article 14 & 15 of oced mc

Certificate Course on International Tax

The Institute of Chartered Accountants of India

May 15, 2010

By:

CA. Gaurav Garg

JGARGEconomic Advisors

JGarg Economic Advisors Pvt. Ltd. 2

Article 14Independent Personal Services

OECD Model Tax Convention

1. Income derived by a resident of a Contracting State inrespect of professional services or other activities of anindependent character shall be taxable only in that stateunless he has a fixed base regularly available to him in theother Contracting State for the purpose of performing hisactivities. If he has such a fixed base, the income may betaxed in the other State but only so much of it as isattributable to that fixed base.

2. The term „professional services‟ includes especiallyindependent scientific, literary, artistic, educational orteaching activities as well as the independent activities ofphysicians, lawyers, engineers, architects, dentists andaccountants.


Overview

Applicable on professional activities of independentcharacter performed by the resident . For e.g. activities ofphysician, accountants etc.

In some DTAAs, Firms are also covered. For e.g. Australia,UK, USA etc.

In general, taxing rights are with State of Residence.

State of Source can tax if activities carried out through fixedbase.

State of Source can tax the income which is only attributableto fixed base.

Article 14 was deleted from the MTC in 2000.


„professional services‟ includes especially

The word especially shows that activities mentioned in thearticle are only illustrative and not exhaustive.

As per Explanation to section 194J, “professional services”means services rendered by a person in the course ofcarrying on a legal, medical, engineering or architecturalprofession or the profession of accountancy or technicalconsultancy or interior decoration or such other professionas is notified by the Board for the purpose of section 44AA.


„professional services‟ includes especially

A profession will imply any vocation carried on by anindividual, or group of individuals, requiring predominantlyintellectual skills, dependent on individual characteristics ofthe person(s) pursuing that vocation, requiring specialisedand advanced education or expertise.

[Graphite India Ltd. v. DCIT [2003] 186 ITD 384 (Kol –ITAT)]

Characteristics of professional services;

Requires less capital and labor

Requires more intellectual capital and personal expertise

Requires a certain qualified training or creative ability


IPS vis-à-vis Fee for Included Services

Specific provision over General provisions

“when an amount paid to an individual, or for that purpose afirm of individuals, resident in the United States of America, isfound to be covered by the scope of expression 'independentpersonal services' within meaning assigned in art. 15 of theIndo-US DTAA, it is immaterial whether or not the same iscovered by the scope of 'fees for included services', which incommon parlance is known as 'fees for technical services',under art. 12(4) of the Indo-US DTAA.”



Fixed Base

Fixed base is not defined in the convention.

E.g. in commentary – physician‟s consulting room, office ofan architect or a lawyer.

Base should be regularly available, not necessarily in use.

Base should serve the requirement of the profession.

Principle relating to Permanent Establishment can beapplied.

No minimum time limit.

Income attributable to the fixed base from which professionhas been carried out is only taxable.


Fixed Base

The 'entire factory premises and auxiliary space' beingavailable to Mr. R can only be for the purpose of carrying outthe specific assignment in connection with which he may havevisited the factory, but it is nobody's case that this place was'regularly available' to Mr. R for being used as a place fromwhich he carried out, or could have carried out, hisindependent professional activities, in the manner in which aprofessional will pursue his profession from his office, or, forthat purpose, a doctor will practice from his consultingchamber. …the connotations of 'fixed base', for the purposeof art. 15, are somewhat akin to a professional's chamberwhich, in broad terms, implies a place from where the personcan conduct his independent professional activities.



Type of persons covered

Depends upon the language in the relevant DTAA


Country Resident IndividualFirm of individuals

Australia Y Y

Austria Y

Bangledesh Y

Brazil Y

Canada Y Y

China Y

France Y Y

Germany Y

Japan Y

UK Y Y

US Y Y


Whether Companies are covered or not?

It is true that a „person‟ may include a company but thepersonal services would mean the services of a human beingor a living person as, in our opinion, no personal servicescould be rendered by a person other than individual or aliving person. [Christiani & Nielsen, 39 ITD 355, ITAT(Mum)]

UN MC supports the view that companies and other bodycorporate are excluded from the coverage of Article 14.

[Para 9 – Commentary on Article 14 of UN MC]



This article does not cover;

Professional services performed in employment (Article 15)

Independent activities of artistes and sportsmen (Article 17)

Income from immovable property, which was used in the courseof rendering professional services (Article 6)


UN Model Convention

In addition to case where there is a fixed base in the Stateof performance, UN Model Convention attributes primarythat State in the following cases;

if the person concerned‟s stay in the State of performance isequal to or more than 183 days in aggregate.

Length of stay is to be calculated by aggregating differentperiods of stay during the 12 month period.

