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DTAA - OECD Model Convention


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Gives a basic understanding of the various clauses in the DTAA - OECD Model.

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DTAA - OECD Model Convention

  1. 1. OECD Model Convention Birds eye view of Articles in OECD Model Convention of DTAAArticle No. Title Aspects Covered Salient FeaturesArticle 1 Persons covered Who can claim benefit of DTAA Person who is a resident of either or both the contracting statesArticle 2 Taxes covered Outlines the range of taxes 1. Taxes on income & capital covered under the DTAA 2. Income from alienation of movable / immovable property 3. Wages / Salaries 4. Capital appreciationArticle 3 General definitions Defines various terms Examples mentioned / used in the DTAA a) “Person" includes an individual, a company and any other body of persons; b) “Company" means any body corporate or any entity that is treated as a body corporate for tax purposes; c) “Business" includes the performance of professional services and of other activities of an independent character.Article 4 Resident Outlines provisions relating to 1. "Resident" means any person liable to tax in residential status of a person either of the contracting states by virtue of his domicile / residence / place of management, etc as per laws of each state. 2. Tie-breaker rule in case of dual residency : a) Permanent Home b) Centre of vital interest c) Habitual Abode d) MAP (Mutual Agreement Procedure)Article 5 Permanent Establishment (PE) Defines what would constitute a 1. Essentially PE means a fixed place of PE and what would not be business / management - Branch, office, factory, considered as PE workshop, etc. 2. Does not include use of facility solely for storage, display, processing or delivery of goods. 3. Business carried out through broker / agent of an independent status is not considered as PE.Article 6 Income from immovable property Taxation of income of a resident 1. Primary right to tax is for the country where the earned from immovable property property is located - SOURCE RULE. situated in another contracting 2. Resident country may also tax, but would give state. credit to tax paid in the other country. Eg : Rental Income, direct use of a mineral deposit.Article 7 Business Profit Relates to business income 1. Business profits would be taxed in that other earned by an resident enterprise country, provided the person / enterprise has a of one country from business PE in such other country. That portion of the performed in another country. income which can be attributed to the PE will be taxed in the source country. 2. "Force of attraction" rule : Some DTAAs apply this rule. As per this rule, all income arising from all sources in the country where the foreign entity maintains a PE is subject to tax in that source country.Article 8 Shipping, Inland waterways and air Taxation of profits & gains from Taxable only in the country in which the place of transport operation of ships in effective management (POEM) of the ship / international and inland aircraft is situated. waterways and aircrafts Sec 44B - Presumptive taxation for non residents operating in international traffic. operating ships. Sec 44BBA - Presumptive taxation for non residents in the business of operating aircrafts. CA. P R Sreenivasan PSDY & Associates
  2. 2. OECD Model ConventionArticle 9 Associated Enterprises Scenario in which enterprise in In such cases the taxable income of the entity one country controls the would be determined by comparing with the management, control and capital income generated by similar companies which of another country directly / are independent - Transfer Pricing rules are indirectly. applied.Article 10 Dividend Paid by a resident company of 1. Primary right to tax is for the country of which one contracting state to a the recipient is resident - RESIDENCE RULE. resident of another contracting 2. Source country may also tax, but within certain state. limits prescribed in the DTAA, eg. 15% of the gross amount. 3. Resident country would give credit to tax withheld by source country.Article 11 Interest Interest on debt / securities / 1. Primary right to tax is for the country of which bonds arising in one contracting the recipient is resident - RESIDENCE RULE. state and paid to resident of 2. Source country may also tax, but within certain another contracting state. limits prescribed in the DTAA, eg. 15% of the gross amount. 3. Resident country would give credit to tax withheld by source country.Article 12 Royalty & Fees for technical "Royalty" means consideration 1. Right to tax is for the country of which the services (FTS) for the use of or for the right to recipient (i.e the licensor) or provider of the use, any copyright of literary, service is resident - RESIDENCE RULE. artistic or scientific work, 2. Source country may tax only in case the including patent, trademark, licensor / service provider has a PE in the other secret formula, etc. country, to the extent it can be attributed to the "FTS" includes payments for PE. technical services provided by experts.Article 13 Capital Gains Gains from alienation of 1. Right to tax is for the country where the movable or immovable property. property is located - SOURCE RULE. Eg : Land, House, Ship / 2. Resident country may also tax, but would give Aircraft, Shares, etc credit to tax paid in the other country.Article 14 Independent Personal Services 1. Covers income from 1. Right to tax is for the country of which the (IPS) professional services (eg. recipient is resident - RESIDENCE RULE. Lawyer, doctor, CA, etc) 2. Source country may also tax if the service 2. Art 14 was deleted in OECD provider has a "Fixed Base" in the source MC and clubbed the same with country. "Business Profits". However UN MC still continues this concept.Article 15 Income from employment Also known as Dependent 1. Right to tax vests with the country of residence Personal Service (DPS). Covers of the person employed. income by way of Salaries, 2. However, if the employment is exercised (i.e Wages, etc. activity is carried on) in the other country for a substantial period during the year, the source country would get right to tax him.Article 16 Directors fees Fees derived by member of a Right to tax is for the country of which the board and other similar company in which the person is a director is payments. resident. - SOURCE RULE.Article 17 Artistes & Sportsmen Includes income earned from 1. Article 17 overrides other articles. Whether the personal activities exercised by artiste / sportsman is performing as an employee "Artistes" (i.e theatre artist, or on his own, the income derived in the source entertainer, stage performer, TV country (i.e country where the activities are artiste, performing musician, etc) performed) are taxed by the source country. and "Sportsperson". 