Title page 1

Contents 5

Volume I 8

INTRODUCTION 9

A. Historical background 9

B. Influence of the OECD Model Convention 12

C. Tax policy considerations that are relevant to the decision of whether to enter into a tax treaty or amend an existing treaty 13

D. Presentation of the Model Convention 14

MODEL CONVENTION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL 23

COMMENTARIES ON THE ARTICLES OF THE MODEL TAX CONVENTION 103

COMMENTARY ON ARTICLE 1. CONCERNING THE PERSONS COVERED BY THE CONVENTION 104

COMMENTARY ON ARTICLE 2. CONCERNING TAXES COVERED BY THE CONVENTION 199

COMMENTARY ON ARTICLE 3. CONCERNING GENERAL DEFINITIONS 208

COMMENTARY ON ARTICLE 4. CONCERNING THE DEFINITION OF RESIDENT 234

COMMENTARY ON ARTICLE 5. CONCERNING THE DEFINITION OF PERMANENT ESTABLISHMENT 265

COMMENTARY ON ARTICLE 6. CONCERNING THE TAXATION OF INCOME FROM IMMOVABLE PROPERTY 436

COMMENTARY ON ARTICLE 7. CONCERNING THE TAXATION OF BUSINESS PROFITS 444

COMMENTARY ON ARTICLE 8. CONCERNING THE TAXATION OF PROFITS FROM INTERNATIONAL SHIPPING AND AIR TRANSPORT 561

COMMENTARY ON ARTICLE 9. CONCERNING THE TAXATION OF ASSOCIATED ENTERPRISES 586

COMMENTARY ON ARTICLE 10. CONCERNING THE TAXATION OF DIVIDENDS 602

COMMENTARY ON ARTICLE 11. CONCERNING THE TAXATION OF INTEREST 675

COMMENTARY ON ARTICLE 12. CONCERNING THE TAXATION OF ROYALTIES 724

COMMENTARY ON ARTICLE 13. CONCERNING THE TAXATION OF CAPITAL GAINS 782

COMMENTARY ON ARTICLE 14. CONCERNING THE TAXATION OF INDEPENDENT PERSONAL SERVICES 821

COMMENTARY ON ARTICLE 15. CONCERNING THE TAXATION OF INCOME FROM EMPLOYMENT 827

COMMENTARY ON ARTICLE 16. CONCERNING THE TAXATION OF DIRECTORS' FEES 871

COMMENTARY ON ARTICLE 17. CONCERNING THE TAXATION OF ENTERTAINERS AND SPORTSPERSONS 875

COMMENTARY ON ARTICLE 18. CONCERNING THE TAXATION OF PENSIONS 901

COMMENTARY ON ARTICLE 19. CONCERNING THE TAXATION OF REMUNERATION IN RESPECT OF GOVERNMENT SERVICE 942

COMMENTARY ON ARTICLE 20. CONCERNING THE TAXATION OF STUDENTS 955

COMMENTARY ON ARTICLE 21. CONCERNING THE TAXATION OF OTHER INCOME 958

COMMENTARY ON ARTICLE 22. CONCERNING THE TAXATION OF CAPITAL 969

COMMENTARY ON ARTICLES 23 A AND 23 B. CONCERNING THE METHODS FOR ELIMINATION OF DOUBLE TAXATION 976

COMMENTARY ON ARTICLE 24. CONCERNING NON-DISCRIMINATION 1043

COMMENTARY ON ARTICLE 25. CONCERNING THE MUTUAL AGREEMENT PROCEDURE 1107

COMMENTARY ON ARTICLE 26. CONCERNING THE EXCHANGE OF INFORMATION 1219

COMMENTARY ON ARTICLE 27. CONCERNING THE ASSISTANCE IN THE COLLECTION OF TAXES 1270

COMMENTARY ON ARTICLE 28. CONCERNING MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS 1283

