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STRUCTURE AND OPERATION OF

(INTERNATIONAL) TAX TREATIES

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Model Tax Treaties

Two Main Models: OECD Model Tax Convention on Income

and on Capital United Nations Model Double Taxation

Convention between Developed and Developing Countries

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Structure of the OECD Model

OECD Model Convention has seven chapters: I Scope of convention II Definitions III Taxation of Income IV Taxation of Capital V Methods of Elimination of Double

Taxation VI Special Provisions VII Final Provisions

Scope of the Convention

Art. 1 – Persons Covered Defines the scope of the DTA in terms of

the persons to which it applies Art. 2 – Taxes Covered

Defines the scope of the DTA in terms of the taxes to which it applies and who applies them

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Definitions

Art. 3 – General Definitions Sets out definitions of terms used in the DTA

for purposes of interpreting the DTA. Also a general rule on applying domestic law for terms not defined specifically in the DTA

Art. 4 – Resident Sets out a particular definition of “resident”

for purposes of interpreting the DTA Art. 5 - Permanent Establishment

Sets out a particular definition of “resident” for purposes of interpreting the DTA

Taxation of Income and Capital

For eliminating double taxation, DTA establishes two categories of rules:(1) Articles 6-22 determine with regard to different classes of income/capital, the respective rights to tax of the State of source and the State of residence – exclusive/non- exclusive taxing rights.

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Taxation of Income and Capital

(2) where these provisions confer on the State of source the rights to tax, the State of residence must allow relief to avoid double taxation

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Income/capital may be classified into three classes :- Income and capital that may be taxed

without limitation in the state of source;- Income that may be subjected to limited

taxation in the state of source; and - Income and capital that may not be

taxed in the state of source.

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Active Income

Art. 7 – Business Profits Allows a source state to tax the

business profits of a resident of the DTA partner state only if that resident has a permanent establishment situated in the source state

Art. 8 – Shipping, inland waterways transport and air transport Profits are taxable only in the

contracting state in which the place of effective management of the enterprise is situated

Art. 14 – Independent personal services

Art. 15

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Active Income

Art. 14 – independent Personal Services Removed from the OECD MC in 2000.

Income from the rendering of independent personal services now dealt with under Art. 7

Many bilateral DTAs still contain an IPS article.

The general rule is that the source state may tax the income from IPS, but only if the individual who provides those services has a fixed base regularly available to him in the source state

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Active Income

Art. 15 – Dependent Personal Services Allows the source state to tax income

from employment exercised in that state only if (i) the employee is present in the source state for at least 183 days in a 12-month period (ii) his employer is not a resident in the source state (iii) the employment income is not borne by a PE that the employer has in the source state

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Active Income

Art. 16 – Directors’ fees The source state may tax first directors’

fees of a member of a board of directors of a company that is a resident of that state

Art. 17 – Artistes and sportsmen allows the source state to tax income

derived from the personal entertaining and sporting activities of entertainers and sportspersons exercised in the source state 12

Active Income

Art. 19 – Government service income of government servants (in

respect of their government service) is taxable only by the state to which the services are rendered

Art. 20 – Students payments received from outside a

contracting state by students or business apprentices while they are in that state solely for the purposes of education or training are not taxable in that state if resident of the other state immediately prior to their visit

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Passive Income

Art. 6 – Income from immovable property allows the state in which immovable

property is located to tax first income that arises from that property

Art. 10 – Dividends Allows the source state to tax dividends

that are paid by companies that are residents to shareholders resident in the other contracting state, subject to certain restrictions 14

Passive Income

Art. 11 – Interest Allows the source state to tax interest

that arises in the source state and is paid to a resident of the other contracting state, subject to certain restrictions

Art. 12 – Royalties Denies the source state taxing rights

over royalties arising in that state

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Passive Income

Art. 13 – Capital Gains Allows the state in which the property is

located to tax the capital gain from the alienation of immovable property. Subject to specific exceptions, only the alienator’s country of residence can tax gains from the alienation of movable property

Art. 18 – Pensions Pensions paid in respect of past

employment in a source state can be taxed only in the pensioner’s state of residence.

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Other income

Art. 21 – Other income A “catch-all” article Designed to bring within the tax net of

one or other of the contracting states income that is not dealt with in the DTA

Provides that generally, such income is taxable only in the state of residence of the recipient

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Capital

Capital Source Country Taxation Allowed

for: Immovable property Business assets of a PE or a fixed base

Special Rule for Shipping etc

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Elimination of Double Taxation

Art. 23 - Methods for Elimination of Double Taxation offers alternative methods of relief from

juridical double taxation: the exemption method and the ordinary tax credit method

Where double taxation of the same income would otherwise arise, the state of residence of the taxpayer must allow relief to avoid double taxation

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Prevention of Tax Avoidance and Fiscal

Evasion Art. 9 – Associated Persons

Allows the tax administration to rewrite the accounts if, as a result of the special relations between the enterprises, the accounts do not show the true taxable profits arising in the state

Art. 26 – Exchange of information Allows the tax administrations in the

contracting states to exchange information with each other to carry out the provisions of the DTA or a state’s domestic law

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Prevention of Tax Avoidance and Fiscal

Evasion Art. 27 – Assistance in the

collection of taxes introduced into the OECD model DTA in

2003 requires each contracting state to assist

the other in the collection of revenue claims

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Miscellaneous Matters

Art. 24 – Non-discrimination prohibits a contracting state form

discriminating in its tax treatment between its own nationals and nationals of the other contracting state

Art. 25- mutual Agreement Procedure imposes an obligation on contracting

states to resolve disputes by mutual agreement notwithstanding domestic remedies 22

Miscellaneous Matters

Art. 28 – Members of Diplomatic Missions and Consular Posts provides that the general rules of

international law or special agreements in relation to the fiscal privileges of members of diplomatic missions or consular posts override the provisions of the DTA

Art. 29- Territorial Extension allows a DTA to be extended to other

states or territories the international relations of which are the responsibility of one of the contracting states

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Protocols

Provisions form an integral part of the Convention

Agreed at time of Convention or subsequent

Uses: Clarifications, deviations, updates

and modification

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Main Differences Between OECD and UN Models

Article 3 – definitions of “enterprise” and “business” in OECD

Article 5 – greater source state taxation under UN: six month duration tests; Services provision Delivery omitted from paragraph 4 Insurance (paragraph 6)

Article 7 – force of attraction in UN Article 8 – UN’s alternative “b” (limited

source state taxation of international shipping

Article 9 – UN’s fraud exclusion in paragraph 3

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Differences Between the OECD and UN Models

Article 10 – rate not specified and ownership threshold is lower (10%)

Article 11 - rate not specified Article 12 – source state taxation of

royalties Article 13 – source state taxation of

shares if holding is above an agreed threshold

Article 14 – deleted from OECD model and UN Model includes a 6 month threshold

Article 16 – extends scope: directors + high level managers

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Differences Between the OECD and UN Models

Article 18 – two alternatives Article 20 – students minor drafting Article 21 – source state taxation of

other income sourced in other state Article 25 – specifies the process in

more detail Article 26 – minor drafting and

OECD’s recent changes (bank secrecy and domestic interest)

Article 27 – no equivalent provision (recent OECD addition)

Stages in a DTA

Negotiation Initialing Signature Ratification Entry into force Effective date

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Thank YouTerima Kasih