model conventions on direct taxation
TRANSCRIPT
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MODEL CONVENTIONS ON DIRECT TAXATION
OECD Model Convention
After world war 1 first time need was felt to harmonise the rules relating to taxation law by the
various countries. It was the year 1921 when league of nations started preparing 1 modelconvention on avoidance of double taxation this model model which is popularly known as the
Mexico Model and was completed by 1943. By that time there was WW 2. After WW 2 the
United Nations initiated the same work on model tax conventions which was completed only in
the year 1946 and was popularly known as London Model Convention. The task was further
researched upon by the Organisation for European Economic Community (OEEC) and its
successor OECD. In 1963 the OECD gave one draft model convention which is known as Draft
Double Taxation Convention On Income And Capital (DDTCIC). In 1977 a model convention
was formulated by the OECD which had its own commentary again given by OECD. In 1991
the OECD started a regular updation of the model tax treaty after 1991 the Non-OECD
countries are also allowed to give inputs for updation of the model convention given by the
OECD.
UN Model Convention
In 1980 a model convention was published by the United Nations Economic and Social
Council. In 2000 this was reviewed and updated because
The initial model convention was based on OECDs model treaty which laid more
stress on residence based taxation, due to which there was a flow of funds from
developing countries to the developed countries. As most of the goods and services
were supplied by the developed countries to the developing countries.
They wanted to review the principle behind taxation of passive incomes.
To review the time for creation of permanent establishment.
To review the rules relating to creation of permanent establishment in case of service
enterprises.
How to attribute profits to a permanent establishment.
Other Model Conventions
Andean Model
It is a model convention which is followed by the countries of Bolivia, Ecuador, Colombia,
Peru and Venezuela.
USA Model
Netherlands Model
Models of various regional models such as SAARC.
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Out of all the above-mentioned model conventions, Indian treaties are either based on UN
Model or OECD model.
Contents of OECD and UN Model
Both these model treaties have similar contents with slight variation. As far as assistance in taxcollection is concerned which is found in Art. 27 of OECD model, the same is missing in UN
Model.
Chapter 1 elates to the scope of the convention which enumerates the taxes covered by such
convention and the persons covered.
Chapter 2 relates to definitions in general and that of residence and of permanent establishment
in particular. Art. 3 general Definitions, Art. 4 residence definitions, Art. 5 permanent
establishment
Chapter 3 relates to taxation of income. This chapter contains provisions relating to the rules to
decide the taxation on income from immovable property, employment, independent personal
services, directors fee, income earned by artists, sportspersons, royalty, dividend, interest,
capital gains etc.
Chapter 4 taxation of capital
Chapter 5 rule for elimination of double taxation. 2 main methods
- Credit method (Capital export neutrality)
- Exemption method (Capital import Neutrality)
Chapter 6 relates to other provisions like mutual exchange of information, assistance in tax
collection, mutual agreement procedure, diplomatic relations and non-discrimination clause.
Chapter 7 deals with the final provisions relating to date do enforcement and termination of tax
treaty.
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