COMMENTARY ON ARTICLE 29. CONCERNING THE ENTITLEMENT TO BENEFITS 1289

COMMENTARY ON ARTICLE 30. CONCERNING THE TERRITORIAL EXTENSION OF THE CONVENTION 1401

COMMENTARY ON ARTICLES 31 AND 32. CONCERNING THE ENTRY INTO FORCE AND THE TERMINATION OF THE CONVENTION 1403

NON-OECD ECONOMIES' POSITIONS ON THE OECD MODEL TAX CONVENTION 1407

INTRODUCTION 1408

POSITIONS ON ARTICLE 1. (PERSONS COVERED) AND ITS COMMENTARY 1410

POSITIONS ON ARTICLE 2. (TAXES COVERED) AND ITS COMMENTARY 1413

POSITIONS ON ARTICLE 3. (GENERAL DEFINITIONS) AND ITS COMMENTARY 1417

POSITIONS ON ARTICLE 4. (RESIDENT) AND ITS COMMENTARY 1423

POSITIONS ON ARTICLE 5. (PERMANENT ESTABLISHMENT) AND ITS COMMENTARY 1432

POSITIONS ON ARTICLE 6. (INCOME FROM IMMOVABLE PROPERTY) AND ITS COMMENTARY 1474

POSITIONS ON ARTICLE 7. (BUSINESS PROFITS) AND ITS COMMENTARY 1478

POSITIONS ON ARTICLE 8. (INTERNATIONAL SHIPPING AND AIR TRANSPORT) AND ITS COMMENTARY 1494

POSITIONS ON ARTICLE 9. (ASSOCIATED ENTERPRISES) AND ITS COMMENTARY 1503

POSITIONS ON ARTICLE 10. (DIVIDENDS) AND ITS COMMENTARY 1507

POSITIONS ON ARTICLE 11. (INTEREST) AND ITS COMMENTARY 1518

POSITIONS ON ARTICLE 12. (ROYALTIES) AND ITS COMMENTARY 1526

POSITIONS ON ARTICLE 13. (CAPITAL GAINS) AND ITS COMMENTARY 1542

POSITIONS ON ARTICLE 14. (INDEPENDENT PERSONAL SERVICES) AND ITS COMMENTARY 1548

POSITIONS ON ARTICLE 15. (INCOME FROM EMPLOYMENT) AND ITS COMMENTARY 1551

POSITIONS ON ARTICLE 16. (DIRECTORS' FEES) AND ITS COMMENTARY 1555

POSITIONS ON ARTICLE 17. (ENTERTAINERS AND SPORTSPERSONS) AND ITS COMMENTARY 1558

POSITIONS ON ARTICLE 18. (PENSIONS) AND ITS COMMENTARY 1562

POSITIONS ON ARTICLE 19. (GOVERNMENT SERVICE) AND ITS COMMENTARY 1565

POSITIONS ON ARTICLE 20. (STUDENTS) AND ITS COMMENTARY 1566

POSITIONS ON ARTICLE 21. (OTHER INCOME) AND ITS COMMENTARY 1571

POSITIONS ON ARTICLE 22. (CAPITAL) AND ITS COMMENTARY 1573

POSITIONS ON ARTICLES 23 A AND 23 B. (EXEMPTION METHOD AND CREDIT METHOD) AND THEIR COMMENTARY 1575

POSITIONS ON ARTICLE 24. (NON-DISCRIMINATION) AND ITS COMMENTARY 1578

POSITIONS ON ARTICLE 25. (MUTUAL AGREEMENT PROCEDURE) AND ITS COMMENTARY 1587

POSITIONS ON ARTICLE 26. (EXCHANGE OF INFORMATION) AND ITS COMMENTARY 1594

POSITIONS ON ARTICLE 28. (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS) AND ITS COMMENTARY 1598

POSITIONS ON ARTICLE 29. (ENTITLEMENT TO BENEFITS) AND ITS COMMENTARY 1599

POSITIONS ON ARTICLE 30. (TERRITORIAL EXTENSION) AND ITS COMMENTARY 1600

POSITIONS ON ARTICLE 32. (TERMINATION) AND ITS COMMENTARY 1602

Volume II 1603

PREVIOUS REPORTS RELATED TO THE MODEL TAX CONVENTION 1606

Transfer Pricing, Corresponding Adjustments and the Mutual Agreement Procedure 1607

INTRODUCTION 1608

I. THE PROBLEM OUTLINED 1609

II. EXPERIENCE WITH PROCEDURES CURRENTLY AVAILABLE FOR AVOIDING OR RELIEVING DOUBLE TAXATION 1613

A. Corresponding adjustments 1613

B. Mutual agreement procedure 1615

III. POSSIBILITY OF MANDATORY CORRESPONDING ADJUSTMENTS SUBJECT TO ARBITRATION 1617

IV. POSSIBLE IMPROVEMENTS TO MORE SATISFACTORY USE OF EXISTING ARRANGEMENTS FOR AVOIDING DOUBLE TAXATION 1623

A. Corresponding adjustments 1624

B. Mutual agreement procedure 1625

1. Clarification of the scope of Article 25 of the OECD Model Double Taxation Convention 1626

2. Procedural aspects 1628

a) Time limits and the time factor 1628

b) Delegation of powers and joint consultation 1631

c) Taxpayer participation 1632

d) Package deals 1634

e) Unilateral information procedures 1634

3. Other suggestions 1635

V. CONCLUSIONS 1637

A. General conclusions 1637

B. Possible practical improvements to the mutual agreement procedure 1638

C. Final remarks 1639

Notes and References 1639

ANNEX: EXTRACTS FROM THE 1977 OECD MODEL DOUBLE TAXATION CONVENTION ON INCOME AND CAPITAL 1641

The Taxation of Income Derived from the Leasing of Industrial, Commercial or Scientific Equipment 1643