2. DTAAs, however, do not normally restrict the resident country from taxing the person as per domestic laws of resident country. 3. Resident country may give credit for the tax paid in the source country i.r.t the doubly taxed income. CA. P R Sreenivasan PSDY & Associates
  3. 3. OECD Model ConventionArticle 18 Pensions Covers pensions and other 1. Relates to pension or similar payments similar payments paid in received by resident of one country from the past consideration of past employer located in the other country. employment. 2. Art 18 provides absolute right to the resident country to tax such amounts received. (Exemption method of avoidance of double taxation)Article 19 Government Services Scenario in which the citizen / 1. Salary, wages, etc paid by government of one national of one country renders country (say India) to an individual resident in services on behalf of the another country (say UK) i.r.o services rendered government of that country in to that country (i.e India), would be taxed by the another country. government of that country itself (i.e India). Income covered : Salary, wages, 2. However, if the individual is a resident and etc national of the other country (say he is a UK citizen) and he became the resident of the other country not solely for purpose of his employment, the income shall be taxed by such other country.Article 20 Students Applies to students, trainees or 1. Payments received by the student for his apprentice who are residents of maintenance, education and training from outside the host country only for the the country are exempt from tax in the host purpose of education or training. country. 2. However, the income earned by the student from the host country itself is taxable in the host country itself.Article 21 Other Income Residuary article Normally such other income is taxed only in the country of residence.Article 22 Capital Taxation of capital (movable / 1. Tax on Immovable property will be imposed by immovable property) owned by the country in which it is located - i.e Principle of resident of one state in another Situs. state. 2. In case of movable property, the taxing rights would vest upon the resident country, unless the recipient of income has a PE in such other country.Article 23A Exemption Method Methods of granting relief for Method by which the resident state exempts the doubly taxed income tax resident from taxing the income already taxed by the other contracting state.Article 23B Credit Method Methods of granting relief for Methods by which the resident state allows doubly taxed income deduction from the domestic income tax to the extent of the taxes paid in relation to the same income in the other contracting state.Article 24 Non Discrimination Non discrimination of non Nationals of one country shall not be subjected in residents / non citizens in either another country to any taxation or any of the contracting states. requirement connected therewith, which is more burdensome as compared to nationals of that country in the same circumstances.Article 25 Mutual Agreement Procedure Reference of case to competent Where a person considers that the actions of one (MAP) authority or both of the Contracting States will result in taxation not in accordance with the provisions of this Convention, he may, present his case to the competent authority. The competent authorities of both states would together try and resolve the issue in the most suitable manner. CA. P R Sreenivasan PSDY & Associates
  4. 4. OECD Model ConventionArticle 26 Exchange of Information Exchange of information 1. The competent authorities shall share certain between two contracting state to specified information for carrying out the facilitate better tax provisions of the DTAA or of the domestic laws of administration in either states. the contracting states. 2. The authority may also exchange other sensitive information related to tax administration and compliance improvement such as Risk analysis techniques or tax avoidance or evasion schemes. 3. Any information received by a contracting state shall be treated as secret in the manner as obtained under the domestic laws of that State.Article 27 Assistance in Tax Collection Mutual co-operation for The contracting states shall lend assistance to enforcement of compliance with each other for collection and recovery of taxes. tax laws.Article 28 Members of diplomatic mission Privileges to members of Nothing in this Convention shall affect the fiscal diplomatic mission to remain. privileges of members of diplomatic missions under the general rules of international law or under the provisions of special agreements.Article 29 Territorial Extension Scope to extend applicability of 1. The applicability of the DTAA may be the treaty extended to any territorial extensions of either of the sates which have specifically been excluded or for which either of the states would be responsible for internationally relations.Article 30 Entry in to force Effective Date of the treaty. Treaty provisions becomes effective in respective contracting states on the dates specified in relevant treaty. CA. P R Sreenivasan PSDY & Associates