplaceofbusinesssolelyforthepurposeofcarryingon,for
theenterprise,anyotheractivityofapreparatoryorauxiliarycharacter.
Themaintenanceofafixedplaceofabusinesssolelyforanycombinationofactivities
mentionedinnsubparagraphs(a)to(e),providedthattheoverallactivityofthefixed
placeofbusinessresultingfromthecombinationisofapreparatoryorauxiliary
character.
5.Notwithstandingtheprovisionsofparagraphs1and2,whereapersonotherthanan
agentofanindependentstatustowhomparagraph7appliesisactinginaContractingState
onbehalfofanenterpriseoftheotherContractingState,thatenterpriseshallbedeemedto
haveapermanentestablishmentinthefirst-mentionedContractingStateinrespectofany
activitieswhichthatpersonundertakesfortheenterprise,ifsuchaperson:
(a)hasandhabituallyexercisesinthatStateanauthoritytoconcludecontractsinthename
oftheenterprise,unlesstheactivitiesofsuchpersonarelimitedtothosementioned
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inparagraph4which,ifexercisedthroughafixedplaceofbusiness,wouldnotmake
thisfixedplaceofbusinessapermanentestablishmentundertheprovisionsofthat
paragraph;or
(b)hasnosuchauthority,buthabituallymaintainsinthefirst-mentionedStateastockof
goodsormerchandisefromwhichheregularlydeliversgoodsormerchandiseonbehalf
oftheenterprise.
6.NotwithstandingtheprecedingprovisionsofthisArticle,aninsuranceenterpriseofa
ContractingStateshall,exceptinregardtore-insurance,bedeemedtohaveapermanent
establishmentintheotherContractingStateifitcollectspremiumsintheterritoryofthat
otherStateorinsuresriskssituatedthereinthroughapersonotherthananagentofan
independentstatustowhomparagraph7applies.
7.AnenterpriseofaContractingStateshallnotbedeemedtohaveapermanent
establishmentintheotherContractingStatemerelybecauseitcarriesonbusinessinthat
otherStatethroughabroker,generalcommissionagentoranyotheragentofanindependent
status,providedthatsuchpersonsareactingintheordinarycourseoftheirbusiness.
However,whentheactivitiesofsuchanagentaredevotedwhollyoralmostwhollyon
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Article7:BusinessProfits
1.TheprotsofanenterpriseofaContractingStateshallbetaxableonlyinthatState
unlesstheenterprisecarriesonbusinessintheotherContractingStatethroughapermanent
establishmentsituatedtherein.Iftheenterprisecarriesonbusinessasaforesaid,theprots
oftheenterprisemaybetaxedintheotherStatebutonlysomuchofthemasisattributable
to(a)thatpermanentestablishment;(b)salesinthatotherStateofgoodsormerchandise
ofthesameorsimilarkindasthosesoldthroughthatpermanentestablishment;or(c)
otherbusinessactivitiescarriedoninthatotherStateofthesameorsimilarkindasthose
effectedthroughthatpermanentestablishment.
2.Subjecttotheprovisionsofparagraph3,whereanenterpriseofaContractingStatecar-
riesonbusinessintheotherContractingStatethroughapermanentestablishmentsituated
therein,thereshallineachContractingStatebeattributedtothatpermanentestablishment
theprotswhichitmightbeexpectedtomakeifitwereadistinctandseparateenterprise
engagedinthesameorsimilaractivitiesunderthesameorsimilarconditionsanddealing
whollyindependentlywiththeenterpriseofwhichitisapermanentestablishment.
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Article9:AssociatedEnterprises
1.Where:
(a)anenterpriseofaContractingStateparticipatesdirectlyorindirectlyinthemanagement,
controlorcapitalofanenterpriseoftheotherContractingState,or
(b)thesamepersonsparticipatedirectlyorindirectlyinthemanagement,controlorcapital
ofanenterpriseofaContractingStateandanenterpriseoftheotherContractingState,
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3.ThetermdividendsasusedinthisArticlemeansincomefromshares,jouissance
sharesorjouissancerights,miningshares,founderssharesorotherrights,notbeing
debt-claims,participatinginprofits,aswellasincomefromothercorporaterightswhichis
subjectedtothesametaxationtreatmentasincomefromsharesbythelawsoftheStateof
whichthecompanymakingthedistributionisaresident.
4.Theprovisionsofparagraphs1and2shallnotapplyifthebeneficialownerof
thedividends,beingaresidentofaContractingState,carriesonbusinessintheother
ContractingStateofwhichthecompanypayingthedividendsisaresident,througha
permanentestablishmentsituatedtherein,orperformsinthatotherStateindependent
personalservicesfromafixedbasesituatedtherein,andtheholdinginrespectofwhich
thedividendsarepaidiseffectivelyconnectedwithsuchpermanentestablishmentorfixed
base.InsuchcasetheprovisionsofArticle7orArticle14,asthecasemaybe,shall
apply.
5.WhereacompanywhichisaresidentofaContractingStatederivesprofitsorincome
fromtheotherContractingState,thatotherStatemaynotimposeanytaxonthedividends
paidbythecompany,exceptinsofarassuchdividendsarepaidtoaresidentofthatother
Stateorinsofarastheholdinginrespectofwhichthedividendsarepaidiseffectively
connectedwithapermanentestablishmentorafixedbasesituatedinthatotherState,nor
subjectthecompanysundistributedprofitstoataxonthecompanysundistributedprofits,
evenifthedividendspaidortheundistributedprofitsconsistwhollyorpartlyofprofitsor
incomearisinginsuchotherState.
Article11:Interest
1.InterestarisinginaContractingStateandpaidtoaresidentoftheotherContractingState
maybetaxedinthatotherState.
2.However,suchinterestmayalsobetaxedintheContractingStateinwhichitarisesand
accordingtothelawsofthatState,butifthebeneficialowneroftheinterestisaresidentof
theotherContractingState,thetaxsochargedshallnotexceed...percent(thepercentage
istobeestablishedthroughbilateralnegotiations)ofthegrossamountoftheinterest.The
bondsordebentures,includingpremiumsandprizesattachingtosuchsecurities,bondsor
debentures.Penaltychargesforlatepaymentshallnotberegardedasinterestforthepurpose
ofthisArticle.
4.Theprovisionsofparagraphs1and2shallnotapplyifthebenecialownerofthe
interest,beingaresidentofaContractingState,carriesonbusinessintheotherContracting
Stateinwhichtheinterestarises,throughapermanentestablishmentsituatedtherein,
orperformsinthatotherStateindependentpersonalservicesfromafixedbasesituated
therein,andthedebt-claiminrespectofwhichtheinterestispaidiseffectivelyconnected
with(a)suchpermanentestablishmentorfixedbase,orwith(b)businessactivities
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referredtoin(c)ofparagraph1ofArticle7.InsuchcasestheprovisionsofArticle7or
Article14,asthecasemaybe,shallapply.
5.InterestshallbedeemedtoariseinaContractingStatewhenthepayerisaresident
suchinterestisbornebysuchpermanentestablishmentorfixedbase,thensuchinterestshall
bedeemedtoariseintheStateinwhichthepermanentestablishmentorfixedbaseissituated.
bythepayerandthebenecialownerintheabsenceofsuchrelationship,theprovisions
ofthisArticleshallapplyonlytothelast-mentionedamount.Insuchcase,theexcesspart
ofthepaymentsshallremaintaxableaccordingtothelawsofeachContractingState,due
regardbeinghadtotheotherprovisionsofthisConvention.
Article12:Royalties
1.RoyaltiesarisinginaContractingStateandpaidtoaresidentoftheotherContracting
StatemaybetaxedinthatotherState.
2.However,suchroyaltiesmayalsobetaxedintheContractingStateinwhichtheyarise
andaccordingtothelawsofthatState,butifthebeneficialowneroftheroyaltiesisa
residentoftheotherContractingState,thetaxsochargedshallnotexceed...percent(the
percentageistobeestablishedthroughbilateralnegotiations)ofthegrossamountofthe
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suchroyaltiesarebornebysuchpermanentestablishmentorfixedbase,thensuchroyalties
shallbedeemedtoariseintheStateinwhichthepermanentestablishmentorfixedbaseis
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Article14:IndependentPersonalServices
1.IncomederivedbyaresidentofaContractingStateinrespectofprofessionalservicesor
otheractivitiesofanindependentcharactershallbetaxableonlyinthatStateexceptinthe
followingcircumstances,whensuchincomemayalsobetaxedintheotherContractingState:
(a)ifhehasafixedbaseregularlyavailabletohimintheotherContractingStateforthe
purposeofperforminghisactivities;inthatcase,onlysomuchoftheincomeasis
attributabletothatfixedbasemaybetaxedinthatotherContractingState;or
(b)ifhisstayintheotherContractingStateisforaperiodorperiodsamountingtoor
exceedingintheaggregate183daysinanytwelve-monthperiodcommencingorending
inthescalyearconcerned;inthatcase,onlysomuchoftheincomeasisderived
fromhisactivitiesperformedinthatotherStatemaybetaxedinthatotherState;or
2.Thetermprofessionalservicesincludesespeciallyindependentscientic,literary,
artistic,educationalorteachingactivitiesaswellastheindependentactivitiesofphysicians,
lawyers,engineers,architects,dentistsandaccountants.
Article15:DependentPersonalServices
1.SubjecttotheprovisionsofArticles16,18and19,salaries,wagesandothersimilar
remunerationderivedbyaresidentofaContractingStateinrespectofanemploymentshall
betaxableonlyinthatStateunlesstheemploymentisexercisedintheotherContracting
State.Iftheemploymentissoexercised,suchremunerationasisderivedtherefrommaybe
taxedinthatotherState.
2.Notwithstandingtheprovisionsofparagraphl,remunerationderivedbyaresidentofa
ContractingStateinrespectofanemploymentexercisedintheotherContractingStateshall
betaxableonlyinthefirst-mentionedStateif:
(a)therecipientispresentintheotherStateforaperiodorperiodsnotexceedinginthe
aggregate183daysinanytwelve-monthperiodcommencingorendinginthefiscal
yearconcerned;and
(b)theremunerationispaidby,oronbehalfof,anemployerwhoisnotaresidentofthe
otherState;and
(c)theremunerationisnotbornebyapermanentestablishmentorafixedbasewhichthe
employerhasintheotherState.
3.NotwithstandingtheprecedingprovisionsofthisArticle,remunerationderivedinrespect
ofanemploymentexercisedaboardashiporaircraftoperatedininternationaltraffic,or
aboardaboatengagedininlandwaterwaystransport,maybetaxedintheContractingState
inwhichtheplaceofeffectivemanagementoftheenterpriseissituated.
Article16:DirectorsFeesandRemunerationofTop-LevelManagerialOfficials
1.DirectorsfeesandothersimilarpaymentsderivedbyaresidentofaContractingState
inhiscapacityasamemberoftheBoardofDirectorsofacompanywhichisaresidentof
theotherContractingStatemaybetaxedinthatotherState.
2.Salaries,wagesandothersimilarremunerationderivedbyaresidentofaContracting
Stateinhiscapacityasanofficialinatop-levelmanagerialpositionofacompanywhichis
aresidentoftheotherContractingStatemaybetaxedinthatotherState.
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Article17:ArtistesandSportspersons
1.NotwithstandingtheprovisionsofArticles14and15,incomederivedbyaresidentof
aContractingStateasanentertainer,suchasatheatre,motionpicture,radioortelevision
artiste,oramusician,orasasportsperson,fromhispersonalactivitiesassuchexercisedin
theotherContractingState,maybetaxedinthatotherState.
2.Whereincomeinrespectofpersonalactivitiesexercisedbyanentertainerora
sportspersoninhiscapacityassuchaccruesnottotheentertainerorsportspersonhimself
buttoanotherperson,thatincomemay,notwithstandingtheprovisionsofArticles7,14and
15,betaxedintheContractingStateinwhichtheactivitiesoftheentertainerorsportsperson
areexercised.
Article18:PensionsandSocialSecurityPayments
Article18(AlternativeA)
1.Subjecttotheprovisionsofparagraph2ofArticle19,pensionsandothersimilar
remunerationpaidtoaresidentofaContractingStateinconsiderationofpastemployment
shallbetaxableonlyinthatState.
2.Notwithstandingtheprovisionsofparagraphl,pensionspaidandotherpaymentsmade
underapublicschemewhichispartofthesocialsecuritysystemofaContractingStateor
apoliticalsub-divisionoralocalauthoritythereofshallbetaxableonlyinthatState.
Article18(AlternativeB)
1.Subjecttotheprovisionsofparagraph2ofArticle19,pensionsandothersimilar
remunerationpaidtoaresidentofaContractingStateinconsiderationofpastemployment
maybetaxedinthatState.
2.However,suchpensionsandothersimilarremunerationmayalsobetaxedintheother
ContractingStateifthepaymentismadebyaresidentofthatotherStateorapermanent
establishmentsituatedtherein.
3.Notwithstandingtheprovisionsofparagraphs1and2,pensionspaidandotherpayments
madeunderapublicschemewhichispartofthesocialsecuritysystemofaContracting
Stateorapoliticalsub-divisionoralocalauthoritythereofshallbetaxableonlyinthat
Article19:GovernmentService
1.(a)Salaries,wagesandothersimilarremuneration,otherthanapension,paidbya
ContractingStateorapoliticalsub-divisionoralocalauthoritythereoftoanindividualin
respectofservicesrenderedtothatStateorsub-divisionorauthorityshallbetaxableonly
inthatState.