I. INTRODUCTION 1644

II. GENERAL BACKGROUND 1644

1. Economic aspects 1644

2. Legal aspects 1645

3. Aspects of national and international tax law 1646

III. THE TAXATION OF INCOME DERIVED FROM THE LEASING OF ICSE UNDER THE OECD MODEL CONVENTION AND BILATERAL TREATIES 1647

1. Effects of existing rules 1647

2. Problems arising under Articles 5 and 7 1647

3. Problems related to non-zero rates of tax at source on royalties 1647

a) The problem described 1647

b) The Committee's considerations 1647

c) Specific cases 1648

IV. SUGGESTIONS FOR A REVISION OF THE 1977 OECD MODEL 1649

V. CONCLUSIONS 1650

VI. RESERVATIONS 1650

ANNEX: PROBLEMS ARISING UNDER ARTICLES 5 AND 7 OF THE OECD MODEL WITH RESPECT TO EQUIPMENT LEASING 1651

The Taxation of Income Derived from the Leasing of Containers 1652

I. INTRODUCTION 1653

II. ECONOMIC BACKGROUND 1653

1. General 1653

2. Business performances 1654

3. Activities 1654

III. RULES FOR THE TAXATION OF INCOME DERIVED FROM THE LEASING OF CONTAINERS UNDER THE OECD MODEL CONVENTION 1655

1. Effects of existing rules 1655

2. Options for a future revision of the Model Convention 1656

IV. APPLICATION OF THE OECD MODEL CONVENTION 1657

1. General 1657

2. Guidelines for the application of Article 5 of the OECD Model (existence of a permanent establishment) 1657

Case A: Simple depots 1658

Case B: Depot-Agence 1659

Case C: Inspection and repair 1659

Case D: Operational branches 1660

Case E: Mere presence of containers 1660

3. Guidelines for the application of Article 7 of the OECD Model (profit allocation) 1660

V. PROBLEMS REGARDING ARTICLES ON ROYALTIES IN BILATERAL CONVENTIONS 1661

VI. CONCLUSIONS 1662

VII. RESERVATIONS 1663

Notes and References 1664

Thin Capitalisation 1665

I. THE PROBLEM STATED 1666

A. Options in corporate financing 1666

B. The choice of financing and the implications for taxation 1667

C. Tax policy aspects 1670

D. Scope of the report 1672

II. COUNTRY PRACTICES 1673

A. Excessive payments of interest 1673

B. Hybrid financing 1673

C. Approaches to the treatment of interest as a distribution of profit 1674

III. RELEVANCE OF TAX TREATIES 1675

A. The problems stated 1675

B. Consideration of the effect of tax treaties 1680

IV. PRACTICAL APPLICATION OF ARM'S LENGTH PRINCIPLE IN RELATION TO THIN CAPITALISATION 1688

V. CONCLUSIONS AND SUGGESTIONS 1692

A. General 1692

B. Summary of conclusions concerning the application and interpretation of tax treaties 1692

C. Final remarks 1695

Notes and References 1696

Double Taxation Conventions and the Use of Base Companies 1697

I. THE PROBLEM STATED 1698

A. Base companies 1698

B. Relevant considerations 1698

C. Terminology 1699

II. ANALYSIS OF FUNCTIONS AND USES OF A "BASE COMPANY" 1700

A. Sheltering of income 1700

B. Types of base companies 1701

III. COUNTERACTING MEASURES IN NATIONAL TAX LAWS 1703

A. General surveillance measures 1703

B. "Substance-over-form" provisions 1704

C. Subpart-F type counteracting legislation 1704

IV. IMPLICATIONS OF A CONVENTION BETWEEN THE STATE OF THE TAXPAYER AND THE STATE OF THE BASE COMPANY 1706

A. Treaty implications of general surveillance measures 1706

B. Treaty implications of "substance-over-form" provisions 1708

C. Treaty implications of counteracting measures 1710

V. IMPLICATIONS OF CONVENTIONS WITH THIRD STATES 1713

A. Third country income: basic approaches 1713

B. Third country income: conclusions and recommendations 1715

C. Relationships with non-source countries 1717

VI. QUESTIONS OF SECONDARY SHELTERING 1719

1. Reinvestment in a country other than the country of residence 1719

2. Reploughing by loans to the shareholder company 1719

3. "Repatriation" as dividends or other tax-exempt income 1720

4. Extraction of income as capital gain 1722

5. Final remarks 1722

VII. COMBATING TAX AVOIDANCE AND TAXPAYER PROTECTION 1723

VIII. FINAL REMARKS 1725

ANNEX I. INTERNATIONAL COUNTERACTING MEASURES: AN OVERVIEW 1728

Double Taxation Conventions and the Use of Conduit Companies 1729

I. THE PROBLEM STATED 1730

A. General 1730

B. Conduit companies 1730

C. Examples 1731

D. Main characteristics of "conduit configurations" 1732

E. Other aspects of the problem 1733

F. Bona fide transactions 1733

G. Similar cases 1733

H. Search for solutions 1734

II. THE 1977 OECD MODEL CONVENTION: GENERAL APPROACH AND SPECIFIC PROVISIONS 1734

A. The general situation 1734

B. Anti-avoidance provisions 1735

III. BILATERAL TREATIES: PROBLEMS FOR NEGOTIATIONS 1737

A. General policy approaches 1737

1. Treaty policy vis-à-vis low-tax countries 1737

2. Specific provisions relating to low-tax countries 1737

B. Specific provisions relating to conduit companies 1738

1. The "look-through" approach 1738

2. The exclusion approach 1739

3. The subject-to-tax approach 1740

4. The channel approach 1743

5. Bona fide provisions 1744

IV. APPLICATION OF EXISTING TREATIES 1745

A. General considerations 1745

B. Handling of artificial tax avoidance 1745

V. FINAL REMARKS 1746

ANNEX I. DESCRIPTION OF "CONDUIT" SITUATIONS 1747

ANNEX II. EXAMPLES OF BILATERAL CLAUSES 1748

The Taxation of Income Derived from Entertainment, Artistic and Sporting Activities 1752

