International taxation issues

Double taxation problem

1. Conflict- two residences Persons/companies who are residents of

both of the Countries.

2. Conflict- residence v. source Taxation on the basis of source and

residence.

OECD Convention

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

RESIDENT

1. For the purposes of this Convention, the term "resident of a Contracting State"

means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof.

This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

Where an individual is a resident of bothContracting States, then his status shall be:

a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him;

if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);

b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;

c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

For companies

Where a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State

A) in which its place of effective management is situated (one version)

B) in which he is incorporated (another version).

PERMANENT ESTABLISHMENT The term "permanent establishment" means 1. A fixed place of business through which

the business of an enterprise is wholly or partly carried on.

2. Dependant agent through which the business of an enterprise is wholly or partly carried on.

The term "permanent establishment" includes especially:

a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop, and f) a mine, an oil or gas well, a quarry or any

other place of extraction of natural resources.

A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months (different terms in different agreements).

the term "permanent establishment" shall be deemed

not to include: a) the use of facilities solely for the purpose of storage, display or delivery of

goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of

purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of

carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

f) the maintenance of a fixed place of business solely for any combination ofactivities mentioned in subparagraphs a) to e), provided that the overall activityof the fixed place of business resulting from this combination is of a preparatoryor auxiliary character.

Business through agents

where a person — other than an agent of an independent status— is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise,

unless the activities of such person are limited to those which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

Business through independent agent An enterprise shall not be deemed to have a

permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

Business through subsidiary

The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

BUSINESS PROFITS

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

CREDIT METHOD

1. Where a resident of a Contracting State derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in the other Contracting State, the first-mentioned State shall allow:

a) as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State;

b) as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State.