(b)However,suchsalaries,wagesandothersimilarremunerationshallbetaxableonlyin
theotherContractingStateiftheservicesarerenderedinthatotherStateandtheindividual
isaresidentofthatStatewho:
(i)isanationalofthatState;or
(ii)didnotbecomearesidentofthatStatesolelyforthepurposeofrenderingtheservices.
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2.(a)Anypensionpaidby,oroutoffundscreatedby,aContractingStateorapolitical
sub-divisionoralocalauthoritythereoftoanindividualinrespectofservicesrenderedto
thatStateorsub-divisionorauthorityshallbetaxableonlyinthatState.
(b)However,suchpensionshallbetaxableonlyintheotherContractingStateifthe
individualisaresidentof,andanationalof,thatotherState.
3.TheprovisionsofArticles15,16,17and18shallapplytosalaries,wagesandothersimilar
remunerationandtopensions,inrespectofservicesrenderedinconnectionwithabusiness
carriedonbyaContractingStateorapoliticalsub-divisionoralocalauthoritythereof.
Article20:Students
Paymentswhichastudentorbusinesstraineeorapprenticewhoisorwasimmediatelybefore
visitingaContractingStatearesidentoftheotherContractingStateandwhoispresentin
thefirst-mentionedStatesolelyforthepurposeofhiseducationortrainingreceivesforthe
purposeofhismaintenance,educationortrainingshallnotbetaxedinthatState,provided
thatsuchpaymentsarisefromsourcesoutsidethatState.
Article21:OtherIncome
1.ItemsofincomeofaresidentofaContractingState,whereverarising,notdealtwithin
theforegoingArticlesofthisConventionshallbetaxableonlyinthatState.
2.Theprovisionsofparagraph1shallnotapplytoincome,otherthanincomefrom
immovablepropertyasdefinedinparagraph2ofArticle6,iftherecipientofsuchincome,
beingaresidentofaContractingState,carriesonbusinessintheotherContracting
Statethroughapermanentestablishmentsituatedtherein,orperformsinthatotherState
independentpersonalservicesfromafixedbasesituatedtherein,andtherightorproperty
inrespectofwhichtheincomeispaidiseffectivelyconnectedwithsuchpermanent
establishmentorfixedbase.InsuchcasetheprovisionsofArticle7orArticle14,asthe
casemaybe,shallapply.
3.Notwithstandingtheprovisionsofparagraphs1and2,itemsofincomeofaresidentof
aContractingStatenotdealtwithintheforegoingArticlesofthisConventionandarising
intheotherContractingStatemayalsobetaxedinthatotherState.
ChapterIVTaxationofCapital
Article22:Capital
1.CapitalrepresentedbyimmovablepropertyreferredtoinArticle6,ownedbyaresident
ofaContractingStateandsituatedintheotherContractingState,maybetaxedinthat
otherState.
2.Capitalrepresentedbymovablepropertyformingpartofthebusinesspropertyof
apermanentestablishmentwhichanenterpriseofaContractingStatehasintheother
ContractingStateorbymovablepropertypertainingtoafixedbaseavailabletoaresident
ofaContractingStateintheotherContractingStateforthepurposeofperforming
independentpersonalservices,maybetaxedinthatotherState.
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3.Capitalrepresentedbyshipsandaircraftoperatedininternationaltrafcandbyboats
engagedininlandwaterwaystransport,andbymovablepropertypertainingtotheoperation
ofsuchships,aircraftandboats,shallbetaxableonlyintheContractingStateinwhichthe
placeofeffectivemanagementoftheenterpriseissituated.
4.AllotherelementsofcapitalofaresidentofaContractingStateshallbetaxableonly
inthatState.
(TheGroupdecidedtoleavetobilateralnegotiationsthequestionofthetaxationofthe
capitalrepresentedbyimmovablepropertyandmovablepropertyandofallotherelements
ofcapitalofaresidentofaContractingState.Shouldthenegotiatingpartiesdecideto
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ChapterVISpecialProvisions
Article24:Non-Discrimination
1.NationalsofaContractingStateshallnotbesubjectedintheotherContractingStateto
anytaxationoranyrequirementconnectedtherewithwhichisotherormoreburdensome
thanthetaxationandconnectedrequirementstowhichnationalsofthatotherStateinthe
samecircumstances,inparticularwithrespecttoresidence,areormaybesubjected.This
provisionshall,notwithstandingtheprovisionsofArticle1,alsoapplytopersonswhoare
notresidentsofoneorbothoftheContractingStates
2.StatelesspersonswhoareresidentsofaContractingStateshallnotbesubjectedineither
ContractingStatetoanytaxationoranyrequirementconnectedtherewithwhichiseither
moreburdensomethanthetaxationandconnectedrequirementstowhichnationalsofthe
Stateconcernedinthesamecircumstances,inparticularwithrespecttoresidence,areor
maybesubjected.
3.ThetaxationonapermanentestablishmentwhichanenterpriseofaContractingState
hasintheotherContractingStateshallnotbelessfavourablyleviedinthatotherState
thanthetaxationleviedonenterprisesofthatotherStatecarryingonthesameactivities.
ThisprovisionshallnotbeconstruedasobligingaContractingStatetogranttoresidents
oftheotherContractingStateanypersonalallowances,reliefsandreductionsfortaxation
purposesonaccountofcivilstatusorfamilyresponsibilitieswhichitgrantstoitsown
4.Exceptwheretheprovisionsofparagraph1ofArticle9,paragraph6ofArticle11,
orparagraph6ofArticle12apply,interest,royaltiesandotherdisbursementspaidbyan
enterpriseofaContractingStatetoaresidentoftheotherContractingStateshall,forthe
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aresidentor,ifhiscasecomesunderparagraph1ofArticle24,tothatoftheContracting
Stateofwhichheisanational.Thecasemustbepresentedwithinthreeyearsfromthefirst
notificationoftheactionresultingintaxationnotinaccordancewiththeprovisionsofthe
Convention.
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2.Innocaseshalltheprovisionsofparagraph1beconstruedsoastoimposeona
ContractingStatetheobligation:
(a)tocarryoutadministrativemeasuresatvariancewiththelawsandadministrative
practiceofthatoroftheotherContractingState;
(b)tosupplyinformationwhichisnotobtainableunderthelawsorinthenormalcourse
oftheadministrationofthatoroftheotherContractingState;
(c)tosupplyinformationwhichwoulddiscloseanytrade,business,industrial,commercial
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3.U
TATES
20,1996
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Officers),uponindividualswhoareneithercitizensofnorhavebeenadmittedforpermanent
residenceinthatState.
Article2:TaxesCovered
1.TheexistingtaxestowhichthisConventionshallapplyare:
(a)intheUnitedStates:theFederalincometaxesimposedbytheInternalRevenueCode
(butexcludingsocialsecuritytaxes),andtheFederalexcisetaxesimposedwithrespect
toprivatefoundations.
(b)in...................:................................
2.TheConventionshallapplyalsotoanyidenticalorsubstantiallysimilartaxesthatare
imposedafterthedateofsignatureoftheConventioninadditionto,orinplaceof,the
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(ii)anylegalperson,partnershiporassociationderivingitsstatusassuchfromthe
lawsinforceinthatState;
(i)thetermqualifiedgovernmentalentitymeans:
(i)anypersonorbodyofpersonsthatconstitutesagoverningbodyofaContracting
State,orofapoliticalsub-divisionorlocalauthorityofaContractingState;
(ii)apersonthatiswhollyowned,directlyorindirectly,byaContractingStateora
politicalsub-divisionorlocalauthorityofaContractingState,provided(A)itis
organizedunderthelawsoftheContractingState,(B)itsearningsarecreditedto
itsownaccountwithnoportionofitsincomeinuringtothebenefitofanyprivate
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2.Wherebyreasonoftheprovisionsofparagraph1,anindividualisaresidentofboth
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(d)themaintenanceofafixedplaceofbusinesssolelyforthepurposeofpurchasinggoods
ormerchandise,orofcollectinginformation,fortheenterprise;
(e)themaintenanceofafixedplaceofbusinesssolelyforthepurposeofcarryingon,for
theenterprise,anyotheractivityofapreparatoryorauxiliarycharacter;
(f)themaintenanceofafixedplaceofbusinesssolelyforanycombinationoftheactivities
mentionedinsubparagraphs(a)through(e).
5.Notwithstandingtheprovisionsofparagraphs1and2,whereaperson-otherthan
anagentofanindependentstatustowhomparagraph6applies-isactingonbehalf
ofanenterpriseandhasandhabituallyexercisesinaContractingStateanauthorityto
concludecontractsthatarebindingontheenterprise,thatenterpriseshallbedeemedto
haveapermanentestablishmentinthatStateinrespectofanyactivitiesthattheperson
undertakesfortheenterprise,unlesstheactivitiesofsuchpersonarelimitedtothose
mentionedinparagraph4that,ifexercisedthroughafixedplaceofbusiness,wouldnot
makethisfixedplaceofbusinessapermanentestablishmentundertheprovisionsofthat
6.AnenterpriseshallnotbedeemedtohaveapermanentestablishmentinaContracting
StatemerelybecauseitcarriesonbusinessinthatStatethroughabroker,generalcommission
agent,oranyotheragentofanindependentstatus,providedthatsuchpersonsareactingin
theordinarycourseoftheirbusinessasindependentagents.
7.ThefactthatacompanythatisaresidentofaContractingStatecontrolsoriscontrolled
byacompanythatisaresidentoftheotherContractingState,orthatcarriesonbusiness
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Article7:BusinessProfits
1.ThebusinessprofitsofanenterpriseofaContractingStateshallbetaxableonlyin
thatStateunlesstheenterprisecarriesonbusinessintheotherContractingStatethrougha
permanentestablishmentsituatedtherein.Iftheenterprisecarriesonbusinessasaforesaid,
thebusinessprofitsoftheenterprisemaybetaxedintheotherStatebutonlysomuchof
themasareattributabletothatpermanentestablishment.
2.Subjecttotheprovisionsofparagraph3,whereanenterpriseofaContractingState
carriesonbusinessintheotherContractingStatethroughapermanentestablishmentsituated
therein,thereshallineachContractingStatebeattributedtothatpermanentestablishment
thebusinessprofitsthatitmightbeexpectedtomakeifitwereadistinctandindependent
enterpriseengagedinthesameorsimilaractivitiesunderthesameorsimilarconditions.
Forthispurpose,thebusinessprofitstobeattributedtothepermanentestablishmentshall
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alsoincludeprofitsfromtherentalofshipsoraircraftonabareboatbasisifsuchshipsor
aircraftareoperatedininternationaltrafficbythelessee,oriftherentalincomeisincidental
toprofitsfromtheoperationofshipsoraircraftininternationaltraffic.Profitsderivedby
anenterprisefromtheinlandtransportofpropertyorpassengerswithineitherContracting
State,shallbetreatedasprofitsfromtheoperationofshipsoraircraftininternationaltraffic
ifsuchtransportisundertakenaspartofinternationaltraffic.
3.ProfitsofanenterpriseofaContractingStatefromtheuse,maintenance,orrentalof
containers(includingtrailers,barges,andrelatedequipmentforthetransportofcontainers)
usedininternationaltrafficshallbetaxableonlyinthatState.
4.Theprovisionsofparagraphs1and3shallalsoapplytoprofitsfromparticipationina
pool,ajointbusiness,oraninternationaloperatingagency.
Article9:AssociatedEnterprises
1.Where:
(a)anenterpriseofaContractingStateparticipatesdirectlyorindirectlyinthe
management,controlorcapitalofanenterpriseoftheotherContractingState;or
(b)thesamepersonsparticipatedirectlyorindirectlyinthemanagement,control,orcapital
ofanenterpriseofaContractingStateandanenterpriseoftheotherContractingState,
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(b)15percentofthegrossamountofthedividendsinallothercases.
Thisparagraphshallnotaffectthetaxationofthecompanyinrespectoftheprofitsoutof
whichthedividendsarepaid.
3.Subparagraph(a)ofparagraph2shallnotapplyinthecaseofdividendspaidbyaUnited
StatespersonthatisaRegulatedInvestmentCompanyoraRealEstateInvestmentTrust
(REIT).InthecaseofaUnitedStatespersonthatisaREIT,subparagraph(b)ofparagraph2
alsoshallnotapply,unlessthedividendisbeneficiallyownedbyanindividualholdinga
lessthan10percentinterestintheREIT.
4.Notwithstandingparagraph2,dividendsmaynotbetaxedintheContractingStateof
whichthepayerisaresidentifthebeneficialownerofthedividendsisaresidentoftheother
ContractingStatethatisaqualifiedgovernmentalentitythatdoesnotcontrolthepayerof
thedividend.
5.ForpurposesoftheConvention,thetermdividendsmeansincomefromsharesorother
rights,notbeingdebt-claims,participatinginprofits,aswellasincomethatissubjectedto
thesametaxationtreatmentasincomefromsharesunderthelawsoftheStateofwhichthe
payerisaresident.
6.Theprovisionsofparagraphs1and2shallnotapplyifthebeneficialownerofthe
dividends,beingaresidentofaContractingState,carriesonbusinessintheotherContracting
State,ofwhichthepayerisaresident,throughapermanentestablishmentsituatedtherein,
orperformsinthatotherStateindependentpersonalservicesfromafixedbasesituated
therein,andthedividendsareattributabletosuchpermanentestablishmentorfixedbase.In
suchcasetheprovisionsofArticle7(BusinessProfits)orArticle14(IndependentPersonal
Services),asthecasemaybe,shallapply.