INTRODUCTION 1754

I. THE PROBLEM STATED 1754

A. The business 1755

B. Scope of the report 1756

C. Main principles 1756

II. THE NEED FOR INFORMATION 1757

A. Country experiences 1757

B. Sources of information 1758

III. ASSESSMENT AND COLLECTION OF TAX UNDER DOMESTIC LEGISLATION 1759

A. Problems in taxing non-resident artistes and athletes 1759

1. Dependent services 1759

2. Independent services 1760

3. Other 1761

B. Problems in taxing resident artistes and athletes 1761

C. Measures taken or under consideration 1762

1. Measures mainly directed at improving compliance by residents 1762

2. Measures concerning non-residents 1763

3. Counteracting the abusive use of "artiste" companies 1765

4. Some policy issues 1766

IV. THE INTERPRETATION AND APPLICATION OF BILATERAL DOUBLE TAXATION CONVENTIONS 1767

A. Introduction 1767

B. "Personal Scope" of Article 17 1768

1. Definitions of "artistes" and "athletes" 1768

2. Support staff, impresarios 1769

3. Interpretation of the expression "personal activities" 1769

C. Income covered by Article 17 1770

1. Income other than remuneration accruing to artistes or athletes 1770

2. Income paid to a person other than the artiste or athlete 1771

D. Other relevant issues 1773

1. Computation of income 1773

2. Allocation issues 1773

3. Cultural events such as those supported from public funds 1773

4. Subsidiary right to tax for the country of residence 1774

5. Triangular cases 1775

V. CONCLUSIONS 1775

A. Suggested improvements in the domestic sphere 1775

B. Suggested improvements in the international sphere 1776

1. Increased exchange of information 1776

2. Assistance in collection 1777

Notes and References 1777

ANNEX: ARTICLE 17 1779

Tax Treaty Override 1781

I. THE PROBLEM 1782

II. THE LEGAL ANALYSIS OF TREATY OVERRIDE 1783

i) Preliminary remarks 1783

ii) The obligation to perform treaties under international law 1784

iii) The rank of treaty obligations under domestic law 1785

iv) Interpretation and application of treaties 1786

III. THE REMEDIES UNDER INTERNATIONAL LAW IN CASE OF NON-COMPLIANCE BY A PARTY WITH ITS TREATY OBLIGATIONS 1787

IV. CASES OF NATIONAL TREATY OVERRIDE 1788

V. THE POSITION OF THE COMMITTEE ON FISCAL AFFAIRS 1789

VI. SUGGESTIONS FOR ACTION 1791

Notes and References 1791

ANNEX A. RECOMMENDATION OF THE COUNCIL CONCERNING TAX TREATY OVERRIDE 1793

The 183 Day Rule: Some Problems of Application and Interpretation 1794

I. INTRODUCTION 1795

II. THE 183 DAY RULE IN THE MODEL CONVENTION 1795

A. The rule 1795

B. Persons to whom the 183 day rule applies 1796

C. Calculation of the 183 day period 1796

i) Methods used 1797

ii) Days included or excluded from the calculation 1797

iii) Comments and suggestions on the calculation of the period 1799

D. Work concentrated in only one State 1801

E. The proper fiscal year 1801

F. The residence of the employer 1801

G. "Is not borne by a permanent establishment" 1802

H. Double taxation and double exemption 1802

I. Conclusion 1802

III. PROPOSED CHANGES TO THE COMMENTARY ON ARTICLE 15 1803

ANNEX I. REPLIES TO THE QUESTIONNAIRE ON THE 183 DAY RULE 1805

ANNEX II. RECOMMENDATION OF THE OECD COUNCIL 1811

The Tax Treatment of Software 1812

I. INTRODUCTION 1813

II. CHARACTERISTICS OF SOFTWARE 1813

III. DEVELOPMENT OF SOFTWARE 1814

IV. TRANSFER OF SOFTWARE 1815

V. MULTINATIONAL ENTERPRISES AND SOFTWARE USE 1816

VI. PRACTICE OF MEMBER COUNTRIES 1817

Legal classification 1817

Tax classification - source country 1818

Tax classification - country of residence 1819

Double taxation conventions 1819

VII. THE APPLICATION OF THE MODEL CONVENTION 1820

VIII. PROBLEMS RELATING TO SOFTWARE PAYMENTS 1821

Problems described 1821

Analysis 1821

Mixed contracts 1824

IX. CONCLUSIONS 1825

APPENDIX 1. QUESTIONNAIRE ON TAX TREATMENT OF SOFTWARE 1827

APPENDIX 2. REPLIES TO QUESTIONNAIRE ON TAX TREATMENT OF SOFTWARE 1830

APPENDIX 3. PROPOSED AMENDMENTS TO THE COMMENTARY ON THE MODEL TAX CONVENTION 1842

Triangular Cases 1845

I. INTRODUCTION 1846

II. OUTLINE OF THE PROBLEM 1846

A. Practical importance of the typical triangular case 1846

B. Tax problems arising in the typical triangular case 1847

i) State R taxes the profits of the permanent establishment 1847

ii) State R exempts the profits of the permanent establishment 1848

III. DISCUSSION OF POSSIBLE SOLUTIONS 1849

A. Discussion based on the Model Convention and Commentary 1850

B. Practice in member countries 1850

i) General 1850

ii) Position concerning the application of the treaty between State P and State S 1852

