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STRUCTURE AND OPERATION OF (INTERNATIONAL) TAX TREATIES. Model Tax Treaties. Two Main Models: OECD Model Tax Convention on Income and on Capital United Nations Model Double Taxation Convention between Developed and Developing Countries. Structure of the OECD Model.

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Presentation Transcript
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STRUCTURE AND OPERATION OF

(INTERNATIONAL) TAX TREATIES

model tax treaties
Model Tax Treaties
  • Two Main Models:
    • OECD Model Tax Convention on Income and on Capital
    • United Nations Model Double Taxation Convention between Developed and Developing Countries
structure of the oecd model
Structure of the OECD Model
  • OECD Model Convention has seven chapters:
    • I Scope of convention
    • II Definitions
    • III Taxation of Income
    • IV Taxation of Capital
    • V Methods of Elimination of Double Taxation
    • VI Special Provisions
    • VII Final Provisions
scope of the convention
Scope of the Convention
  • Art. 1 – Persons Covered
    • Defines the scope of the DTA in terms of the persons to which it applies
  • Art. 2 – Taxes Covered
    • Defines the scope of the DTA in terms of the taxes to which it applies and who applies them
definitions
Definitions
  • Art. 3 – General Definitions
    • Sets out definitions of terms used in the DTA for purposes of interpreting the DTA. Also a general rule on applying domestic law for terms not defined specifically in the DTA
  • Art. 4 – Resident
    • Sets out a particular definition of “resident” for purposes of interpreting the DTA
  • Art. 5 - Permanent Establishment
    • Sets out a particular definition of “resident” for purposes of interpreting the DTA
taxation of income and capital
Taxation of Income and Capital

For eliminating double taxation, DTA establishes two categories of rules:

(1) Articles 6-22 determine with regard to different classes of income/capital, the respective rights to tax of the State of source and the State of residence – exclusive/non- exclusive taxing rights.

taxation of income and capital1
Taxation of Income and Capital

(2) where these provisions confer on the State of source the rights to tax, the State of residence must allow relief to avoid double taxation

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Income/capital may be classified into three classes :