7.AContractingStatemaynotimposeanytaxondividendspaidbyaresidentoftheother
State,exceptinsofarasthedividendsarepaidtoaresidentofthefirst-mentionedStateor
thedividendsareattributabletoapermanentestablishmentorafixedbasesituatedinthat
State,normayitimposetaxonacorporationsundistributedprofits,exceptasprovidedin
paragraph8,evenifthedividendspaidortheundistributedprofitsconsistwhollyorpartly
ofprofitsorincomearisinginthatState.
8.AcorporationthatisaresidentofoneoftheStatesandthathasapermanentestablishment
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Article11:Interest
1.InterestarisinginaContractingStateandbeneficiallyownedbyaresidentoftheother
ContractingStatemaybetaxedonlyinthatotherState.
2.TheterminterestasusedinthisConventionmeansincomefromdebt-claimsofevery
frombondsordebentures,includingpremiumsorprizesattachingtosuchsecurities,bonds
ordebentures,andallotherincomethatissubjectedtothesametaxationtreatmentasincome
frommoneylentbythetaxationlawoftheContractingStateinwhichtheincomearises.
IncomedealtwithinArticle10(Dividends)andpenaltychargesforlatepaymentshallnot
beregardedasinterestforthepurposesofthisConvention.
3.Theprovisionsofparagraph1shallnotapplyifthebeneficialowneroftheinterest,being
aresidentofaContractingState,carriesonbusinessintheotherContractingState,inwhich
theinterestarises,throughapermanentestablishmentsituatedtherein,orperformsinthat
otherStateindependentpersonalservicesfromafixedbasesituatedtherein,andtheinterest
isattributabletosuchpermanentestablishmentorfixedbase.Insuchcasetheprovisionsof
Article7(BusinessProfits)orArticle14(IndependentPersonalServices),asthecasemay
be,shallapply.
bythepayerandthebeneficialownerintheabsenceofsuchrelationship,theprovisions
ofthisArticleshallapplyonlytothelast-mentionedamount.Insuchcasetheexcesspart
ofthepaymentsshallremaintaxableaccordingtothelawsofeachState,dueregardbeing
hadtotheotherprovisionsofthisConvention.
5.Notwithstandingtheprovisionsofparagraph1:
toanychangeinthevalueofanypropertyofthedebtororarelatedpersonortoany
dividend,partnershipdistributionorsimilarpaymentmadebythedebtortoarelated
person,andpaidtoaresidentoftheotherStatealsomaybetaxedintheContracting
Stateinwhichitarises,andaccordingtothelawsofthatState,butifthebeneficial
ownerisaresidentoftheotherContractingState,thegrossamountoftheinterestmay
betaxedataratenotexceedingtherateprescribedinsubparagraph(b)ofparagraph2
ofArticle10(Dividends);and
(b)Interestthatisanexcessinclusionwithrespecttoaresidualinterestinarealestate
mortgageinvestmentconduitmaybetaxedbyeachStateinaccordancewithits
domesticlaw.
Article12:Royalties
1.RoyaltiesarisinginaContractingStateandbeneficiallyownedbyaresidentoftheother
ContractingStatemaybetaxedonlyinthatotherState.
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2.ThetermroyaltiesasusedinthisConventionmeans:
(a)anyconsiderationfortheuseof,ortherighttouse,anycopyrightofliterary,artistic,
scientificorotherwork(includingcomputersoftware,cinematographicfilms,audio
orvideotapesordisks,andothermeansofimageorsoundreproduction),anypatent,
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5.Gainsfromthealienationofanypropertyotherthanpropertyreferredtoinparagraphs1
through4shallbetaxableonlyintheContractingStateofwhichthealienatorisaresident.
Article14:IndependentPersonalShelves
1.IncomederivedbyanindividualwhoisaresidentofaContractingStateinrespectof
theperformanceofpersonalservicesofanindependentcharactershallbetaxableonlyin
thatState,unlesstheindividualhasafixedbaseregularlyavailabletohimintheother
ContractingStateforthepurposeofperforminghisactivities.Ifhehassuchafixedbase,
theincomeattributabletothefixedbasethatisderivedinrespectofservicesperformedin
thatotherStatealsomaybetaxedbythatotherState.
2.Forpurposesofparagraphl,theincomethatistaxableintheotherContractingState
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Article17:ArtistesandSportsmen
1.IncomederivedbyaresidentofaContractingStateasanentertainer,suchasatheatre,
motionpicture,radio,ortelevisionartiste,oramusician,orasasportsman,fromhispersonal
activitiesassuchexercisedintheotherContractingState,whichincomewouldbeexempt
fromtaxinthatotherContractingStateundertheprovisionsofArticles14(Independent
PersonalServices)and15(DependentPersonalServices)maybetaxedinthatotherState,
exceptwheretheamountofthegrossreceiptsderivedbysuchentertainerorsportsman,
includingexpensesreimbursedtohimorborneonhisbehalf,fromsuchactivitiesdoesnot
exceedtwentythousandUnitedStatesdollars($20,000)oritsequivalentinforthetaxable
yearconcerned.
2.Whereincomeinrespectofactivitiesexercisedbyanentertainerorasportsmanin
hiscapacityassuchaccruesnottotheentertainerorsportsmanhimselfbuttoanother
person,thatincome,notwithstandingtheprovisionsofArticles7(BusinessProfits)and
14(IndependentPersonalServices),maybetaxedintheContractingStateinwhichthe
activitiesoftheentertainerorsportsmanareexercised,unlessitisestablishedthatneither
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6.ForpurposesofthisConvention,whereanindividualwhoisaparticipantinapension
planthatisestablishedandrecognizedunderthelegislationofoneoftheContractingStates
performspersonalservicesintheotherContractingState:
(a)Contributionspaidbyoronbehalfoftheindividualtotheplanduringtheperiod
thatheperformssuchservicesintheotherStateshallbedeductible(orexcludible)
incomputinghistaxableincomeinthatState.Anybenefitsaccruedundertheplanor
paymentsmadetotheplanbyoronbehalfofhisemployerduringthatperiodshallnot
betreatedaspartoftheemployeestaxableincomeandshallbeallowedasadeduction
incomputingtheprofitsofhisemployerinthatotherState.
(b)IncomeearnedbutnotdistributedbytheplanshallnotbetaxableintheotherState
untilsuchtimeandtotheextentthatadistributionismadefromtheplan.
(c)Distributionsfromtheplantotheindividualshallnotbesubjecttotaxationinthe
otherContractingStateiftheindividualcontributessuchamountstoasimilarplan
establishedintheotherStatewithinatimeperiodandinaccordancewithanyother
requirementsimposedunderthelawsoftheotherState.
(d)Theprovisionsofthisparagraphshallnotapplyunless:
(i)contributionsbyoronbehalfoftheindividualtotheplan(ortoanothersimilar
planforwhichthisplanwassubstituted)weremadebeforehearrivedintheother
State;and
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orsub-divisionorauthorityinthedischargeoffunctionsofagovernmentalnature
shall,subjecttotheprovisionsofsubparagraph(b),betaxableonlyinthatState;
(b)suchpension,however,shallbetaxableonlyintheotherContractingStateifthe
individualisaresidentof,andanationalofthatState.
Article20:StudentsandTrainees
Paymentsreceivedbyastudent,apprentice,orbusinesstraineewhois,orwasimmediately
beforevisitingaContractingState,aresidentoftheotherContractingState,andwhois
presentinthefirst-mentionedStateforthepurposeofhisfull-timeeducationatanaccredited
educationalinstitution,orforhisfull-timetraining,shallnotbetaxedinthatState,provided
thatsuchpaymentsariseoutsidethatState,andareforthepurposeofhismaintenance,
educationortraining.TheexemptionfromtaxprovidedbythisArticleshallapplytoan
apprenticeorbusinesstraineeonlyforaperiodoftimenotexceedingoneyearfromthe
datehefirstarrivesinthefirst-mentionedContractingStateforthepurposeofhistraining.
Article21:Otherincome
1.ItemsofincomebeneficiallyownedbyaresidentofaContractingState,whereverarising,
notdealtwithintheforegoingArticlesofthisConventionshallbetaxableonlyinthatState.
2.Theprovisionsofparagraph1shallnotapplytoincome,otherthanincomefromreal
propertyasdefinedinparagraph2ofArticle6(IncomefromRealProperty(Immovable
Property)),ifthebeneficialowneroftheincome,beingaresidentofaContractingState,
carriesonbusinessintheotherContractingStatethroughapermanentestablishmentsituated
therein,orperformsinthatotherStateindependentpersonalservicesfromafixedbase
situatedtherein,andtheincomeisattributabletosuchpermanentestablishmentorfixed
base.InsuchcasetheprovisionsofArticle7(BusinessProfits)orArticle14(Independent
PersonalServices),asthecasemaybe,shallapply.
Article22:LimitationofBenefits
1.AresidentofaContractingStateshallbeentitledtobenefitsotherwiseaccordedto
residentsofaContractingStatebythisConventiononlytotheextentprovidedinthis
2.AresidentofaContractingStateshallbeentitledtoallthebenefitsofthisConvention
iftheresidentis:
(a)anindividual;
(b)aqualifiedgovernmentalentity;
(c)acompany,if
(i)allthesharesintheclassorclassesofsharesrepresentingmorethan50percent
ofthevotingpowerandvalueofthecompanyareregularlytradedonarecognizedstock
exchange,or
(ii)atleast50percentofeachclassofsharesinthecompanyisowneddirectlyor
indirectlybycompaniesentitledtobenefitsunderclause(i),providedthatinthecaseof
indirectownership,eachintermediateownerisapersonentitledtobenefitsoftheConvention
underthisparagraph;
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(d)describedinsubparagraph1(c)(i)ofArticle4(Residence);
(e)describedinsubparagraph1(c)(ii)ofArticle4(Residence),providedthatmorethan
50percentofthepersonsbeneficiaries,membersorparticipantsareindividualsresidentin
eitherContractingState;or
(f)apersonotherthananindividual,if:
(i)Onatleasthalfthedaysofthetaxableyearpersonsdescribedinsubparagraphs(a),
(b),(c),(d)or(e)own,directlyorindirectly(throughachainofownershipinwhicheach
personisentitledtobenefitsoftheConventionunderthisparagraph),atleast50percentof
eachclassofsharesorotherbeneficialinterestsintheperson,and
(ii)lessthan50percentofthepersonsgrossincomeforthetaxableyearispaidor
accrued,directlyorindirectly,topersonswhoarenotresidentsofeitherContractingState
(unlessthepaymentisattributabletoapermanentestablishmentsituatedineitherState),in
theformofpaymentsthataredeductibleforincometaxpurposesinthepersonsStateof
3.(a)AresidentofaContractingStatenototherwiseentitledtobenefitsshallbeentitled
tothebenefitsofthisConventionwithrespecttoanitemofincomederivedfromtheother
State,if:
(i)theresidentisengagedintheactiveconductofatradeorbusinessinthefirst-
mentionedState,
(ii)theincomeisconnectedwithorincidentaltothetradeorbusiness,and
(iii)thetradeorbusinessissubstantialinrelationtotheactivityintheotherState
generatingtheincome.
(b)Forpurposesofthisparagraph,thebusinessofmakingormanaginginvestmentswill
notbeconsideredanactivetradeorbusinessunlesstheactivityisbanking,insuranceor
securitiesactivityconductedbyabank,insurancecompanyorregisteredsecuritiesdealer.
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asanationalsecuritiesexchangeundertheU.S.SecuritiesExchangeActof1934;and
(b)[stockexchangesoftheotherContractingState].
Article23:RelieffromDoubleTaxation
1.InaccordancewiththeprovisionsandsubjecttothelimitationsofthelawoftheUnited
States(asitmaybeamendedfromtimetotimewithoutchangingthegeneralprinciple
hereof),theUnitedStatesshallallowtoaresidentorcitizenoftheUnitedStatesasacredit
againsttheUnitedStatestaxonincome
(a)theincometaxpaidoraccruedtobyoronbehalfofsuchcitizenorresident;and
(b)inthecaseofaUnitedStatescompanyowningatleast10percentofthevoting
stockofacompanythatisaresidentofandfromwhichtheUnitedStatescompanyreceives
dividends,theincometaxpaidoraccruedtobyoronbehalfofthepayerwithrespecttothe
profitsoutofwhichthedividendsarepaid.
Forthepurposesofthisparagraph,thetaxesreferredtoinparagraphs1(b)and2of
Article2(TaxesCovered)shallbeconsideredincometaxes.
2.Inaccordancewiththeprovisionsandsubjecttothelimitationsofthelawof(asitmay
beamendedfromtimetotimewithoutchangingthegeneralprinciplehereof),shallallow
toaresidentorcitizenofasacreditagainstthetaxonincome
(a)theincometaxpaidoraccruedtotheUnitedStatesbyoronbehalfofsuchresidentof
citizen;and
(b)inthecaseofacompanyowningatleast10percentofthevotingstockofacompany
thatisaresidentoftheUnitedStatesandfromwhichthecompanyreceivesdividends,the
incometaxpaidoraccruedtotheUnitedStatesbyoronbehalfofthepayerwithrespectto
theprofitsoutofwhichthedividendsarepaid.
Forthepurposesofthisparagraph,thetaxesreferredtoinparagraphs1(a)and2of
Article2(TaxesCovered)shallbeconsideredincometaxes.