C. Assessment of possible solutions 1852

i) Elimination of double taxation 1852

ii) Tax avoidance 1855

IV. CONCLUSION 1856

V. RECOMMENDATION 1856

Proposed changes to the Commentary 1857

The Tax Treatment of Employees' Contributions to Foreign Pension Schemes 1860

I. INTRODUCTION 1861

II. BACKGROUND 1861

III. EXISTING TREATIES 1862

IV. AIM OF A PROVISION FOR INCLUSION IN THE COMMENTARY 1863

V. FORM OF A PROVISION FOR INCLUSION IN THE COMMENTARY 1863

VI. CONDITIONS OF A PROVISION FOR INCLUSION IN THE COMMENTARY 1864

Characteristics of the employee 1864

Residence test 1864

Nationality/citizenship test 1865

Time limit 1866

Characteristics of the contributions 1867

Scheme recognised in the home country 1867

Corresponding schemes 1867

Existing membership 1868

Characteristics of relief 1868

VII. OTHER CONSIDERATIONS 1869

VIII. SUGGESTED PROVISION 1869

IX. CONCLUSION 1870

ANNEX A. PROVISIONS IN BILATERAL TAX CONVENTIONS 1871

ANNEX B. SUMMARY OF THE SIX PROVISIONS ALLOWING RELIEF FOR PENSION 1873

ANNEX C. SUGGESTED ADDITIONS TO THE COMMENTARY ON ARTICLE 18 CONCERNING THE TAX TREATMENT OF CONTRIBUTIONS... 1874

Attribution of Income to Permanent Establishments 1881

I. INTRODUCTION 1882

II. ISSUES RAISED BY THE TAX TREATMENT OF PERMANENT ESTABLISHMENTS 1884

A. The recognition of profits or losses 1884

B. Contractual freedom or limited recognition of arrangements concluded between permanent establishments and the rest of... 1888

C. Principle of a distinct and separate enterprise: arm's length price or allocation of expenses 1890

C.1. Goods, technology and trademarks, services, financial transactions 1890

C.2. Attribution of a capital endowment, capital raised from external sources (borrowing) or own funds in the form of interest-bearing loans 1895

D. Taxation of actual profits; consolidation 1897

E. Special cases 1898

F. Attribution of profits and principle of non-discrimination 1898

G. Methods for the elimination of double taxation 1898

III. CONCLUSIONS AND SUGGESTIONS 1900

ANNEX I. XL IFA CONGRESS, NEW YORK 1986 1902

ANNEX II. QUESTIONNAIRE ON THE ISSUES RAISED BY THE TAX TREATMENT OF PERMANENT ESTABLISHMENTS 1904

A. The recognition of profits or losses 1904

B. Contractual freedom or limited recognition of arrangements concluded between permanent establishments and the rest... 1905

C. Principle of a distinct and separate enterprise (Article 7, OECD Model Tax Convention); arm's length principle for intra-company... 1905

D. Taxation of actual profits; consolidation 1906

E. Special cases (excluding those mentioned in Article 5, paragraph 4 of the OECD Model Tax Convention) 1907

F. Attribution of profits and principle of non-discrimination 1907

G. Methods for the elimination of double taxation 1907

ANNEX III. PROPOSED MODIFICATIONS TO THE COMMENTARY ON ARTICLE 7 OF THE MODEL TAX CONVENTION 1908

Tax Sparing: A Reconsideration 1917

I. INTRODUCTION 1920

a) The changing global economic framework 1920

b) Tax sparing - a time for reconsideration? 1922

c) The growing importance of the Model Tax Convention outside the OECD area 1923

II. THE HISTORICAL DEVELOPMENT OF TAX SPARING PROVISIONS 1924

III. TRADITIONAL COUNTRY POSITIONS ON THE ISSUE OF TAX SPARING 1926

IV. TAX SPARING: AN EMERGING CONSENSUS ON THE NEED FOR A RE-EVALUATION 1927

a) The new global economic framework 1927

b) Tax sparing as an instrument of foreign aid 1928

c) Tax sparing may encourage an excessive repatriation of profits 1928

d) The basic assumption underlying tax sparing is invalid 1929

e) Effectiveness of tax incentives 1931

f) Abuse of tax sparing provisions 1933

g) Administrative difficulties 1934

V. RECENT TRENDS IN TAX SPARING PROVISIONS 1935

a) Categories of taxpayers 1935

b) Categories of income 1935

c) Limitation of the "deemed paid tax" 1936

d) Duration of tax sparing 1936

e) Types of countries 1936

f) General anti-abuse provisions 1937

VI. BEST PRACTICES IN DESIGNING TAX SPARING PROVISIONS 1937

a) Definition of tax incentives 1937

b) Definition of activities 1938

c) Tax rates 1938

d) Income exempt under domestic law or treaty 1938

e) Anti-abuse clause 1939

f) Time limitation 1939

g) Controlled foreign company legislation 1940

VII. RECOMMENDATIONS 1940

Notes 1942

Bibliography 1942

ANNEX I. MEMBER COUNTRY TAX SPARING PROVISIONS REFERRED TO IN THE REPORT 1943

ANNEX II. TAX SPARING PROVISIONS BETWEEN OECD MEMBER COUNTRIES 1956

ANNEX III. TAX SPARING PROVISIONS IN TREATIES BETWEEN OECD MEMBER AND CERTAIN NON-MEMBER COUNTRIES 1959

ANNEX IV. TAX AVOIDANCE SCHEME I 1961

ANNEX V. TAX AVOIDANCE SCHEME II 1966

ANNEX VI. ANTI-ABUSE PROVISIONS 1967

ANNEX VII. THE COMMENTARY ON ARTICLE 23 B OF THE OECD MODEL TAX CONVENTION 1968

ANNEX VIII. RECOMMENDATION OF THE COUNCIL ON THE GRANTING AND DESIGN OF TAX SPARING IN TAX CONVENTIONS 1970

The Application of the OECD Model Tax Convention to Partnerships 1971

I. INTRODUCTION 1973

I.1. Background 1973

I.2. Organisation of the report 1973

II. APPLICATION OF TAX CONVENTIONS BY THE STATE OF SOURCE 1974

II.1. Preliminary remarks on the tax treatment of foreign entities 1974

II.2. Differences that affect the tax treatment of partnerships 1975

II.3. When is a partnership entitled to the benefits of a tax convention? 1977

II.4. The partners' entitlement to treaty benefits when the partnership is not a resident 1982

