C h a l l e n g e U s. Panel discussion on the UN Model Convention Chairman: Mr. G. E....
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Transcript of C h a l l e n g e U s. Panel discussion on the UN Model Convention Chairman: Mr. G. E....
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
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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
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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
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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)
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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
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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
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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
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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
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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?
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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?
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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