3.WhereaUnitedStatescitizenisaresidentof:
(a)withrespecttoitemsofincomethatundertheprovisionsofthisConventionareexempt
fromUnitedStatestaxorthataresubjecttoareducedrateofUnitedStatestaxwhenderived
byaresidentofwhoisnotaUnitedStatescitizen,shallallowasacreditagainsttax,onlythe
taxpaid,ifany,thattheUnitedStatesmayimposeundertheprovisionsofthisConvention,
otherthantaxesthatmaybeimposedsolelybyreasonofcitizenshipunderthesavingclause
ofparagraph4ofArticle1(GeneralScope);
(b)forpurposesofcomputingUnitedStatestaxonthoseitemsofincomereferredtoin
subparagraph(a),theUnitedStatesshallallowasacreditagainstUnitedStatestaxthe
incometaxpaidtoafterthecreditreferredtoinsubparagraph(a);thecreditsoallowedshall
notreducetheportionoftheUnitedStatestaxthatiscreditableagainstthetaxinaccordance
withsubparagraph(a);and
(c)fortheexclusivepurposeofrelievingdoubletaxationintheUnitedStatesunder
subparagraph(b),itemsofincomereferredtoinsubparagraph(a)shallbedeemedtoarise
intotheextentnecessarytoavoiddoubletaxationofsuchincomeundersubparagraph(b).
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Article24:Non-discrimination
1.NationalsofaContractingStateshallnotbesubjectedintheotherContractingState
toanytaxationoranyrequirementconnectedtherewiththatismoreburdensomethanthe
taxationandconnectedrequirementstowhichnationalsofthatotherStateinthesame
circumstances,particularlywithrespecttotaxationonworldwideincome,areormaybe
subjected.Thisprovisionshallalsoapplytopersonswhoarenotresidentsofoneorboth
oftheContractingStates.
2.Thetaxationonapermanentestablishmentorfixedbasethataresidentorenterpriseof
aContractingStatehasintheotherContractingStateshallnotbelessfavourablylevied
inthatotherStatethanthetaxationleviedonenterprisesorresidentsofthatotherState
carryingonthesameactivities.Theprovisionsofthisparagraphshallnotbeconstruedas
obligingaContractingStatetogranttoresidentsoftheotherContractingStateanypersonal
allowances,reliefs,andreductionsfortaxationpurposesonaccountofcivilstatusorfamily
responsibilitiesthatitgrantstoitsownresidents.
3.Exceptwheretheprovisionsofparagraph1ofArticle9(AssociatedEnterprises),
paragraph4ofArticle11(Interest),orparagraph4ofArticle12(Royalties)apply,interest,
royalties,andotherdisbursementspaidbyaresidentofaContractingStatetoaresidentof
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taxationwhichisnotinaccordancewiththeConvention.Anyagreementreachedshallbe
implementednotwithstandinganytimelimitsorotherprocedurallimitationsinthedomestic
lawoftheContractingStates.Assessmentandcollectionproceduresshallbesuspended
duringthependencyofanymutualagreementproceeding.
thedomesticlawsofthatStateandshallbedisclosedonlytopersonsorauthorities(including
courtsandadministrativebodies)involvedintheassessment,collection,oradministration
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2.Innocaseshalltheprovisionsofparagraph1beconstruedsoastoimposeona
ContractingStatetheobligation:
(a)tocarryoutadministrativemeasuresatvariancewiththelawsandadministrative
practiceofthatoroftheotherContractingState;
(b)tosupplyinformationthatisnotobtainableunderthelawsorinthenormalcourse
oftheadministrationofthatoroftheotherContractingState;(c)tosupplyinformationthat
orpersonsactinginanagencyorfiduciarycapacity,orrespectinginterestsinaperson,
includingbearershares,regardlessofanylawsorpracticesoftherequestedStatethat
mightotherwiseprecludetheobtainingofsuchinformation.Ifinformationisrequested
byaContractingStateinaccordancewiththisArticle,theotherContractingStateshall
obtainthatinformationinthesamemannerandtothesameextentasifthetaxofthe
first-mentionedStatewerethetaxofthatotherStateandwerebeingimposedbythatother
State,notwithstandingthattheotherStatemaynot,atthattime,needsuchinformationfor
administrativepracticesofthatotherStatewithrespecttoitsowntaxes.
4.EachoftheContractingStatesshallendeavourtocollectonbehalfoftheother
ContractingStatesuchamountsasmaybenecessarytoensurethatreliefgrantedbythe
ConventionfromtaxationimposedbythatotherStatedoesnotinuretothebenefitofpersons
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Article28:EntryintoForce
1.ThisConventionshallbesubjecttoratificationinaccordancewiththeapplicable
proceduresofeachContractingState.EachContractingStateshallnotifytheotherassoon
asitsprocedureshavebeencompliedwith.
2.TheConventionshallenterintoforceonthedateofthereceiptofthelaterofsuch
notifications,anditsprovisionsshallhaveeffect:
(a)inrespectoftaxeswithheldatsource,foramountspaidorcreditedonorafterthe
firstdayofthesecondmonthnextfollowingthedateonwhichtheConventionentersinto
(b)inrespectofothertaxes,fortaxableperiodsbeginningonorafterthefirstdayof
JanuarynextfollowingthedateonwhichtheConventionentersintoforce.
Article29:Termination
1.ThisConventionshallremaininforceuntilterminatedbyaContractingState.Either
ContractingStatemayterminatetheConventionbygivingnoticeofterminationtothe
otherContractingStatethroughdiplomaticchannels.Insuchevent,theConventionshall
ceasetohaveeffect:
(a)inrespectoftaxeswithheldatsource,foramountspaidorcreditedaftertheexpiration
ofthe6monthperiodbeginningonthedateonwhichnoticeofterminationwasgiven;and
(b)inrespectofothertaxes,fortaxableperiodsbeginningonoraftertheexpirationof
the6monthperiodbeginningonthedateonwhichnoticeofterminationwasgiven.
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4.L
EAGUEOF
ATIONS
ILATERAL
OMMENTARIES
FORTHE
REVENTIONOF
AXATIONINTHE
ATTEROF
RESENTEDIN
ENEVA
CTOBER
1928(1928D
GeneralConsiderations
Intheirreport,thetechnicalexpertshadstatedthattheirdraftbilateralConventionforthe
PreventionofDoubleTaxationappliedmoreparticularlytocountrieswhichlevyimpersonal
taxesandalsoapersonalgeneraltax;butthatthemodeltexttheyproposedcouldalsobe
madetoserveintheeventofthesimultaneousexistenceofageneraltaxinthecountry
ofdomicile,andschedulartaxesinthecountryoforigin.Theyaddedthatthetextof
theConventioncouldbeabridgedwhenevertwoContractingStatespossessedsufficiently
similarfiscalsystems.
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I.ImpersonalTaxes
Article2
Theincomefromimmovableproperty,i.e.,thatwhichcorrespondstotheactualorpresumed
rentalvalueofsuchproperty,aswellasanyotherincomefromsuchpropertywhichisnot
coveredbyArticle5,shallbetaxableintheStateinwhichthepropertyinquestionis
Thisruleshallapplytoincomefrommortgagesorothersimilarobligations.
Article3
Incomefrompublicfunds,bonds,includingmortgagebonds,loansanddepositsorcurrent
accounts,shallbetaxableintheStateinwhichthedebtorsofsuchincomeareatthetime
Article4
IncomefromsharesorsimilarinterestsshallbetaxableintheStateinwhichtherealcentre
ofmanagementoftheundertakingissituated.
Article5
Income,notreferredtoinArticle7,fromanyindustrial,commercialoragricultural
undertakingandfromanyothertradesorprofessionsshallbetaxableintheStateinwhich
thepermanentestablishmentsaresituated.
Therealcentresofmanagement,branches,miningandoilfields,factories,workshops,
agencies,warehouses,offices,depots,shallberegardedaspermanentestablishments.The
factthatanundertakinghasbusinessdealingswithaforeigncountrythroughabona-fide
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Article8
PublicorprivatepensionsshallbetaxableintheStateofthedebtorofsuchincome.
Article9
Annuitiesorincomefromothersourcesnotreferredtointhepreviousparagraphsshallbe
taxableintheStateoffiscaldomicileofthecreditorofsuchincome.
II.PersonalTaxes
Article10
ThepersonaltaxonthetotalincomeshallbeleviedbytheStateinwhichthetaxpayerhas
hisfiscaldomicile,i.e.,hisnormalresidence,thetermresidencebeingunderstoodtoa
permanenthome.
TheStateofdomicileshalldeductfromitspersonaltaxthelesserofthetwofollowing
(a)EithertheamountofthetaxactuallypaidintheotherContractingStateonincome
fromimmovableproperty(Article2)andonincomefromindustrial,commercialor
agriculturalundertaking(Article5);or
(b)Theamountofthetaxrelatingtotheincomereferredtoinparagraph(a)attheratesin
forceintheStateofdomicile.
Thisdeductionshallnotintotalexceedxpercentofthetotalpersonaltaxleviablein
theStateofdomicile.
WhentheStateofdomicileimposesimpersonaltaxes,thedeductionprovidedforabove
shallnotincludeimpersonaltaxeswhichcorrespondorrelatetoincometaxedintheother
ContractingState.
Article11
InthecaseoftaxpayerswhopossessafiscaldomicileinbothContractingStates,the
personaltaxshallbeimposedineachoftheseStatesinproportiontotheperiodofstay
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Article14
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Desirousofavoidinganycontroversyonmattersofdoctrine,theexpertshavenotdefined
thetwogreatcategoriesofdirecttaxes.Theymerelynote,bywayofindication,that
impersonaltaxesareinmostcasesleviedonallkindsofincomeatthesource,irrespective
ofthepersonalcircumstancesofthetaxpayer(nationality,domicile,civilstatus,family
suchincomeareatthetimeresident.
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BypublicfundsismeantthesecuritiesissuedbytheStateorbyotherpublicbodies
branchwhichpaysthisinterest.
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ItmustalsobenotedthatdraftConventionNo.Ibcontemplatesthismoreextended
systemofrelief.
Article5
Thisclausehasreferencetoincomefromanyindustrial,commercialoragricultural
undertakings,andfromanyothertradesorprofessions,notreferredtoinArticle7;itis
tobetaxableinthecountriesinwhichthepersonscontrollingtheundertakingsorengaged
inthetradeorprofession,possesspermanentestablishments.
Thewordundertakingsmustbeunderstoodinitswidestsense,withoutmakingany
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suchactivitieswillrespectivelybedealtwithinaccordancewiththeotherprovisionsofthis
Convention.
Furthermore,thescopeofthelastparagraphofArticle5maybeextendedsoastoapply
alsotoriverandlakeshipping.
Article6
Thisarticleprovidesthatthefeesofmanagersanddirectorsofjoint-stockcompaniesshall
betaxableinaccordancewiththerulelaiddowninArticle4,thatis,intheStateinwhich
therealcentreofmanagementoftheundertakingissituated.
Thisprovisionisdesignedtocoverthespecialtaxonvariablefees,whicharededucted
fromprofitsandhenceconstituteapartofthelatter.Fixedsalaries,onthecontrary,
comewithinthecategoryofgeneralexpenditureandaregovernedbythefollowing
Article7
Salaries,wagesandotherremunerationofanykind(withtheexceptionofthefees
mentionedinArticle6)shallbetaxableintheStateinwhichtherecipientscarryontheir
employment.
TheincomeisactuallyproducedinthatStateandthetaxcaneasilybeleviedatthe
ofsuchincome.
Itappearedbothrightandpracticalthatallpensionsshouldbemadesubjecttothesame
Inthespecialcaseofprivatepensions,however,thecountryofthedebtormaybetaken
tobethatinwhichtheactivitywascarriedonwithinthemeaningofArticle7,orthatin
whichthepartiesconcernedsubsequentlyestablishedtheirdomicile.
Article9
Contrarytotheabove-mentionedprovisions,annuitiesorincomefromotherclaimsnot
referredtointhepreviousparagraphsshallbetaxableintheStateoffiscaldomicileofthe
creditorofsuchincome.
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Theexceptionwhichisthusmadeforannuitiesisjustifiedbythespecialnatureofthis
formofincome,sincetherecipientisfreetoselectthecountrywhichistobeliableforthe
II.PersonalTaxes
Article10
Underthetermsofthisarticle,thepersonaltaxontotalincomeistobeleviedbytheStatein
whichthetaxpayerhashisfiscaldomicile,i.e.,hisnormalresidence,thetermresidence
beingunderstoodtomeanapermanenthome.
Thisprovisionisofdoubleimport:itspecifiestheplaceatwhichthepersonalor
generaltaxshallbeleviedand,furthergivesadefinitionoffiscaldomicileintermswhich
werediscussedatgreatlengthandarethoseacceptedbythemajorityoftheexisting
codesoflaw.
Thewordspermanenthomeconveytheideaofanestablishmentintendedtolastfor
sometime.Evenapersonwhostaysatanhotelforseveralmonthsmaybeconsideredas
normallyresidingthere.Moreover,aStateisalwaysfreetotaxanyofitsownnationals
whowouldnotbetaxedbecausetheyarecontinuallymovingabout.
Article10providesforamodificationoftherulewhichitlaysdown.
Inordertoavoiddoubletaxation,theStateofdomicilewillmakeadeductionfromits
personaltaxwithregardtotheincometaxedinthecountryoforigin.Butwhatshouldbethe
amountofsuchdeduction?Itistobelimitedtothelesserofthetwofollowingamounts,i.e.:
(a)EithertheamountofthetaxactuallypaidintheotherContractingStateonincomefrom
immovableproperty(Article2)andfromindustrial,commercialoragriculturalundertakings
(Article5);or
(b)Theamountofthetaxontheincomereferredtoinparagraph(a)attheratesinforcein
theStateofdomicile.