II.5. Entitlement to treaty benefits when one State treats the partnership as a taxable entity 1986

II.6. Application of the Convention where the benefits are dependent upon certain characteristics or attributes of the taxpayer 1992

III. APPLICATION OF TAX CONVENTIONS BY THE STATE OF RESIDENCE 1996

III.1. Conflicts of qualification 1996

III.2. Problems arising from conflicts of income allocation 2004

Notes and References 2008

ANNEX I. PROPOSED CHANGES TO THE OECD MODEL TAX CONVENTION 2009

ANNEX II. RESERVATIONS BY FRANCE, GERMANY, THE NETHERLANDS, PORTUGAL AND SWITZERLAND 2020

ANNEX III. LIST OF ENTITIES IN SELECTED COUNTRIES 2025

Issues Related to Article 14 of the OECD Model Tax Convention 2061

INTRODUCTION 2063

I. THE ELIMINATION OF ARTICLE 14 2063

II. WHICH ACTIVITIES FALL WITHIN ARTICLE 14? 2064

III. WHICH ENTITIES FALL WITHIN ARTICLE 14? 2065

IV. WHAT ARE THE PRACTICAL DIFFERENCES CONCERNING TAXATION UNDER ARTICLES 7 AND 14? 2066

a) Are there differences between the concepts of "permanent establishment" and "fixed base"? 2067

b) Does Article 14 restrict source taxation to income from services performed personally by the taxpayer? 2069

c) Are the specific rules of paragraphs 2-7 of Article 7 rules applicable to Article 14? 2073

d) Are there differences in the source taxation rights granted under Articles 7 and 14? 2074

e) Does the distinction between Articles 7 and 14 have any impact on domestic law distinctions? 2074

V. DOES THE ELIMINATION OF ARTICLE 14 REQUIRE CHANGES TO ARTICLE 7? 2075

Notes 2075

ANNEX: CHANGES TO THE MODEL TAX CONVENTION RESULTING FROM THE DECISION TO ELIMINATE ARTICLE 14 2076

Changes to the Articles 2076

Changes to the Commentary 2079

Restricting the Entitlement to Treaty Benefits 2097

1. INTRODUCTION 2098

2. NATURE OF THE WORK DONE BY THE COMMITTEE 2098

3. USE OF THE CONCEPTS OF PLACE OF EFFECTIVE MANAGEMENT AND PERMANENT ESTABLISHMENT 2099

a) Changes adopted by the Committee 2099

b) Background 2100

4. NEW PROVISIONS AIMED AT RESTRICTING THE BENEFITS OF TAX CONVENTIONS 2102

a) Changes adopted by the Committee 2102

b) Background 2112

5. RESTRICTION OF THE BENEFITS OF TAX CONVENTIONS AFTER THE INTRODUCTION OF A NEW REGIME 2112

a) Changes adopted by the Committee 2113

6. CLARIFICATION OF THE CONCEPT OF "BENEFICIAL OWNERSHIP" 2114

a) Changes adopted by the Committee 2114

b) Background 2117

Notes 2119

Treaty Characterisation Issues Arising from E-Commerce 2120

1. INTRODUCTION 2121

2. OVERVIEW OF THE REPORT 2121

3. BUSINESS PROFITS AND ROYALTIES 2122

a) Business profits and payments for the use of, or the right to use, a copyright 2122

b) Business profits and payments for know-how 2125

c) Business profits and payments for the use of, or the right to use, industrial, commercial or scientific equipment 2129

4. PROVISION OF SERVICES 2131

5. TECHNICAL FEES 2133

6. MIXED PAYMENTS 2135

Notes 2136

ANNEX 1. CHANGES TO THE COMMENTARY ON ARTICLE 12 OF THE OECD MODEL TAX CONVENTION 2137

ANNEX 2. ANALYSIS OF VARIOUS CATEGORIES OF TYPICAL E-COMMERCE TRANSACTIONS 2141

ANNEX 3. OBSERVATIONS BY GREECE AND SPAIN 2155

Issues Arising under Article 5 (Permanent Establishment) of the Model Tax Convention 2157

1. INTRODUCTION 2159

2. "FIXED PLACE OF BUSINESS" (PARAGRAPHS 1 AND 2) 2160

a) Issue 2.1: "Fixed place of business": the geographical link requirement 2160

b) Issue 2.2: "Fixed place of business": time requirement 2162

c) Issue 2.3: Relationship between the enterprise and the fixed place of business 2165

d) Issue 2.4: Place of management 2168

e) Issue 2.5: Active v. passive activity 2169

f) Issue 2.6: Cables and pipelines Issue 2171

g) Issue 2.7: Permanent establishment in relation to an enterprise 2173

3. BUILDING SITES AND CONSTRUCTION OR INSTALLATION PROJECTS (PARAGRAPH 3) 2174

a) Issue 3.1: Supervisory activities and the aggregation of construction contracts 2174