Multiple counting of the common days is to be avoided

[Clifford Chance UK vs. Dy. CIT (2002) 76 TTJ , Bom - ITAT ]



Article 15Dependent Personal Services

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Stay > 182 days in the year

Resident

Yes

Stay > 60 days in the tax year and Stay > 365 days in the preceding 4 tax yearsYes

No

Non -Resident

NoNon –Resident for 9 out of

10 previous tax years

Stay in India < 730 days in preceding 7 tax years

Resident but not Ordinarily Resident

Resident & Ordinarily Resident

No

No

Yes

Yes

In case of individual –

being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship….or for the purpose of employment outside India…the word sixty days should be read as one hundred and two days….


OECD Model Convention

1. Subject to the provisions of Article 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrommay be taxed in that other State.

2. Not withstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if;



a) the recipient is present in the other state for a period or periodsnot exceeding in the aggregate 183 days in any 12 monthsperiod commencing or ending in the fiscal year concerned, and

b) the remuneration is paid by, or on behalf of, an employer who isnot a resident of the other State, and

c) the remuneration is not borne by a permanent establishment ora fixed base which the employer has in the other State.


OECD Model Convention – Lets again read it

salaries, wages and other similar remuneration derived by aresident of Contracting State (say India)

in respect of an employment

shall be taxable only in that State (India)

unless the employment is exercised in the otherContracting State (say USA).

If the employment is so exercised, such remuneration as isderived therefrom may be taxed in that other State (USA).



Not withstanding the provisions of paragraph 1,remuneration derived by a resident of a Contracting State(India) in respect of an employment exercised in the otherContracting State (USA) shall be taxable only in the first-mentioned State (India) if;

a) the recipient is present in the other state (USA) for a period orperiods not exceeding in the aggregate 183 days in any 12months period commencing or ending in the fiscal yearconcerned, and

b) the remuneration is paid by, or on behalf of, an employer who is

not a resident of the other State (USA), and

c) the remuneration is not borne by a permanent establishment ora fixed base which the employer has in the other State (USA).


Overview

Dependent Services may be presumed if a person – theemployee – makes his capacity for work available to another –the employer – and, in performing such activities, theemployee is obligated to follow the direction and instructionsof the employer.

“other similar remuneration” – Wide in scope.

For the application of treaty, it is irrelevant when and wherethe remuneration is paid; all that matters is whether itaccrues to the employee in respect of the period he spent inforeign jurisdiction.

The Place where the employment is exercised is the placewhere the employee is personally present for the purpose of

exercising his employment.


Not Applicable on

Professionals, freelancers

Working Partners

Director in his capacity as a Board member

Pension

Salary & pension to Government employees

Payment to student, teachers & professors


Taxing rights

State where employment is exercised can tax non-residentemployee if any of the following condition is satisfied;

a) Non - resident is present in the State during relevant year formore than 183 days.

(OR)

b) Remuneration to non- resident is paid by, or on behalf ofemployer who is resident of the State.

(OR)

c) Remuneration to non- resident is borne by PE or Fixed baseor business or trade which the employer has in the State.


Meaning of Employer

Not defined in the Convention.

Employer is the person having rights on the work producedand bearing the relative responsibility and risk.

Factors which can be considered while determining who isthe employer are;

Who bears the responsibility or risk for the results produced bythe employee‟s work

Who is having the authority to instruct the employees

Who is controlling the place where work is performed

Who has control over the facilities and other assets given toemployees for the performance of job, etc.

Dolphin Drilling Ltd. vs. ACIT [Delhi, ITAT – 121 TTJ 433]


Meaning of Employer

Indian Co. has two agreements with its Parent Co. in USA –collaboration Agreement and Secondment Agreement.Employees to work under the direct control of the India Co.Parent Co continue to pay salary but get the samereimbursed from India Co. As per the agreement at any timebe recalled by the Parent Co and India Co cannot alter thesalary.

AAR in case of AT&S India Pvt Ltd held that India Co is notthe employer.


may be taxed

Right of taxation is available to both the Contracting States.

“Going by the plain interpretation of the expression 'may betaxed' and the interpretation that has been placed in the saidcommentary, right of taxation is available to both theContracting States in regard to the employment income of theapplicant in accordance with the relevant domestic laws.”

[AAR - S.Mohan vs DIT, 212 CTR 100]


Computation of number of days‟

The Indian Income-tax Act is silent about subjectcomputation.

OECD Model Convention follows „days of physical presence‟method for the purpose of computation.

Under this method the following days are included;

part of a day

day of arrival

day of departure

all other days spent inside the state

Days that are to be excluded

transit between two different point outside the State of activity ifthe individual is present in the State of activity for less than 24hrs.