Thisdeductionmaynotexceedxpercentofthetotalamountofthepersonaltaxlevied
inthecountryofdomicile.
Thisrestrictionisdesignedtopreventataxpayerwhosewholeincomeisderivedfrom
abroadfromescapingalltaxationinhiscountryofdomicile.
Thefollowingexamplewillexplaintheapplicationofthesystemofdeductionsadvocated
bytheexperts:AtaxpayerdomiciledinStateAdrawsatotalincomeof100,000francs,
20,000ofwhicharederivedfromanindustrialorcommercialundertakingsituatedinStateB,
which,underthishead,leviesanimpersonaltaxof4,000francs.
ThetaxinStateAwillbecalculatedonthetotaloftheincome(forinstance,atthe
rateof20percent),i.e.,100
20/100=20,000francs,butthefiscalauthoritieswill
deducttherefromthesumof4,000francsmentionedabove,sothatthetaxwillbereduced
to20
000=16,000francs.
If,however,intheStateofdomicilethetaxonlyamountsto3,000francsonanincome
of20,000francs,3,000francswillbedeductedandthetaxwillthembereducedto
000=17,000francs.AStatewillthusnotsufferlossowingtothefactthatits
nationalsengageinbusinessinotherStates.
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ThereliefprovidedforabovewillbegrantedinparticularincasesinwhichtheStateof
domicileonlyleviesageneralincometax.Ifthisgeneraltaxisofapurelycomplementary
nature,andisadditionaltoimpersonaltaxes,therewillbenoneedforrelief,oratanyrate
suchreliefwillhavetobelimited.Forthisreason,thelastparagraphofArticle10laysdown
that,iftheStateofdomicileleviesimpersonaltaxes,thedeductionsprovidedforunder(a)
or(b)inArticle10shallnotincludetheimpersonaltaxescorrespondingorrelatingtothe
incometaxedintheStateoforigin.
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Article14
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Therealcentresofmanagement,branches,miningandoil-fields,factories,workshops,
agencies,warehouses,offices,depots,shallberegardedaspermanentestablishments.
Thefactthatanundertakinghasbusinessdealingswithaforeigncountrythrougha
Article3
ReliefthroughDeductionsandRefunds
Onreportinghisoritstotalincomefromallsources,anypersonorcompanydomiciled
intheterritoryofoneoftheContractingStatesshallbegrantedreliefinrespectoftaxes
payableintheotherContractingStateonincometaxableunderArticle2bypriorityinsuch
otherContractingState.
ForthispurposetheStateofdomicileshalldeductfromitstaxonthetotalincomethe
lesserofthetwofollowingamounts:
)ThetaximposedbytheotherContractingStateonincometaxablebyprioritytherein;
)Anamountwhichrepresentsthesameproportionofthetaxpayableonthetotalincome
astheincometaxablebyprioritybearstothetotalincome.
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TheStatewhichhascollectedanorigintaxonrevenuesnotenumeratedunderArticle2
shallrefundtheamountonproductionofproperevidence.
Article4
AsregardsanyspecialprovisionswhichmaybenecessarytoenablethepresentConvention
tobeapplied,moreparticularlyincasesnotexpresslyprovidedfor,thefinancial
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Article4
Thefeesofmanagersanddirectorsofjoint-stockcompaniesshallbetaxableintheState
wheretherealcentreofmanagementoftheundertakingissituated.
Article5
Salaries,wagesorotherremunerationofanykindshallbetaxableintheStateinwhichthe
recipientscarryontheiremployment.
Salariesofofficialsandpublicemployeeswhoareservingabroadshall,however,be
taxableintheStatewhichpaysthesesalaries.
Article6
PublicorprivatepensionsshallbetaxableintheStateofthedebtorofsuchincome.
Article7
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Article11
If,undertheprovisionsofthisConvention,eitheroftheContractingStateshassurrendered
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specialstepseithertodeductfromthetaxleviedbytheStateofdomicilethewholeorpart
ofthetaxdeductedbytheStateoforiginortograntarefundbytheStateoforiginofthe
wholeorpartofthetaxleviedbydeductionatthesource.
AsthelanguageofConventionIahasbeenemployedtoalargeextentinConventionIc,
theCommentaryapplicabletoConventionIaapplies,
mutatismutandis,
toConventionIc.
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5.L
EAGUEOF
ATIONS
EXTOFTHE
ONVENTIONFOR
LLOCATIONOF
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ArticleIII
1.IfanenterprisewithitsfiscaldomicileinoneContractingStatehaspermanent
establishmentsinotherContractingStates,thereshallbeattributedtoeachpermanent
enterprisesoperatinginthecountry.
provisionsshallapply:
(a)IfapermanentestablishmentinoneState(creditorestablishment)suppliesfunds,
bedeemedtoaccrueasincometothecreditorestablishmentandasadeductionfrom
grossincometothedebtorestablishment,andsuchinterestshallbecomputedatthe
inter-bankrateforsimilartransactionsinthecurrencyused.
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(b)Contrarytotheprovisionsoftheprecedingparagraph,fromtheinterestaccruingas
incometothecreditorestablishmentanddeductiblefromgrossincomebythedebtor
establishmentthereshallbeexcludedtheinterestcorrespondingtothepermanent
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PROTOCOL
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Apermanentestablishmentshallnotbedeemedtoexistinthecaseofcommercial
travellersnotcomingunderanyoftheprecedingcategories.
LLOCATIONOFTHE
NCOMEOF
RTICLE
ONSIDEREDIN
BYTHE
NotwithstandingArticlesIIandIIIabove,thefollowingprovisionshallapplyasregards
theallocationoftheincomeofinsuranceenterprises:
Whenaninsuranceenterprisethefiscaldomicileofwhichissituateinoneofthe
ContractingStatespossessesapermanentestablishmentinanotherContractingState,the
latterStateshalltaxthepermanentestablishmentsituatedonitsterritoryonthebasisof
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6.L
EAGUEOF
ATIONS
ILATERAL
ONVENTIONFOR
REVENTIONOFTHE
AXATIONOF
RESENTEDIN
ULY
1943(M
ArticleI
1.ThepresentConventionisdesignedtopreventdoubletaxationinthecaseofthetaxpayers
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ArticleV
IncomewhichanenterpriseofoneoftheContractingStatesderivesfromtheoperationof
shipsoraircraftregisteredinsuchStateistaxableonlyinthatState.
ArticleVI
1.Directorspercentages,attendancefeesandotherspecialremunerationpaidtodirectors,
managersandauditorsofcompaniesaretaxableonlyintheStatewherethefiscaldomicile
oftheenterpriseissituated.
2.If,however,suchremunerationispaidforservicesrenderedinapermanentestablishment
situatedintheotherContractingState,itshallbetaxableonlyinthatState.
ArticleVII
1.CompensationforlabourorpersonalservicesshallbetaxableonlyintheContracting
Stateinwhichsuchservicesarerendered.
2.ApersonhavinghisfiscaldomicileinoneContractingStateshall,however,beexempt
fromtaxationintheotherContractingStateinrespectofsuchcompensationifheis
temporarilypresentwithinthelatterStateforaperiodorperiodsnotexceedingatotal
ofonehundredandeighty-threedaysduringthecalendaryear,andshallremaintaxablein
thefirstState.
3.IfthepersonremainsinthesecondStatemorethanonehundredandeighty-threedays,
heshallbetaxablethereininrespectofcompensationheearnedduringhisstaythere,but
shallnotbetaxableinrespectofsuchcompensationinthefirstState.
4.Incomederivedbyanaccountant,anarchitect,adoctor,anengineer,alawyerorother
personengagedinthepracticeofaliberalprofessionshallbetaxableonlyintheContracting
Stateinwhichthepersonhasapermanentestablishmentat,orfrom,whichherenders
5.IfanysuchpersonhasapermanentestablishmentinbothContractingStates,heshallbe
taxableineachStateonlyontheincomereceivedforservicesrenderedtherein.
ArticleVIII
1.Salaries,wagesandotherremunerationpaidbyoneoftheContractingStates,orby
publicbodies,institutionsorservicesdependingonit,toitsnationalscarryingoutpublic
functionsintheotherStateshallbetaxableonlyinthefirstState,providedthatthese
functionsareincludedwithinthenormalfieldofactivityoftheState,asthisfieldisdefined
byinternationalusage.
2.PublicpensionsshallbetaxableonlyintheStateofthedebtorentity.
ArticleIX
IncomefrommovablecapitalshallbetaxableonlyintheContractingStatewheresuch
capitalisinvested.
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ArticleX
1.Royaltiesfromimmovablepropertyorinrespectoftheoperationofamine,aquarry,or
othernaturalresourceshallbetaxableonlyintheContractingStateinwhichsuchproperty,
mine,quarry,orothernaturalresourceissituated.
hisfiscaldomicile.
ArticleXII
GainsderivedfromthesaleorexchangeofrealpropertyshallbetaxableonlyintheState
inwhichthepropertyissituated.
ArticleXIII
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ArticleXVI
1.Whenataxpayershowsproofthattheactionofthetaxadministrationofoneofthe
ContractingStateshasresultedindoubletaxation,heshallbeentitledtolodgeaclaimwith
thetaxadministrationoftheStateinwhichhehashisfiscaldomicileorofwhichheisa
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6.Thefactthatabrokerplaceshisservicesatthedisposalofanenterpriseinordertobringit
intotouchwithcustomersdoesnotinitselfimplytheexistenceofapermanentestablishment
fortheenterprise,evenifhisworkfortheenterpriseis,toacertainextent,continuousor
iscarriedonatregularperiods,andevenifthegoodssoldhavebeentemporarilyplaced
inawarehouse.Similarly,thefactthatacommissionagent(
Commissionaire
)actsinhis
ownnameforoneormoreenterprisesandreceivesanormalrateofcommissiondoesnot
constituteapermanentestablishmentforanysuchenterprise,evenifthegoodssoldhave
beentemporarilyplacedinawarehouse.
7.Apermanentestablishmentshallnotbedeemedtoexistinthecaseofcommercial
travellersnotcomingunderanyoftheprecedingcategories.
8.Thefactthataparentcompany,thefiscaldomicileofwhichisoneoftheContracting
States,hasasubsidiaryintheotherStatedoesnotmeanthattheparentcompanyhasa
permanentestablishmentinthatState,regardlessofthefiscalobligationsofthesubsidiary
towardtheStateinwhichitissituated.
ArticleVI
TheallocationoftheincomeoftheenterprisesmentionedinArticleIVoftheConvention
shallbeeffectedinthefollowingmanner:
1.Inrespectofindustrial,commercialandagriculturalenterprisesingeneralandforother
independentactivities:
(a)IfanenterprisewithitsfiscaldomicileinoneContractingStatehasapermanent
establishmentintheotherContractingState,thereshallbeattributedtoeachpermanent
enterprisesoperatinginthecountry.Wheretheactivitiesofthepermanentestablishmentare
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inthenatureofthoseofagenuinelyindependentcommissionagentorbroker,theincome
followingprovisionsshallapply:
(a)IfapermanentestablishmentinoneState(creditorestablishment)suppliesfunds,
asincometothecreditorestablishmentandasadeductionfromgrossincometothedebtor
establishmentfortaxpurposes,anditshallbecomputedattheinter-bankrateforsimilar
transactionsinthecurrencyused;
(b)Theinterestcorrespondingtothepermanentcapitalallottedtothedebtorestablishment,
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orcontrolledbythesameinterests,and,astheresultofsuchsituation,thereexistintheir
commercialorfinancialrelationsconditionsdifferentfromthosewhichwouldhaveexisted
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7.L
EAGUEOF
ATIONS
ILATERAL
ONVENTIONFOR
REVENTIONOFTHE
AXATIONOF
ROPERTY
RESENTEDIN
1946(L
ArticleI
1.ThepresentConventionisdesignedtopreventdoubletaxationinthecaseofthetaxpayers
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ArticleV
IncomewhichanenterpriseinoneoftheContractingStatesderivesfromtheoperationof
skipsoraircraftengagedininternationaltransportistaxableonlyintheStateinwhichthe
enterprisehasitsfiscaldomicile.
ArticleVI
1.RemunerationforlabourorpersonalservicesshallbetaxableintheContractingStatein
whichsuchservicesarerendered.
2.ApersonhavinghisfiscaldomicileinoneContractingStateshall,however,beexempt
fromtaxationintheotherContractingStateinrespectofsuchremunerationifheis
temporarilypresentwithinthelatterStateforaperiodorperiodsnotexceedingatotal
ofonehundredandeighty-threedaysduringthetaxableyear,andshallremaintaxablein
thefirstState.
3.IfapersonremainsinthesecondStatemorethanonehundredandeighty-threedays,he
shallbetaxablethereininrespectoftheremunerationheearnedduringhisstaythere,but
shallnotbetaxableinrespectofsuchremunerationinthefirstState.
4.Incomederivedbyanaccountant,anarchitect,anengineer,alawyer,aphysicianorother
personengagedonhisownaccountinthepracticeofaprofessionshallbetaxableinthe
ContractingStateinwhichthepersonhasapermanentestablishmentat,orfrom,whichhe
rendersservices.
