C h a l l e n g e U s

Panel discussion on the UN Model Convention

Chairman: Mr. G. E. Veerabhadrappa, Chairman, ITAT

Speakers: Mr. Pramod Kumar, Member, ITAT

Prof. Roy Rohatgi

Mr. T. P. Ostwal

Ms. Shefali Goradia , Partner, BMR Advisors

IFA, MumbaiJuly 6-7, 2012

All

right

s re

serv

edA

ll rig

hts

rese

rved

History of the UN Model Convention

1967: Economic and Social Council of the UN requested Secretary-General to set up

an ad hoc group comprising experts and tax administrators nominated by

Governments, but acting in their personal capacity, both from developed and

developing countries to explore ways and means for facilitating the conclusion of tax

treaties between developed and developing countries and formulation of guidelines

and techniques

1979: Manual for the Negotiation of Bilateral Tax Treaties between Developed and

Developing Countries was published

1980: The United Nations Model Double Taxation Convention between Developed

and Developing Countries was published

December 1997: The Eighth Meeting of the Group of Experts held in Geneva

established a Focus Group to proceed with the revision and update of both the UN

Model Double Taxation Convention and the Manual for the Negotiation of Bilateral

Tax Treaties between Developed and Developing Countries.

| 3Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

History of the UN Model Convention

1999: Amended and consolidated draft of the UN Model Convention was adopted

2000: Examination by Steering Committee

2001: Revised UN Model Convention published after taking into account

globalization and changes to international tax policies

2011: UN Model Convention updated

| 4Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Salient amendments in the 2011 UN Model Convention

Amendment to Article 25 (Mutual Agreement Procedure) providing for mandatory

binding arbitration when a dispute arising under a treaty cannot be resolved under the

usual Mutual Agreement Procedure (MAP)

New version of Article 26 (Exchange of Information) which confirms and clarifies the

importance of exchange of information under the UN Model

New Article 27 (Assistance in Collection of Taxes) concerning assistance in the

collection of taxes, which provides the rules under which states may agree to assist

each other in tax collection, along the lines of the corresponding provision in the OECD

Model Tax Convention

Modified Article 13 (Capital Gains) dealing with taxation of capital gains, which now

addresses possible tax evasion

Updated commentary to Article 5 (Permanent Establishment), addressing cases

where countries wish to delete Article 14 (Independent Personal Services) and deal

with income, formerly dealt with by Article 14, in Articles 5 and 7 (bringing it in line with

the OECD Model, in which Article 14 was already deleted in 2000)

| 5Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Spectrum for taxation of services under the UN MC

• Article 14 - Independent Personal Services

• Article 15 – Dependent Personal Services

• Article 18 – Pensions & Social Security payments (Alternative A )

• Article 5(6) and 7 – Insurance

• Article 16 – Director’s fees

• Article 17 – Artistes and Sportspersons

• Article 19 – Government service

• Article 21 – Other Income

• Article 8 – Shipping (Alternative A)

• Articles 5(1) and 5(2) and 7 – Business Profits

• Article 5(3)(a) and 7 – Construction and related services

• Article 5(3)(b) and 7 – Furnishing of services (including consultancy services)

• Article 18 – Private Pension payments

Residence country taxation

Panel discussion on the UN Model Convention | 6

Source country taxation

Threshold based taxation

Permanent Establishment

taxation

Taxation of fees for technical services not dealt with in the UN MC or the commentary to the UN MC

All

right

s re

serv

edA

ll rig

hts

rese

rved

General principles for taxation of services

Source principle

Threshold principle

Base erosion principle

Enforcement principle

Net basis of taxation principle

Allocation of taxing rights amongst the following: Country of residence of recipient

Country where the activity is performed (physical performance)

Country where the payment is received

Country where the services are used

Country where the payer is a resident

| 7Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Taxation of fees for technical services

Increased cross-border flow of services

High value transactions

Recipient of services constitutes a source

Technical fees are tax deductible in the source country

Possible characterizations under the current UN MC

Business Profits Basic PE

Construction PE

Independent Personal Services

Other income

| 8Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Various approaches being considered

Sub-committee on Services created in 2009 in the 5th Annual Session of the United

Nations Committee of Experts on International Cooperation in Tax Matters

Sub-committee is mandated to address the issue of tax treatment of services in general

in a broad way including related aspects and issues

Sub-committee to prepare proposals for taxation of fees for technical services for

consideration during the 8th Annual Session in October 2012

The following alternatives are being considered in the context of taxation of fees for

technical services Revision to Commentary to include discussion on treatment on technical fees but no change to

the MC

Revision to Commentary to include discussion and suggest alternative taxing frameworks but

no change to the MC

Reduction of threshold for service PE and IPS articles

Revision to Article 12 (Royalties)

Include a separate article

Revision to Article 21 (Other Income)

Deeming subsidiary to be a PE

| 9Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Issues / open questions

Should there be a difference in the taxing framework for goods and services?

Services are intangible

Not all services will require a fixed place for rendering them

Value of services high although they could be delivered in a relatively short period of time

If yes, which services should be subjected to the distinct taxing framework?

All technical services

Technical services that are ancillary or subsidiary to the application

Technical assistance

Know-how (‘Make available’ type of services)

Show-how

Non-technical services (commercial, marketing, management, financial, etc) and related

consultancy services

Electronic services

Should entities who are in the business of rendering services be covered by this taxing

framework?

| 10Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Issues / open questions

How can the term ‘technical services’ be defined?

Based on the definition under the Act

Based on the India-US tax treaty?

OECD 2002 Report:

Technical fees often refer to a consideration for any service, other than to an employee of the person

making the payments, of a technical, managerial or consultancy nature

Technical services are specialist skills or technical knowledge generally based on applied science or

craftsmanship required to provide the service

A managerial service would involve functions related to how a business is run as opposed to functions

involved in carrying on that business

Consultancy services are advisory services generally provided by a consultant or professional person for

a fee

The use of technology to develop the service or deliver it does not make it a technical service

How should technical services be taxed?

Gross basis

Net basis

How should mixed contracts be dealt with?

| 11Panel discussion on the UN Model Convention

All

right

s re

serv

edA

ll rig

hts

rese

rved

Issues / open questions

Where on the spectrum discussed earlier should the taxation of technical services lie,

considering the following parameters?

Allocation of taxing rights: Developed nations versus developing nations

Use of factors of production in the source state

Base erosion

Role of transfer pricing

Reciprocal cross-border flow of services

| 12Panel discussion on the UN Model Convention