handbook-tb

Brian J. Arnoldof non-resident employees and non-resident independent contractorsis that the latter may carry on activities in the source country for up tosix months without becoming subject to source country tax, whereasemployees of resident employers or non-resident employers with a PEor fixed base are taxable by the source country irrespective of howlong they spend in the source country. The same distinction may existunder some countries’ domestic law.Thus, even if a non-resident service provider is taxable underthe domestic law of the source country, any tax treaties entered intoby the source country that are based on the United Nations or OECDModel Conventions will limit the source country’s tax more severelyfor employees than for independent contractors. Non-resident serviceproviders have an incentive to structure their relationships to avoidemployment status.Neither the United Nations nor the OECD Model Conventionprovides a definition of employment or independent services. Article14 (2) of the United Nations Model Convention provides an inclusivedefinition of professional services, but that definition simply refers to“independent” activities without defining what the term “independent”means. Under Article 3 (2), the terms “employment” and “activities ofan independent character” in the case of Article 14 or “business” in thecase of Article 7, have the meanings for purposes of the treaty that theyhave under the domestic law of the source country unless the contextrequires otherwise. 56 Most countries distinguish between employmentand independent services for various legal purposes, including tax.Where a country’s domestic law allows the formal contractualarrangement to be ignored and the nature of the services to be determinedbased on the substance of the relationship between the serviceprovider and the customer, the provisions of the treaty will respectthe application of domestic law in this regard. 57 However, the decision183 days and only working days (not all days of presence) are counted forthis purpose.56In this situation, the source country is the country applying the treaty.57See paragraph 1 of the Commentary on Article 15 of the UnitedNations Model Convention, quoting paragraphs 8.5 – 8.7 of the Commentaryon Article 15 of the OECD Model Convention.78