5.Ifanypersondescribedintheprecedingparagraphhasapermanentestablishmentin
bothContractingStates,heshallbetaxableineachStateonlyontheincomeforservices
renderedtherein.
ArticleVII
Salaries,wages,pensionsandotherremunerationpaidbytheGovernment,political
subdivisionsandgovernmentalagenciesofoneoftheContractingStatestonationalsofsuch
Stateinrespectoftheperformanceofdiplomatic,consularorothergovernmentalfunctions
intheotherState,shallbetaxableonlyinthefirstState,providedthatthesefunctions
areincludedwithinthenormalfieldofgovernmentalfunctionsandarenotconnected
withthecarryingonofatradeorbusinessonbehalfoftheState,itssubdivisionsand
itsagencies.
ArticleVIII
1.Dividendsandotherincomefromsharesinacompanyandsharesofprofitsaccruing
tolimitedliabilitypartnersinalimitedliabilitypartnershipshallbetaxableonlyinthe
ContractingStatewherethecompanyorlimitedliabilitypartnershiphasitsfiscaldomicile.
2.Notwithstandingtheprovisionsofparagraph1,dividendspaidbyacompanywhichhas
itsfiscaldomicileinoneContractingStatetoacompanywhichhasitsfiscaldomicilein
theotherContractingStateandhasadominantparticipationinthemanagementorcapital
ofthecompanypayingthedividendsshallbeexemptfromtaxintheformerState.
3.Dividendspaidby,orundistributedprofitsof,acompanywhichhasitsfiscaldomicile
inoneContractingStateshallnotbesubjectedtoanytaxbytheotherContractingStateby
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reasonofthefactthatthedividendsorundistributedprofitsrepresent,inwholeorinpart,
incomederivedfromtheterritoryofthatotherState.
ArticleIX
1.Interestonbonds,securities,notes,debenturesoronanyotherformofindebtednessshall
betaxableonlyintheStatewherethecreditorhashisfiscaldomicile.
2.TheStateofthedebtoris,however,entitledtotaxsuchinterestbymeansofdeduction
orwithholdingatsource.
3.Thetaxwithheldatsourceunderparagraph2ofthisArticleshahinnocaseexcee
%ofthetaxedinterest.
ArticleX
1.Royaltiesfromimmovablepropertyorinrespectoftheoperationofamine,aquarryor
othernaturalresourceshallbetaxableonlyintheContractingStateinwhichsuchproperty,
mine,quarryorothernaturalresourceissituated.
2.RoyaltiesderivedfromoneoftheContractingStatesbyanindividual,corporationor
otherentityoftheotherContractingStateinconsiderationfortherighttouseapatent,a
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ArticleXIII
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ArticleXIX
Asregardsanyspecialprovisionswhichmaybenecessaryfortheapplicationofthepresent
Convention,moreparticularlyincasesnotexpresslyprovidedfor,andintheeventof
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4.Thefiscaldomicileofapartnership,companyandanyotherlegalentityor
defacto
shallbetheStateinwhichitsrealcentreofmanagementissituated.
ArticleIII
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7.Apermanentestablishmentshallnotbedeemedtoexistinthecaseofcommercial
travellersnotcomingunderanyoftheprecedingcategories.
8.Thefactthataparentcompany,thefiscaldomicileofwhichisoneoftheContracting
States,hasasubsidiaryintheotherStatedoesnotmeanthattheparentcompanyhasa
permanentestablishmentinthatState,regardlessofthefiscalobligationsofthesubsidiary
towardtheStateinwhichitissituated.
ArticleVI
TheallocationoftheincomeoftheenterprisesmentionedinArticleIVoftheConvention
shallbeeffectedinthefollowingmanner:
1.Inrespectofindustrial,commercialandagriculturalenterprisesingeneralandforother
independentactivities:
(a)IfanenterprisewithitsfiscaldomicileinoneContractingStatehasapermanent
establishmentintheotherContractingState,thereshallbeattributedtoeachpermanent
similarenterprisesoperatinginthecountry.Wheretheactivitiesofthepermanentestab-
lishmentareinthenatureofthoseofagenuinelyindependentcommissionagentorbroker,
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followingprovisionsshallapply:
(a)IfapermanentestablishmentinoneState(creditorestablishment)suppliesfunds,
asincometothecreditorestablishmentandasadeductionfromgrossincometothedebtor
establishmentfortaxpurposes,anditshallbecomputedattheinter-bankrateforsimilar
transactionsinthecurrencyused;
(b)Theinterestcorrespondingtothepermanentcapitalallottedtothedebtorestablishment,
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ArticleVIII
TheprovisionsofArticleIVoftheConventionshallnotapplytopedlars,inlandshipping,
touringshowsandothersimilaroccupations,whichshallbetaxableinaccordancewiththe
legislationofthecountrywheretheseoccupationsarecarriedonandconcerningwhichthe
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8.C
OMMENTARIESON
EAGUEOF
ATIONS
Foreword
InthereportontheworkofitstenthsessionheldinLondoninMarch1946,theFiscal
CommitteeoftheLeagueofNationsexpresseditselfasfollows:
DuringthelastsessionwhichtheCommitteeheldbeforethewar,inJune1939,itwas
suggestedthatarevisionshouldbeundertakenofthemodelbilateralconventionsontax
Thenumeroustaxtreatieswhichwereconcludedduringthedecadewhichprecededthe
warcontained,however,variousimprovementsonthe1928ModelConventions.TheFiscal
Committee,foritspart,hadbeenabletocarryfurthertheworkinitiatedbytheGeneral
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receivedwithinitsterritoryregardlessofthepersonalstatusoftherecipient.Anyperson
whoistaxableinonecountryonaccountofhispersonalstatusandwhoreceivesincome
fromanothercountryorholdspropertythereinisexposedtosuchdoubletaxation.This
resultcanbeavoidedonlyifoneorbothofthejurisdictionsconcernedlimittheirfiscal
claimsorallowacreditagainsttheirtaxonaccountoftheforeigntax.
Underasecondcategorycomethecasesofdoubletaxationduetothefactthatcountries
applydifferentcriteriaasregardspersonaltaxliability,ordefinedifferentlythebasesofsuch
countryhavingtheirdomicileorresidenceinanother,personswithadomicileorresidence
intwodifferentcountries,personssimultaneouslyregardedbytwotaxjurisdictionsas
domiciledorresidentintheirrespectiveterritories.
Athirdkindofinternationaldoubletaxationofincomeandpropertyincludesthecases
wheretwoormorecountriesregardagivenkindofincomeorpropertyastaxablein
theirrespectiveterritoriesbecausetheyapplydifferenttestsofimpersonaltaxliability.
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Inbothdrafts,theModelConventionisfollowedbyaProtocolcontainingdefinitionsof
suchphrasesasfiscaldomicile,permanentestablishmentandrulesofprocedureonsuch
mattersastheallocationofbusinessprofits.ThearticlesoftheProtocolwillbeconsideredin
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NationalsoftheContractingStateswhohavetheirFiscaldomicileinathirdState
donotcomeundertheprovisionsoftheConvention,sincemostcountriesdonottaxtheir
nationalshavingtheirFiscaldomicileabroad,except,ofcourse,ontheincometheyderive
fromtheircountry.Thestatusofsuchpersonswouldhavetobeconsideredbytaxtreaty
negotiatorswhenoneorbothoftheStatesconcernedbasespersonalliabilitytoincometax
onnationalityaswellasonFiscaldomicile.
TheConventionisintendedtoapplytoallordinaryandspecialtaxesonindividualand
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Incomederivedfromtheexploitationoflands,buildings,andsub-soilasapartofa
business,includingmining,forestryandagriculture,doesnotcomewithinthepurviewof
ArticleII,butofArticleIV,concerningbusinessincome.
ArticleIII:IncomefromMortgages
TheeffectofArticleIII,paragraph1,istomaketherulegoverningtheincomefromreal
propertyapplyalsototaxationofincomefrommortgagesonsuchproperty.Thisrule
would,however,notapplytothoseso-calledmortgagebondswhicharenotguaranteedby
anyspecificrealpropertyandwhichareissuedbycreditinstitutionsinordertofinance
theloanstheygrantonmortgagesdrawnupintheirnames.Suchbondswouldcomerather
undertheprovisionsofArticleIX,whichappliestoincomefrommovablecapitalingeneral,
intheMexicodraft,andtointerestondebtsintheLondondraft.
Byanalogywiththeabove-mentionedruleonincomefrommortgagesonrealproperty,
thesecondparagraphofArticleIIIprovidesthatincomefrommortgagesonseaandair
vesselsistaxableinthecountryofregistry,sincesuchvesselsaregenerallyregardedas
beinglegallysituatedinthatcountry.
ArticleIV:IncomefromBusiness
BothintheLondonandMexicodrafts,incomefromanyindustrial,commercialor
agriculturalenterpriseandfromanyothergainfuloccupationisgovernedbyArticleIV
oftheModelConventionandArticlesIVtoVIIIoftheProtocol.Suchincomeismainly
representedbybusinessprofitsandthisphraseshallbeusedforbrevityssake.
Thefirstquestionwhicharisesininternationaltaxpracticeconcerningbusinessprofitsis
thefollowing:Whatarethefactswhichrenderanenterpriseliabletotaxationonitsprofits
inaforeigncountry?Thisquestionisdealtwithinparagraphs1and2ofArticleIVinboth
drafts.AccordingtotheMexicoversion,anenterprisewillbeliabletotaxonitsprofitsin
aforeigncountryifithascarriedoutitsbusinessoractivitiesinthatcountryprovidedsuch
activitiesdidnotmerelytaketheformofisolatedoroccasionaltransactions.Ontheother
hand,theLondondraftrequiresthatanenterpriseshouldhaveapermanentestablishment
inacountrytobecomesubjecttotheincome-taxlawsofthatcountry.
ItwasarguedinfavourofthecriterioncontainedintheMexicodraftthat,ifanenterprise
weretobetaxableonitsprofitsinaforeigncountryonlyifithadapermanentestablishment
inthatcountry,somecountrieswouldloserevenue.Moreover,certainformsofFiscalevasion
mightbeencouraged.Indeed,someenterprisesmightseektoavoidtaxationinacountryby
carryingouttheirbusinessinthatcountrywithoutmaintainingapermanentestablishment
thereinorbyconcealingtheexistenceofsuchanestablishment.
However,whentheFiscalCommitteeconsideredinLondontheMexicodraft,itreferred
tothefactthatthecriterionofthepermanentestablishmentmoreorlessasdefinedby
theCommitteeinitsearlierwork
,wascontainedinnearlyalldouble-taxationtreaties
relatingtobusinessincome.Onthatoccasion,itwasstatedthattheuseofthiscriterion
wasnotinitselfapttofacilitateFiscalevasionsince,invirtueofArticleXIIIoftheModel
TaxConvention,thetotaltaxliabilityofanenterpriseremains,asarule,thesame,no
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AccordingtoArticleV,paragraph3,oftheProtocol,aforeignenterpriseisnot,inprinciple,
liabletoincometaxinacountryifitsoperationsinthatcountryareexclusivelycarried
outthroughabroker,commissionagent,orotheragentofagenuinelyindependentstatus
inthatcountry.Anagent,however,willnotbeconsideredasindependent,accordingto
ArticleV,paragraph4,oftheProtocol,andtheenterpriseforwhichheactswillbeliableto
incometaxinthecountrywhereheisestablishedincasessuchasthefollowing:theagent
habituallyactsinthenameoftheenterpriseconcernedasadulyaccreditedagentandenters
intocontractsonitsbehalf;theagentisasalariedemployeeoftheenterpriseandhabitually
transactsbusinessonitsaccount;theagenthabituallyholds,forthepurposeofsale,astock
ofgoodsthatbelongtotheenterprise.
ArticleV,paragraph5,oftheProtocoladdsthat,whentheofficeandbusinessexpensesof
theagentinparticular,therentofthepremisesusedbyhimwhenworkingfortheenterprise
concernedarepaidbythatenterprise,thisfactwillberegardedasproofofacontractof
employment,indicatingthattheenterprisepossessesanestablishmentinthecountry.
Accordingtotheabove-mentionedprovisions,thereseemtobeconsequentlyfourdistinct
criteriaaccordingtowhichaforeignenterprisemaybedeemedtohaveanestablishmentin
thecountrywhereitdealsthroughanagent:
(a)Powerofthelocalagenttobindtheenterprise;
(b)Existenceofacontractofemploymentwithalocalagent;
(c)Maintenanceinthecountryofastockofgoodsunderthecontrolofanagentforsales
inthatcountry;
(d)Paymentoftherentofthepremisesusedbytheagentandofhisofficeexpenses.
Anyofthesefourconditionsissufficienttorenderanenterpriseliabletoincometaxin
itsownnameinthecountrywhereanagentoperates,providedthattheconditionwhichis
fulfilledcorrespondstoapermanentstateofthingsoranhabitualpractice.
Ontheotherhand,paragraphs6and7ofArticleVoftheProtocolstipulatethat
foreignenterprisesdoingbusinessinacountrythroughbrokersandcommissionedagents
ofagenuinelyindependentstatus,orthroughcommercialtravellersvisitingcustomersor
suppliersinacountry,shouldnotbeliabletoincometaxinthatcountry.