Computation of number of days‟

Days that are to be excluded

holiday spent outside the State of activity

short breaks (for whatever reason) spent outside the State ofactivity.

Small stay about half an hour can be excluded [ITO vsGautam Banerjee – Mum ITAT]


“expenditure borne” by P.E.

The State in which employment is exercised.

Remunerations would be considered borne by P.E. if it can be claimed as a deduction.

The expression „borne‟ may refer to either the liability which a person is liable to discharge or the actual sum paid by him in discharge of that liability.

[CIT v. Dalhousie Properties Ltd. [1984] 149 ITR 708 (SC)]

If P.E. is subject to presumptive taxation in India, it would be assumed that salary expenditure is borne by a P.E. [Sedco Forex Drilling Inc, vs. DCIT]


Employee Stock Option

The Article allows the State of source to tax the part of the stock option benefit that constitute remuneration derived from employment exercised in that State.

As per the Indian Income-tax Act, Stock Option benefits are taxable in the hands of the employees as perquisite with effect from April 2009.

Value of Benefit = FMV on date of Exercise

– Amount recovered from employee


Case Study 1

Mr. A, resident of India, worked in foreign jurisdiction for 100 days on offshore project, and

Employer of Mr. A is an Indian Co. and Indian Co. is not having any P.E. in foreign jurisdiction, and

Indian Co. is bearing the salary of Mr. A.


Case Study 2

Mr. A, resident of India, worked in foreign jurisdiction for 185 days on offshore project, and

Employer of Mr. A is an Indian Co. and Indian Co. is not having any P.E. in foreign jurisdiction, and

Indian Co. is bearing the salary of Mr. A.


Case Study 3

Mr. A, resident of India, deputed to Foreign Subsidiary for200 days by its employer,

Employer of Mr. A is an Indian Co. and Indian Co. is nothaving any P.E. in foreign jurisdiction, and

Salary for 200 days is cross charged from Foreign Subsidiaryby an Indian Co.


Case Study 4

Mr. A, resident of India, deputed to Foreign Subsidiary for100 days by its employer,

Employer of Mr. A is an Indian Co. and Indian Co. is nothaving any P.E. in foreign jurisdiction, and

Salary for 100 days is cross charged from Foreign Subsidiaryby an Indian Co.


Case Study 5

Mr. A, resident of India, deputed to Branch office in foreignjurisdiction for 100 days by its employer,

Employer of Mr. A is an Indian Co. and

Salary for 100 days is not cross charged from the branchoffice by an Indian Co.


Case Study 6

Mr.A employee of an Indian Co., deputed to UK Co. in UK for3 yrs. He continued to be on payroll of an Indian Co. andcontinued receiving salary in India. Indian Co. as a practiceuse to recover the amount on back to back basis from UKCo. Mr.A‟s stay in India was less than 60 days in all thesubject 3 yrs. and he also paid taxes in UK as per UK Laws.

The salary so paid by Indian Co is not taxable in India inaccordance with the DTAA, provided the same is taxed inUK.

[British Gas India (P) Ltd. vs. CIT – 287 ITR 462 – AAR]


Special provision for taxation of crew members of airlineand shipping company.

“ 3. Notwithstanding the preceding provisions of thisArticle, remuneration derived in respect of an employmentexercised aboard a ship or aircraft operated in internationaltraffic, or aboard a boat engaged in inland waterwaystransport, may be taxed in the Contracting State in whichthe place of effective management of the enterprise issituated.”

Stay of crew member in other contracting state is of noimportance.

Its applicable only on crew member and not on groundstaff.


India‟s DTAAs with other countries generally giving taxingright to the State of which employer is a “resident” insteadof State in which the place of effective management issituated.

The scope of Article 15(3) as contained in India‟s DTAA withKuwait is much wider, it applies to each and every employeeof the employer.


As per DTAAs, determination of Residential status of a person depends upon the domestic law of the country

There may be a case that as per domestic law of two contracting state, a person may be become “Resident” in both of the contracting state.

Question comes in this situation which country needs to forgo its taxing right in order to avoid double taxation.

Tie breaker rule applies – Article 4 (2).


As per the provision of the OECD Model Tax Convention, the tie-breaking rules have to be applied as per hierarchy of tests below;

Permanent home - State in which permanent home is available

Centre for vital interest - State which is centre for vital interest

Habitual abode - In which state the person has habitual abode

Nationality – State of which a person is a national

Mutual Agreement Procedure

Question comes in this situation which country needs to forgo its taxing right in order to avoid double taxation.

Tie breaker rule applies – Article 4 (2).


CA. Gaurav GargJGarg Economic Advisors

Pvt. Ltd.Email: [email protected]: +91 9899994934

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article 14 & 15 of oced mc

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