    • Income and capital that may be taxed without limitation in the state of source;
    • Income that may be subjected to limited taxation in the state of source; and
    • Income and capital that may not be taxed in the state of source.
active income
Active Income
  • Art. 7 – Business Profits
    • Allows a source state to tax the business profits of a resident of the DTA partner state only if that resident has a permanent establishment situated in the source state
  • Art. 8 – Shipping, inland waterways transport and air transport
    • Profits are taxable only in the contracting state in which the place of effective management of the enterprise is situated
  • Art. 14 – Independent personal services
  • Art. 15
active income1
Active Income
  • Art. 14 – independent Personal Services
    • Removed from the OECD MC in 2000. Income from the rendering of independent personal services now dealt with under Art. 7
    • Many bilateral DTAs still contain an IPS article.
    • The general rule is that the source state may tax the income from IPS, but only if the individual who provides those services has a fixed base regularly available to him in the source state
active income2
Active Income
  • Art. 15 – Dependent Personal Services
    • Allows the source state to tax income from employment exercised in that state only if (i) the employee is present in the source state for at least 183 days in a 12-month period (ii) his employer is not a resident in the source state (iii) the employment income is not borne by a PE that the employer has in the source state
active income3
Active Income
  • Art. 16 – Directors’ fees
    • The source state may tax first directors’ fees of a member of a board of directors of a company that is a resident of that state
  • Art. 17 – Artistes and sportsmen
    • allows the source state to tax income derived from the personal entertaining and sporting activities of entertainers and sportspersons exercised in the source state
active income4
Active Income
  • Art. 19 – Government service
    • income of government servants (in respect of their government service) is taxable only by the state to which the services are rendered
  • Art. 20 – Students
    • payments received from outside a contracting state by students or business apprentices while they are in that state solely for the purposes of education or training are not taxable in that state if resident of the other state immediately prior to their visit
passive income
Passive Income
  • Art. 6 – Income from immovable property
    • allows the state in which immovable property is located to tax first income that arises from that property
  • Art. 10 – Dividends
    • Allows the source state to tax dividends that are paid by companies that are residents to shareholders resident in the other contracting state, subject to certain restrictions
passive income1
Passive Income
  • Art. 11 – Interest
    • Allows the source state to tax interest that arises in the source state and is paid to a resident of the other contracting state, subject to certain restrictions
  • Art. 12 – Royalties
    • Denies the source state taxing rights over royalties arising in that state
passive income2
Passive Income
  • Art. 13 – Capital Gains
    • Allows the state in which the property is located to tax the capital gain from the alienation of immovable property. Subject to specific exceptions, only the alienator’s country of residence can tax gains from the alienation of movable property
  • Art. 18 – Pensions
    • Pensions paid in respect of past employment in a source state can be taxed only in the pensioner’s state of residence.
other income
Other income
  • Art. 21 – Other income
    • A “catch-all” article
    • Designed to bring within the tax net of one or other of the contracting states income that is not dealt with in the DTA
    • Provides that generally, such income is taxable only in the state of residence of the recipient
capital
Capital
  • Capital
    • Source Country Taxation Allowed for:
      • Immovable property
      • Business assets of a PE or a fixed base
    • Special Rule for Shipping etc
elimination of double taxation
Elimination of Double Taxation
  • Art. 23 - Methods for Elimination of Double Taxation
    • offers alternative methods of relief from juridical double taxation: the exemption method and the ordinary tax credit method
    • Where double taxation of the same income would otherwise arise, the state of residence of the taxpayer must allow relief to avoid double taxation
prevention of tax avoidance and fiscal evasion
Prevention of Tax Avoidance and Fiscal Evasion
  • Art. 9 – Associated Persons
    • Allows the tax administration to rewrite the accounts if, as a result of the special relations between the enterprises, the accounts do not show the true taxable profits arising in the state
  • Art. 26 – Exchange of information
    • Allows the tax administrations in the contracting states to exchange information with each other to carry out the provisions of the DTA or a state’s domestic law
prevention of tax avoidance and fiscal evasion1
Prevention of Tax Avoidance and Fiscal Evasion
  • Art. 27 – Assistance in the collection of taxes
    • introduced into the OECD model DTA in 2003
    • requires each contracting state to assist the other in the collection of revenue claims
miscellaneous matters
Miscellaneous Matters
  • Art. 24 – Non-discrimination
    • prohibits a contracting state form discriminating in its tax treatment between its own nationals and nationals of the other contracting state
  • Art. 25- mutual Agreement Procedure
    • imposes an obligation on contracting states to resolve disputes by mutual agreement notwithstanding domestic remedies
miscellaneous matters1
Miscellaneous Matters
  • Art. 28 – Members of Diplomatic Missions and Consular Posts
    • provides that the general rules of international law or special agreements in relation to the fiscal privileges of members of diplomatic missions or consular posts override the provisions of the DTA
  • Art. 29- Territorial Extension
    • allows a DTA to be extended to other states or territories the international relations of which are the responsibility of one of the contracting states
protocols
Protocols
  • Provisions form an integral part of the Convention
  • Agreed at time of Convention or subsequent
  • Uses:
    • Clarifications, deviations, updates and modification
main differences between oecd and un models
Main Differences Between OECD and UN Models
  • Article 3 – definitions of “enterprise” and “business” in OECD
  • Article 5 – greater source state taxation under UN:
    • six month duration tests;
    • Services provision
    • Delivery omitted from paragraph 4
    • Insurance (paragraph 6)
  • Article 7 – force of attraction in UN
  • Article 8 – UN’s alternative “b” (limited source state taxation of international shipping
  • Article 9 – UN’s fraud exclusion in paragraph 3
differences between the oecd and un models
Differences Between the OECD and UN Models
  • Article 10 – rate not specified and ownership threshold is lower (10%)
  • Article 11 - rate not specified
  • Article 12 – source state taxation of royalties
  • Article 13 – source state taxation of shares if holding is above an agreed threshold
  • Article 14 – deleted from OECD model and UN Model includes a 6 month threshold
  • Article 16 – extends scope: directors + high level managers
differences between the oecd and un models1
Differences Between the OECD and UN Models
  • Article 18 – two alternatives
  • Article 20 – students minor drafting
  • Article 21 – source state taxation of other income sourced in other state
  • Article 25 – specifies the process in more detail
  • Article 26 – minor drafting and OECD’s recent changes (bank secrecy and domestic interest)
  • Article 27 – no equivalent provision (recent OECD addition)
stages in a dta
Stages in a DTA

Negotiation

Initialing

Signature

Ratification

Entry into force

Effective date

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Thank You

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