Paragraph8ofArticleVoftheProtocolreferstosubsidiarycompanies.Itstatesthata
subsidiarycannotberegardedasapermanentestablishmentoftheparententerprise.This
provisionhastwomaineffects.Inthefirstplace,thecountrywherethesubsidiaryissituated
isnotentitledtotaxtheparentcompanyexcept,ofcourse,onthedividendswhichtheparent
companymayreceivefromitssubsidiary,inaccordancewiththeprovisionsofArticleIXof
theMexicodraftandArticleVIII,paragraph2,oftheLondonModelConvention,towhich
referenceismadeonpage25.Secondly,intaxingtheparentcompany,theauthoritiesofthe
countryinwhichsuchcompanyissituatedmaynottakeintoaccounttheactualprofitsmade
bythesubsidiarycompanyintheothercountry,butonlythedividendsandotherincomepaid
bythesubsidiarytotheparentcompany.Theserulesfollowtheprinciplethatasubsidiary
constitutesadistinctlegalentityandshouldthereforebetaxedseparately.Atthesametime,
ArticleVIIoftheProtocolindicatesthecriteriaaccordingtowhichthecorrectnessofthe
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Whileparagraphs1and2ofArticleIVoftheModelConventionandthecomplementary
provisionsinArticleVoftheProtocol,whichhavebeenconsideredabove,definethe
conditionsunderwhichanenterprisemaybesubjecttoincometaxinaforeigncountry,
paragraphs3and4ofArticleIVoftheModelConventionandArticleVIoftheProtocol
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theapportionmentformulaeareplantandequipment,circulatingcapital,payrolls,costof
operation,physicaloutput,turnover.Itisunderstoodthattheselectionandtheweighting
ofthedifferentfactorsthatitmayappearappropriatetousewilldifferaccordingtothe
typeofenterprise.Itis,however,providedthattheformulaeofapportionmentshouldbe
soselectedastoensureresultsapproaching,ascloselyaspossible,thosewhichwouldbe
reectedbyaseparateaccounting.
andtreatedasareceiptofthecreditorestablishment.
Inviewoftheirspecialconditionsofoperation,insurancecompaniesrepresentoneofthe
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hashisFiscaldomicileinthatcountry.ThedifferenceinwordingofthatarticleintheMexico
andLondondraftsisduetothefactthatanattempthasbeenmadetostatethisrulemore
preciselyinthelatterdraft.Theruleinquestioniscontainedinnumerousspecialandgeneral
taxtreaties.Itisintendedtofacilitatetheoperationofinternationaltransportenterprises.
Italsoavoidsthenumerousdifficultieswhichexperiencehasshowntobeinvolvedinthe
taxationofprofitsfrominternationalnavigationoutsidethehome-countryoftheoperating
Foritspart,inlandwatertransportisnotaffectedbyArticleVandremains,likerail
androadtransport,subjecttotheprovisionsofArticleIV,whichappliestobusiness
incomeingeneral.Theprovisionsofthatarticleremainapplicablealsototheincome
thatamaritimeorairtransportenterprisemightderivefromservicesotherthanactual
maritimeorairtransport
e.g.
,warehousingcharges,insurancecommissionsandtravel
agencyfees.
ArticleVI:RemunerationfromPersonalServicesandPrivateEmployment
ArticleVIoftheLondondraftreproducesArticleVIIoftheMexicodraft1anditisintended
tocovertheearningsfromallprivateemploymentsandprofessions.Itdoesnotapply,
however,toprivatepensions,whicharedealtwithseparatelyinArticleXI,ortoother
formsofearnedincomewhicharementionedinotherarticlessuchasArticlesIV,V,
VIandVIII.
ThefirstparagraphofArticleVIlaysdownthegeneralprinciplethatremuneration
forlabourandpersonalservices,asunderstoodinthiscontext,istaxableonlyinthe
countrywheretheservicesarerendered.Accordingtoparagraphs2and3ofthat
article,however,apersonhavinghisFiscaldomicileinoneoftheContractingStates
willbeconsideredashavingrenderedservicesintheotherContractingStateonlyif
theperiodorperiodsduringwhichhehasstayedintheothercountryexceed183
days.Thismodificationoftheruleoftaxingtheremunerationforpersonalservicesin
thecountrywherethecorrespondingservicesarerenderedisintendedtofacilitatethe
operationsofenterprisesengagedininternationaltradeandthemovementofworkersacross
nationalborders.
Paragraphs4and5dealspecificallywithindependentprofessionsandembodyrules
similartothoseofparagraphs2and3ofArticleIVrelatingtothetaxationofbusiness
incomeaccordingtothecriterionofpermanentestablishment.Accordingtoparagraph4,
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)Thepayeemustbeanationaloftheabove-mentionedState;
)Thepaymentmustbeinrespectoftheperformanceofdiplomatic,consularorother
governmentalfunctions;
)Suchfunctionsmustfallwithinthenormalfieldofgovernmentaldutiesandmustnot
beconnectedwiththecarrying-onofatradeorabusinessonbehalfofthepayingauthority.
ContractingStatesmayfinditconvenienttospecifytheofficialsorfunctions
thataretobecoveredbythisrule,whichisnotintendedtorestrictanytax
immunityorprivilegegrantedtodiplomaticorconsularagentsunderinternationalusage
ortreaties.
ArticleVIII:Dividends
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ArticleIX:InterestonDebts
AccordingtotheprovisionsoftheLondondraft,interestonallkindsofindebtednessisto
betaxed,inprinciple,exclusivelyintheStatewherethecreditorhashisFiscaldomicile.
ThisistheoppositeoftherulecontainedinArticleIXoftheMexicodraft.Indeed,itwas
consideredthat,especiallyasregardsinterest,thecountryfromwhichcapitaloriginated
hadapriorrighttotaxsuchinterestwhereverthecapitalwasinvested.Nevertheless,itwas
concededthattheStateofthedebtorcouldtaxsuchinterestinthesamewayasifitwere
paidtonationalsorresidentsbymeansofdeductionorwithholdingatsource.Atthesame
time,itwasthoughtthatthiswithholdingtaxshouldnotexceedacertainpercentageto
befixedbyagreement.
Bothasregardsdividendsandinterest,itshouldbenotedthatthetreatmentofincome
frommovablecapitalisoneofthemostcomplexquestionsthatariseinconnectionwiththe
preventionofinternationaldoubletaxation.Inthismatter,thereisanoppositionofinterests
theplacewheretheinvestmentisused.
Thepracticalsolutionoftheproblemdepends,inmostcases,ontheextenttowhich
eachoftheContractingStatesiswillingtolimititsrightoftaxationinordertofacilitate
internationalinvestment.Inthisconnection,itisadvisablethatregardshouldbehadnot
onlytotheincidenceofataxontheincomefromimportedcapital,andtheimmediate
effectsofsuchmeasuresonpublicrevenue,butalsototheconsequences,economicand
Fiscal,entailedbytheeconomicdevelopment,tradeandincreaseofincomewhichinboth
countriesmayfollowthecapitalmovementsinquestion.
ArticleX:RoyaltiesfromRealEstate,PatentsandCopyrights
Inthesamewayasotherincomefromrealproperty,whichisgovernedbyArticleIIofthe
ModelConvention,royaltiesreceivedbyaperson,asownerorpossessorofrealproperty
inconsiderationoftherighttouseorexploitnaturaldepositsandresourcessituatedonthe
surfaceorinthesubsoilofhisproperty,suchasmines,quarries,wells,springs,waterfalls,
forests,aretaxableinthecountrywherethepropertyissituated.Insofarasadistinction
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thenewversionofparagraph2ofthearticleunderconsiderationexclusivelyinthecountry
towhichthegrantorbelongs.Arestrictiontothatprincipleis,however,madebythenew
linewiththeruleadoptedinArticleIXofthatdraftasregardsincomefrommovablecapital.
IntheLondondraft,privatepensionsandlifeannuitiesaremadetaxableinthecountryof
Fiscaldomicileofthecreditor,asinthecaseofinterestfromdebts.Inbothdrafts,ArticleX
oftheProtocolcontainsaspecialprovisionrelatingtothetaxationofallowancesofstudents
andapprenticesfromonecountrywhoarestayingintheotherfortheirstudiesortraining.
Theseremittancesaremadeexemptfromtaxationinthecountrywherethebeneficiaries
arestudying.
ArticleXII:CapitalGains
ThefirstparagraphofArticleXIIintheLondondraftreproducestheprovisionsalready
containedintheMexicodraft.Itstipulatesthatgainsderivedfromthesaleorexchangeof
realpropertyaretaxableonlyintheStateinwhichthepropertyissituated.Asinthecaseof
taxationofincomefromrealpropertycoveredbyArticleIIoftheModelConvention,the
clausesofArticlesIIandIIIoftheProtocolwouldapplyasregardsmattersofdefinition.
ThesecondparagraphofArticleXIIinitsLondonwordingextendstheprovisionsof
ArticlesIVandVasregardsthetaxationofthegainsderivedfromthesaleorexchangeof
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taxpayersentireincomeevenwhenitistaxable,inpartorasawhole,intheothercountry.
FromthetaxdueinthecountryofFiscaldomicileadeductionhastobemade,however,
onaccountofthetaxespaidintheothercountryinaccordancewiththeprecedingarticles
suchdividends,thedeductionprovidedbyArticleXIII,itmaybedesirabletostipulatethat
taxeswhichacompanyisrequiredtowithholdfromdividendsitdistributesortopayon
suchdividendsshallbeconsideredashavingbeenpaidbytheshareholderforthepurpose
ofthisarticle.
Taxableyearsandtaxcollectiondatesdifferfromcountrytocountry.Thisshouldbe
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apply,
mutatismutandis
,tothetaxesonproperty,capitalorincrementofwealthmentioned
inArticleXV,thoughthisisnotspecificallystatedintheModelConvention.
ArticleXVII:TaxpayersRightsofAppeal
ThespecialproceduresofappealprovidedforinArticleXVIIareintendednottoreplace
buttosupplementtheproceduresoftaxappealestablishedbythetaxlegislationofthe
ContractingStates.Thetaxpayerwho,inspiteoftheprovisionsoftheConvention,has
suffereddoubletaxationhastheoptionoffilinghisappealwiththetaxauthoritiesofthe
countryofwhichheisanationalorofthecountrywherehehashisFiscaldomicile;for
itseemslegitimatethatheshouldbeabletoobtaintheprotectionintaxmattersofone
ortheotherStateaccordingtothecircumstances.Itshould,moreover,benotedthatthe
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9.M
ONVENTIONFORTHE
VOIDANCEOF
AXATION
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(j)Thetermcapitalgainsmeanstheprofitobtainedbyapersoninthealienationof
propertynothabituallyacquired,producedortransferredinhisordinarylineofbusiness
activity.
(k)Thewordpensionmeansaperiodicpaymentmadeinconsiderationofservices
renderedorinjuriessustained;andthewordannuitymeansacertainsumofmoney
payableperiodicallyduringthelifeofthebeneficiary,orduringacertainperiodoftime,
gratuitouslyorinconsiderationofpaymentsmadeinmoney.
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(g)Adepository,storagefacility,warehouseoranysimilarestablishmentusedforreceiving,
storingordeliveringgoods;
(h)Anyotherpremises,officeorfacilities,thepurposeofwhichispreparatoryorauxiliary
tothebusinessactivitiesoftheenterprise;
(i)Anagentorrepresentative.
WhereabusinessenterpriseundertakesactivitiesinbothContractingStates,eachone
ofthemmaytaxincomefromsourceswithinitsterritory.Iftheactivitiesareundertaken
throughrepresentatives,orthroughtheuseoffacilities,suchastheonesindicatedinthe
precedingparagraph,theprofitsearnedshallbeattributedtosuchpersonsorfacilities,
providedthatsaidpersonsorfacilitiesaretotallyindependentfromthebusinessenterprise.
Article8:ProfitsofTransportationEnterprises
Theprofitsearnedbyatransportationenterprisefromitsair,land,sea,lakeorriver
operations,shallbeliabletotaxationonlybytheContractingStateofwhichsuchenterprise
isaresident.
Theprofitsearnedbyatransportationenterprisefromitsair,land,sea,lakeorriver
operationsinanyoftheContractingStatesshallbetaxableonlybysuchContractingState.
Article9:RoyaltiesfromtheUseofPatents,TradeMarksandTechnology
Royaltiesderivedfromtheuseofpatents,trademarks,non-patentedtechnicalknowledge
orothersimilarintangiblepropertywithintheterritoryofoneoftheContractingStates
shallbetaxableonlybysuchContractingState.
Article10:Interest
InterestderivedfromloansshallbetaxableonlybytheContractingStateintheterritoryof
whichtheloanhasbeenused.Subjecttorebuttal,itispresumedthattheloanhasbeenused
intheContractingStatefromwhichtheinterestpaymenthasbeenmade.
Article11:DividendsandSharesofProfit
DividendsandsharesofprofitshallbetaxableonlybytheContractingStateofwhichthe
businessenterprisepayingthemisaresident.
Article12:CapitalGains
CapitalgainsshallbetaxableonlybytheContractingStatewhereinthepropertyissituated
atthetimeofthesale,exceptforcapitalgainsderivedfromthealienationof:
(a)Ships,aircraft,busesandothertransportationvehicles,whichshallbetaxableonlyby
theContractingStatewhereinsuchvehiclesareregisteredatthetimeofthealienation
thereof,and
(b)Negotiableinstruments,sharesofstockandothersecurities,whichshallbetaxableonly
bytheContractingStateinwhichterritorytheyhavebeenissued.
