Tax Treaty

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Types of Income That “Shall be Taxable Only”

No.

Types

Explanation

Article 7

Business profit

Except if the business types is permanent establishment

Article 8

Shipping, inland waterways transport and air transport

Imposed in place of effective management. Except if income originated from activities conducted within a country border

Article 12

Royalties

In UN model it is “May be Taxed”

Article 13

Capital gain

If provisions in article 13:5 fulfilled

Article 14

Income from professional service *deleted since 2000

Except if professional service has affixed base in source country

Article 15

Income from employment

If one of this condition fulfilled

(1) Employment is more than 183 days in 12 months; (2) Income paid by employer, which is a resident of source country; (3) Income paid by employer is recognized as an expense by PE in source country

Article 18

Pensions

-

Article 19

Government service

-

Article 21

Other income

-

Implementation of Tax Treaty

- Determine persons, taxes, states covered and effective date

- Define the income

- Determine which countries has taxable rights

- Shall be taxable only (just 1 country)

- May be taxed (can be both countries)

- Eliminate any double taxation

- Applying MAP

First step

This convention shall apply to persons who are residents of one or both contracting state

- Residents is not clearly defined in OECD/ UN model → it depends on each contracting state’s tax laws

- It can be happened, both contracting states claim each persons to be its residence → rule : one person can only become resident in one country

- If the conflicting situation happened use tie breaker rule → person is resident, when (must be applying in ascending order) :

- It has permanent home

- It has closer personal and economic relations

- Habitual abode

- Nationality

- Mutual agreements

Second step

Definition of terminology

- Stated explicitly in one specific article

- Stated explicitly not in one specific article, but stated in one or more articles in tax treaty

- Not stated explicitly in one specific article nor stated in one or more articles in tax treate

Third step

- Usually used distributive rules/ assignment rules/ allocation articles

- Types of income, according to distributive rules :

- Active income → from business and employment

- Passive income → from investment, either tangible or intangible investment

- Other income → not active nor passive

- The taxable rights can be given to one country, or share between two countries

Fourth step

- In applying substantive provisions , the countries that eligible to impose tax on certain income is depend on text of tax treaty :

- Shall be taxable only → Indicated that taxable rights given only to one country, if it is OECD model it is usually given to domicile country, if it is UN model it is usually given to source country

- May be taxed → Indicated that taxable rights may be given to more than one country, (if OECD model taxable rights may be given to source country; if UN model taxable rights may be given to domicile country) → potential problem for double taxation.