Chapter 27: Overview of Model Tax Conventions (OECD, UN & US Models)
1. Philosophical Divide: OECD vs UN vs US Models
| Parameter | OECD Model Convention | UN Model Convention | US Model Convention |
|---|---|---|---|
| Core Orientation | Favors Residence-based taxation. Represents capital-exporting developed countries. | Favors Source-based taxation. Preserves taxing rights of capital-importing developing countries. | Based on OECD Model but includes Citizenship-based taxation and strict LOB. |
| Withholding Tax Rates | Lower or zero withholding tax on passive incomes (dividends, royalties). | Higher withholding tax permitted to source state. | Strict LOB required to access lower rates. |
| PE Thresholds | Higher time thresholds (e.g. 12 months for construction PE). | Lower time thresholds (e.g. 6 months for construction PE). | Similar to OECD. |
2. Article 4: Dual Residence Tie-Breaker Ladder (Individuals)
Where an individual is resident in both Contracting States, status is determined sequentially:
Step 1: Permanent Home Available: Resident of State where he has a permanent home.
Step 2: Center of Vital Interests: If permanent home in both or neither, resident of State with closer personal and economic relations.
Step 3: Habitual Abode: If center of vital interests cannot be determined, resident of State where he has habitual abode.
Step 4: Nationality: If habitual abode in both or neither, resident of State of which he is a national.
Step 5: Mutual Agreement Procedure (MAP): If national of both or neither, competent authorities settle by mutual agreement.
Step 1: Permanent Home Available: Resident of State where he has a permanent home.
Step 2: Center of Vital Interests: If permanent home in both or neither, resident of State with closer personal and economic relations.
Step 3: Habitual Abode: If center of vital interests cannot be determined, resident of State where he has habitual abode.
Step 4: Nationality: If habitual abode in both or neither, resident of State of which he is a national.
Step 5: Mutual Agreement Procedure (MAP): If national of both or neither, competent authorities settle by mutual agreement.
3. Article 5: Permanent Establishment (PE) Master Comparison
| PE Category | OECD Model Rule | UN Model Rule |
|---|---|---|
| Fixed Place PE (Art 5(1)) | Fixed place of business through which business is wholly or partly carried on. | Identical to OECD. |
| Construction PE (Art 5(3)) | Building site, construction or installation project continues for > 12 Months. | Project continues for > 6 Months (includes assembly and supervisory activities). |
| Service PE | No explicit Service PE provision in text (relies on Fixed Place). | Explicit Service PE if services continue for aggregate > 183 days in any 12-month period. |
| Agency PE (Art 5(5)) | Dependent agent habitually concludes contracts in name of enterprise. | Includes agents who maintain stock of goods from which they regularly deliver. |
4. Articles 7, 10, 11 & 12: Business & Passive Incomes
| Article | Subject Matter | OECD Model Rule | UN Model Rule |
|---|---|---|---|
| Article 7 | Business Profits | Profits taxed only to the extent attributable to the PE. | Limited Force of Attraction: Source state can tax sales of same/similar goods directly by HO. |
| Article 10 | Dividends | Exclusive or low source taxation. | Source taxation retained with negotiated rate. |
| Article 12 | Royalties | Exclusive taxation in Residence state (source tax 0%). | Shared taxation with Source state. Includes equipment leasing in definition of royalties. |
5. High-Frequency Exam Traps
Trap 1: Equipment leasing under OECD vs UN Model!
Under the UN Model, consideration for the use of commercial, industrial, or scientific equipment is classified as Royalty (Article 12). Under the OECD Model, equipment leasing is classified as Business Profits (Article 7) and is taxable only if there is a PE!
Under the UN Model, consideration for the use of commercial, industrial, or scientific equipment is classified as Royalty (Article 12). Under the OECD Model, equipment leasing is classified as Business Profits (Article 7) and is taxable only if there is a PE!
Trap 2: Independent agent losing status!
An agent of independent status loses independence and becomes an Agency PE if his activities are devoted wholly or almost wholly on behalf of that enterprise and conditions are not at arm's length!
An agent of independent status loses independence and becomes an Agency PE if his activities are devoted wholly or almost wholly on behalf of that enterprise and conditions are not at arm's length!