b) Issue 3.2: Computation of the construction period 2175

c) Issue 3.3: Scope of the reference to "installation project" 2176

d) Issue 3.4: Multiple installation projects 2176

e) Issue 3.5: Renovations 2177

f) Issue 3.6: Coherent geographic whole 2178

g) Issue 3.7: Place of management of several construction sites 2178

4. PREPARATORY AND AUXILIARY ACTIVITIES (PARAGRAPH 4) 2180

a) Issue 4.1: Use of "or" in paragraph 25 2180

b) Issue 4.2: Clarification of the "deeming" language 2181

c) Issue 4.3: Storage facilities 2182

5. AGENCY PERMANENT ESTABLISHMENTS (PARAGRAPHS 5 AND 6) 2183

a) Issue 5.1: Level of presence of the agent in the source country 2183

b) Issue 5.2: Agent with implied contractual authority 2185

c) Issue 5.3: Habitually exercising an authority to conclude contracts 2186

d) Issue 5.4: Commercial representations 2187

e) Issue 5.5: Meaning of independence 2188

f) Issue 5.6: Agent with only one principal 2191

g) Issue 5.7: Agents acting in the ordinary course of their business 2192

ANNEX 1. CHANGES TO THE COMMENTARY 2195

ANNEX 2. OBSERVATIONS BY THE CZECH REPUBLIC 2205

Cross-border Income Tax Issues Arising from Employee Stock-Option Plans 2207

INTRODUCTION 2209

BACKGROUND ON ESOPS 2209

Stock-option 2209

ESOP 2209

Benefit to the employee 2210

Value of a stock-option 2210

Vesting of an option 2210

ISSUES RELATED TO THE EMPLOYEE 2211

Timing mismatch in taxing the employment benefit 2211

Distinguishing employment income from capital gains 2215

Difficulty in determining to which services the option relates 2218

Employment services that are provided in more than one State 2222

Multiple residence taxation 2225

Compliance issues 2228

Alienation of stock-options as a result of a merger or acquisition and replacement of options 2229

Valuation issues 2230

The granting of stock-options to members of a board of directors 2230

ISSUES RELATED TO THE EMPLOYER 2232

Deductibility of the costs of ESOPs 2232

Remuneration "borne by" a permanent establishment 2233

Notes 2234

ANNEX 1. GRAPHICAL ILLUSTRATION 2236

ANNEX 2. CHANGES TO THE OECD MODEL TAX CONVENTION 2237

Improving the Resolution of Tax Treaty Disputes 2246

INTRODUCTION 2247

A. ARBITRATION OF UNRESOLVED ISSUES IN A MUTUAL AGREEMENT CASE 2248

Proposed paragraph 2249

Proposed Commentary on the new paragraph 2250

ANNEX: SAMPLE MUTUAL AGREEMENT ON ARBITRATION 2259

B. OTHER PROPOSED CHANGES TO THE COMMENTARY ON ARTICLE 25 OF THE OECD MODEL TAX CONVENTION 2276

1. Time limitations 2277

2. Probability of taxation not in accordance with the Convention 2280

3. Denial of access to the MAP 2282

4. Suspension of collection of tax 2284

5. Suspension or remission of interest and penalties 2286

6. MAP and corresponding adjustments 2287

7. Relationship between domestic law and the MAP 2288

8. Scope of paragraph 3 of Article 25 2291

C. FOLLOW-UP TO OTHER PROPOSALS OF THE 2004 PROGRESS REPORT 2294

1. Manual on Effective Mutual Agreement Procedure 2294

2. MAP reporting framework 2294

3. Partial double taxation relief 2295

4. Consistency, competitiveness and non-discrimination 2295

5. Secondary adjustments 2296

6. Triangular cases 2296

ANNEX 1. FOLLOW-UP WORK ON THE PROPOSALS INCLUDED IN THE 2004 PROGRESS REPORT 2297

ANNEX 2. MAP PROGRAM STATISTICS FOR [2006] YEAR 2304

Application and Interpretation of Article 24 (Non-Discrimination) 2308

INTRODUCTION 2309

A. GENERAL ISSUES 2309

A-1. General comments on the principles underlying Article 24 2309

A-2. Provisions applicable to groups of companies 2313

A-3. Discrimination against one taxpayer or a class of taxpayers? 2317

B. ISSUES RELATED TO PARAGRAPH 1 2318

B-1. Application of paragraph 1 to companies 2318

B-2. Interpretation of the term "in the same circumstances" 2321

B-3. National treatment versus most-favoured-nation 2322

C. ISSUES RELATED TO PARAGRAPH 3 2322

C-1. Structure and rate of tax for purposes of paragraph 3 2322

C-2. Comparable circumstances for the purposes of paragraph 3 2326

C-3. Application of paragraph 3 to specific domestic provisions 2328

C-4. Paragraph 3 and transfer pricing rules 2332

C-5. Tax rates applicable to the profits attributable to a permanent establishment 2332

D. ISSUES RELATED TO PARAGRAPH 4 2334

D-1. Deductions covered by paragraph 4 2334

E. ISSUES RELATED TO PARAGRAPH 5 2336

E-1. Thin capitalisation rules 2336

E-2. Interpretation of the term "other similar enterprises" 2338

F. ISSUES RELATED TO PARAGRAPH 6 2339

F-1. Application of Article 24 to all taxes notwithstanding Article 2 2339

ANNEX: ISSUES THAT REQUIRE A MORE FUNDAMENTAL ANALYSIS OF THE ISSUE OF NON-DISCRIMINATION AND TAXATION 2340

Tax Treaty Issues Related to REITs 2345

INTRODUCTION 2346

APPLICATION OF TAX TREATIES TO REIT INVESTMENTS 2347

Classification of the income of a REIT 2347

Treaty entitlement of the REIT 2347

Treaty entitlement of the REIT investor 2348

Who is the relevant taxpayer for purposes of tax treaties? 2348

How should REIT distributions to foreign investors be treated under tax treaties? 2349