August22,2005Time:15:9Project:exhibits-july-2005.tex
Article13:IncomefromtheRenderingofPersonalServices
Remunerations,fees,wages,salaries,benefitsandsimilarcompensationreceivedas
paymentsforservicesrenderedbyemployees,professionalsortechnicians,orforpersonal
servicesingeneral,shallbetaxableonlyintheterritorywhereinsuchserviceshavebeen
rendered,exceptforwages,salaries,remunerationsandsimilarcompensation,receivedby:
(a)PersonsrenderingservicestoaContractingStateinthedischargeofofficialdutiesduly
accredited,whichshallbetaxableonlybysuchContractingState,eveniftheserviceshave
beenrenderedwithintheterritoryoftheotherContractingState.
(b)Thecrewsofships,aircraft,busesandothertransportationvehiclesengagedin
internationaltraffic,whichshallbetaxableonlybytheContractingStateofwhichthe
employerisaresident.
Article14:ProfessionalServiceandTechnicalAssistanceBusinessEnterprises
Incomereceivedbybusinessenterprisesengagedinrenderingprofessionalservicesor
technicalassistance,shallbetaxableonlybytheContractingStatewhereinsuchservices
orassistancearerendered.
Article15:PensionsandAnnuities
Pensions,annuitiesandotherperiodicincomeofasimilarcharactershallbetaxableonlyby
theContractingStatewhereinthesourceofsuchincomeissituated.Thesourceisconsidered
tobesituatedintheterritoryoftheStatewherethecontractprovidingforsuchperiodic
incomeisexecutedand,ifthereisnocontract,intheStatefromwhichthepaymentofsuch
incomeismade.
Article16:PublicEntertainmentActivities
Incomederivedfromartisticorpublicentertainmentactivitiesshallbetaxableonlybythe
ContractingStatewhereinsuchactivitieshavebeencarriedout,withoutregardtothetime
thatthepersonsperformingsaidactivitiesstayintheterritoryofsuchContractingState.
454
August22,2005Time:15:9Project:exhibits-july-2005.tex
ChapterIVGeneralProvisions
Article19:ConsultationsandInformation
forestablishingtheadministrativecontrolsrequiredfortheavoidanceoffraudandtax
evasion.
Theinformationexchangedpursuanttotheprovisionsoftheprecedingparagraphshall
beconsideredasconfidential,andshallnotbetransmittedtoanypersonotherthan
theauthoritiesresponsiblefortheadministrationofthetaxeswhicharesubjecttothis
Convention.
August22,2005Time:15:16Project:Chapter2.tex
August24,2005Time:18:13Project:index.tex
accountingpro“ts236…7
capitalallowances239…41
August24,2005Time:18:13Project:index.tex
Index
businessprots(
crossborderleasingactivities138
deferredbusinessprots142
August24,2005Time:18:13Project:index.tex
Index
ShippingCorporationofIndiaLimitedvGamlen
ChemicalCompanyAustralasia(1980)
StaglineLtd.vFoscolo,Mango&Coltd(1932)
StickelvMNR(1972)
StubartInvestmentsLtdvTheQueen(1984)
SunLifeAssuranceofCanadavPearson(1984)
SwedishCentralRailwyVompanyLimitedv
Thompson(InspectorofTaxes)(192325)
TheCommonwealthvTasmania(1893)
TheQueenvMelfordDevelopmentsInc(1982)
TheTataIron&SteelCo.LtdvDCIR(1998)
ThielvFCT(1990)
57,58,59,118,138
Todd(InspectorofTaxes)vEgyptianDeltaLand
andInvestmentCompnayLimited(192628)
TransvaalAssociatedHideandSkinMerchants
(Pty)LtdvCollectorofTaxes(1967)
Trans-WorldAirlinesvFranklinMintCorporation
UnionCorporationLtd.vInlandRevenue
Commissioners(1952)
UnionofIndiavAzadiBachaoAndolan(2003)
25,37,62,74,121
equityratio266
companies210,213,215
individuals200,201,203
treaties34,35
dependentagentpermanentestablishment135
diplomaticmissionsandconsularposts191
directorsfees1645
distributiverules68,1003
dividends14750,2647,308
doctrineofincorporation17
doctrineoftransformation17
domicile2212,309
DominicanRepublic198,200,213
doubletaxationavoidance23,167
economicdoubletax2,15,310
economicattachment15
foreigntaxrelief27895
juridicaldoubletax2,3,156,319
August24,2005Time:18:13Project:index.tex
Index
doubletaxationavoidance(
modelconventions1769
personalattachment15
August24,2005Time:18:13Project:index.tex
Index
hybridentity316
hybridinstrument316
Iceland35,213
immigrationstatus202
imputationsystem317
incentives,tax246248
incomeclassicationrules100
incomefromimmovableproperty1367
incorporation,doctrineof17
independentagentpermanentestablishment
independentpersonalservices15961
advancetaxrulings2601
companies213,216
individuals200,204
royalties275
sourcerules226
treaties1920,34,35,62
Indonesia35,200,202,213,214
inlandwaterwaystransport139145
insuranceofrisks-permanentestablishment135
benecialowner150,151
borrower,taxdeductionfor2701
debt2689
debtclaims150,151
denition151,268
lender,taxon26970
permanentestablishment150
sourcerules152,2712
specialrelationship152
taxation269
InterestandRoyaltyDirective82
InternationalCovenantonCivilandPoliticalRights
(ICCPR)83
internationallaw
enforceability212
sourcesoftaxlaw134
sovereignty21
internationaltaxation12,13
internationaltrafcdenition118
August24,2005Time:18:13Project:index.tex
Index
Kazakhstan200,213
Kenya200,201,213
know-how154,272
Korea35,200
Latvia200,201,202,213
LeagueofNations648
leaseaccounting2413
leasingequipment-permanentestablishment127
Lebanon198,213,214
Lesotho198,199,202,213
licenceroyalties154
Liechtenstein201,213
LimitationonBenets1745,320
Lithuania200,213
capitallosses2545
scalunitysystem2567
foreignbranchlosses2556
groupcontributionsystem257
groupreliefsystem257
grouptaxation2567
operatinglosses251
revenuelosses2524
timingdifferencelosses251
tradinglosses2524
utilizationoflosses251
Luxembourg
foreigntaxrelief290
companies213,214,217
individuals200,201,202,206
treaties34,35
Macau198,213
Malawi198
Malaysia198,199,200,210,213
Maldives198
Malta198,199,200,201,213,2901
Mauritius198,199,200,213,291
MergerDirective823
Mexico197,200,201,206,213,214,217,291
mineralroyalties154
modelconventions34
seealso
Articles11293
assignmentrules689
benets723
categoriesofincome689
conictrules70
distributiverules68
historicalbackground648
juridicaldoubletaxation,reliefagainst702
LeagueofNations648
August24,2005Time:18:13Project:index.tex
Index
foreigntaxrelief292
companies210,213,214,217
individuals200,201,202,2067
treaties35,51
OECDModelConvention3
airtransport1425
artistesandsportsmen1657
assignmentrules101
assistanceinthecollectionoftaxes
associatedenterprises1456
attributionrules103
businessprots13740
capital174
capitalgains1578
diplomaticmissionsandconsularposts,members
of191
directorsfees164
distributiverules1003
dividendincome1479
doubletaxation,eliminationof1768
employmentincome1613
entryintoforce192
exchangeofinformation1858
generaldenitions11720
governmentservice1701
historicalbackground6468
immovableproperty,incomefrom1367
incomeclassicationrules100
incomefromimmovableproperty1367
independentpersonalservices15960
inlandwaterwaystransport1424
interestincome1502
mutualagreementprocedure1824
non-discrimination17982
otherincome1723
partnerships1134
pensions168
permanentestablishment12534
personscovered1125
residence1204
royalties1535,273
shipping1424
sourcerules1001
sportsmen1657
students1712
taxescovered1167
termination193
territorialextension192
treatyabuse114
treatyshopping115
UNModelConventioncompared1058
USModelConventioncompared10912
offshorenancialcentres45
OrganisationforEconomicCo-operationand
Development
seealso
OECDModelConventions
comparisonwithUNmodeltreaty735
August24,2005Time:18:13Project:index.tex
Index
permanentestablishment(
premiums,collectionof135
preparatoryorauxiliarybusinessactivities1323
registeredofces1278
royaltyincome153
services,furnishingof135
stockagents135
subsidiary1302
temporaryxedlocation126
covered1125
denition1178
personalservices
independentpersonalservices
Peru35,213,200,202,207
Philippines198,201,202,213
physicalpresencetest2001
placeofeffectivemanagement1234,2123
Poland201,202,213
companies210,213,214,218
individuals201,207
treaties35
preferentialtaxregimes5
premiums,collectionof
permanentestablishment135
presumptivetaxes2301
principles,internationaltax2226
professionalservices
businessprots138
protocol17,326
publicinternationallaw134
PuertoRico201,213
Qatar198
qualiedgovernmentalentitydenition120,175
qualicationconicts5356
receivedorremittanceregime199
conictresolution2
treaties256
anti-avoidance123
companies20920
centralmanagementandcontrol210
centralorsuperiormanagement210
day-to-daymanagement210
dualresidence211
effectivemanagement1234,2102
incorporation213
legalseat213
locationofmanagementorrealseat213
modelconventions1205
operationalmanagement210
reformproposals2123
registeredaddressorofce210
dualresidence1223,199,211
individuals199209
centreofvitalinterests122
connectingfactors122
economic,socialorfamilyties201
factsandcircumstancestest2012
habitual,usualorcustomaryplaceofabode
immigrationstatus202
intentiontoresidepermanently202
ofcialregistration202
modelconventions1205
nationality1223,202
permanentorprincipleresidence201
physicalpresencetest2001
residenceorhomeavailable201
otherentities2202
placeofeffectivemanagement123,124
registeredaddressorofce210
residenceofacontractingstate1201
tie-breakertests122
treatyresidence123
Romania201,202,213,214
royalties
associatedenterprise155
benecialowner153
denition154,328
effectivelyconnected154
income2725
intellectualproperty272,317
know-how154,272,319
licences154
meaning272
mineral154
modelconventions1535,273
payments2734
permanentestablishment153
softwarepayments154,156
sourcerules2745
specialrelationship155
technicalserviceandassistance272
transferofrights154
rolloverrelief277,328
August24,2005Time:18:13Project:index.tex
Index
companies213,218
individuals200,207
satellitesandspace
businessprots140
SaudiArabia198,213,214
SavingsDirective812,328
Senegal201,202,213
schedulartaxsystem228,2334,328
services,furnishingofpermanentestablishment135
Seychelles198
shipping-businessprots139,1425
Singapore198,199
foreigntaxrelief2923
companies210,213,218
individuals200,202,207
treaties35
SlovakRepublic201,202,213
Smith,Adam195
softwareroyalties154,156
SolomonIslands200,213,214
sourcerules15,22,2227
businessconnection226
basicsourcerules222,2235
categoriesofincome2245
conicts2267
dividends267
forceofattractionprinciple226
interest152
modelconventions68
modeltreaties1001
purpose222
taxingsourcerules222,2256
SouthAfrica
anti-avoidancemeasures123
foreigntaxrelief293
companies214,216
individuals201,202,208
treaties56
SouthKorea213,218
sovereignty
doubletaxation14
internationallaw21
companies210,213,214,218
individuals200,201,208
sportsmen1657
SriLanka197
companies210,214
individuals200
treaties35
stateaid79
states,meaningof1
August24,2005Time:18:13Project:index.tex
Index
transferpricing5,335
transformation,doctrineof17
travauxpreparatoires
42,63,336
abuse37
breach38
comingintoforce312
concluding32
countryexamples1821
dateofentryintoforce32
dateofsignature32
directeffect178
doctrineofincorporation17
doctrineoftransformation17
domesticlawoverriding347
constitutionalprovisions356
fundamentalchangeofcircumstances37
impossibilityofperformance38
OECDTreatyOverridereport(1989)34,35
remedies378
treatyoverride34
doubletaxation2,34
August24,2005Time:18:13Project:index.tex
Index
non-discrimination182
OECDmodeltreatydifferences1058
otherincome173
pensions169
permanentestablishment1356
personscovered115
residence124
royalties1556
shipping144
sportsmen167
students172
taxescovered117
termination193
territorialextension192
UndertakingsforCollectiveInvestmentin
TransferableSecurities83
UnitedArabEmirates198
UnitedKingdom199
advancetaxrulings263
anti-avoidancemeasures123
dividends264
foreigntaxrelief282,294
companies210,213,214,219
individuals200,201,202,209
treaties20,35,51,57,624
UnitedStates
advancetaxrulings2634
capitalgains277
dividends264
foreigntaxrelief282,283,2945
modelconventions
USModelConvention
companies220
individuals200,201,202,209
royalties275
sourcerules223,225,226
treaties21,34,35,51,57,64
Uruguay198,214
USModelConvention67,68,16970
airtransport1445
artistes167
assistanceinthecollectionoftaxes191
associatedenterprises147
capital1746
capitalgains159
diplomaticmissionsandconsularposts,members
of191
directorsfees165
dividends150
doubletaxation1789
employmentincome1634
entryintoforce192
generaldenitions120
governmentservice171
immovableproperty,incomefrom137
inlandwaterwaystransport1445
interestincome153
mutualagreementprocedure185
non-discrimination182
OECDConventioncompared10912
otherincome174
pensions16970
permanentestablishment136
personscovered1156
residence1245
royalties156
shipping1445
sportsmen167
students172
taxescovered117
termination193
territorialextension192
Uzbekistan201,213
Venezuela200,213
ViennaConventiononDiplomaticRelations191
ViennaConventionontheLawofTreaties(VCLT)
23,14,2731,338

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