Issues arising from this approach 2354

Definition of REIT 2354

Distinction between large and small investor 2355

Taxation of distributions to large investors 2355

Distribution of capital gains 2355

Treatment of capital gains on interests in a REIT 2356

Relief of double taxation in the State of residence 2357

Application of the participation exemption / EU parent-subsidiary directive 2358

Distributions to tax-exempts (pension funds) 2358

Potential for base erosion and access to interest treatment 2358

Investment by a foreign REIT 2359

ANNEX: TECHNICAL ANALYSIS OF VARIOUS APPROACHES PUT FORWARD FOR EXTENDING DOMESTIC REIT REGIMES TO FOREIGN REITS 2362

Subsequent withholding tax 2362

Deeming the foreign REIT to be a domestic REIT for tax treaty purposes 2362

Deeming the foreign REIT to have a permanent establishment 2362

Application of these approaches to foreign REITs investing directly in domestic immovable property 2363

Application of these approaches to foreign REITs investing in domestic REITs 2364

The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles 2366

EXECUTIVE SUMMARY 2367

I. INTRODUCTION 2368

II. BACKGROUND 2370

2.1. Benefits of investing through CIVs 2370

2.2. Structure of the CIV industry 2371

III. APPLICATION OF CURRENT TREATY RULES TO CIVS 2373

3.1. Can a CIV claim the benefits of tax treaties on its own behalf? 2373

a) Is a CIV a "person"? 2373

b) Is a CIV a "resident of a Contracting State"? 2374

c) Is a CIV the "beneficial owner" of the income it receives? 2375

3.2. If a CIV cannot claim benefits, is there any relief for the investors? 2377

3.3. Relief from double taxation for income received by CIVs 2378

IV. POLICY ISSUES RAISED BY CURRENT TREATMENT OF CIVS 2380

4.1. Potential for differential treatment of economically similar CIVs 2381

4.2. Potential for treaty shopping through CIVs 2381

4.3. Potential deferral of income 2383

4.4. Loss of preferential benefits 2384

V. PROPOSED CHANGES TO THE COMMENTARY TO ADDRESS CIVS 2384

Tax Treaty Issues Related to Emissions Permits/Credits 2397

1. BACKGROUND TO EMISSIONS PERMITS, CERS AND ERUS 2398

2. TAX TREATY ISSUES RELATED TO EMISSIONS PERMITS/CREDITS 2400

A. The issuance of emissions permits 2400

B. The issuance of CERs and ERUs 2401

C. The trading of emissions permits/credits 2405

1. Article 7 (Business Profits) 2405

2. Article 13 (Capital Gains) 2406

3. Article 6 (Income from immovable property) 2406

4. Article 8 (Shipping, Inland Waterways Transport and Air Transport) and paragraph 3 of Article 13 2409

5. Article 12 (Royalties) 2409

6. Article 21 (Other Income) 2410

7. Possible disagreements as to the proper treaty treatment 2410

3. PROPOSED CHANGES TO THE COMMENTARY 2411

Notes 2413

Issues Related to Article 17 of the OECD Model Tax Convention 2416

INTRODUCTION 2417

PART 1. COMMENTS NOT SPECIFICALLY RELATED TO THE PROPOSALS 2417

1. Suggestion that Article 17 should be deleted 2417

2. Suggestion that Article 17 should be substantially amended 2418

3. Suggestion that Article 17 should not apply to entertainers who are employed 2420

4. Comments according to which many entertainers earn small amounts of income and not recognising expenses results in excessive taxation 2420

5. Suggestion that treaties do not eliminate double taxation if States do not agree on the interpretation of Article 17 2420

6. Special issues for theatre producers (non-profit companies should not be taxed and the part of the income of artistes that does not... 2421

7. Other comments not specifically related to the proposals included in the discussion draft 2421

PART 2. PROPOSALS RELEASED IN APRIL 2010 AND COMMENTS DIRECTLY RELATED TO THESE PROPOSALS 2421

1. What is an entertainer or sportsperson? 2421

2. Application of Article 17 to race prizes 2423

3. What are the personal activities of an entertainer or sportsperson as such? 2424

Activities of models and public speakers 2424

Preparation and training activities 2426

Activities of producers and promoters and need to avoid double taxation when paragraph 2 is applied 2427

Alternative provision for the members of a sports team 2429

4. Source and allocation rules for activities performed in various countries 2430

5. Special categories of payments 2433

Merchandising payments and prizes and awards paid by a national federation, association or league 2433

Broadcasting payments 2435

Payments for image rights 2436

ANNEX: CONSOLIDATED VERSION OF THE CHANGES TO ARTICLE 17 AND ITS COMMENTARY INCLUDED IN THIS REPORT 2438

Notes 2448

APPENDIX: RECOMMENDATION OF THE OECD COUNCIL CONCERNING THE MODEL TAX CONVENTION ON INCOME AND ON CAPITAL 2449

Boxes 1921

Box I. Example 1921

Box II. Example 1922

Box III. Pakistan-US (1957) - Article XV 1924

Box IV. (Omit) 1929

Box V. (Omit) 1930