handbook-tb

Taxation of income from servicesseveral countries tax income from such services on a gross basis unlessthe non-resident service provider has a PE or fixed base in the country.Under the provisions of Articles 7 and 14 of the United Nations ModelConvention, non-resident service providers are taxable exclusively bythe country in which they are resident, unless the services are providedthrough a PE or fixed base in the source country or, in the case ofprofessional and other independent services provided by an individual,the individual stays in the source country for at least 183 days in any12-month period. If the source country is entitled to tax income fromservices derived by a non-resident service provider under Article 7 orArticle 14 (1) (a), it is entitled to tax any income “attributable” to thePE or fixed base. Such income may include income earned outside thesource country (foreign source income) as long as it is attributable tothe PE or fixed base. 64 However, the consumption or use of servicesin the source country and the deduction against the source country’stax base of the payments for services to non-residents are insufficientto justify taxation by the source country under the provisions of theUnited Nations Model Convention. In effect, the source country’s entitlementto tax under Article 7 or Article 14 is subordinated to the residencecountry’s right to tax unless a substantial minimum thresholdrequirement (PE, fixed base or 183 days of presence) is met. Moreover,even if the conditions of Article 7 or Article 14 for taxation by a sourcecountry are met, the source country must impose tax on a net basis. 65As a result, if a country taxes non-resident service providers on a grossbasis, it is required under any applicable tax treaties to allow non-residentsto file tax returns, claim deductions for any expenses incurred inearning the income and pay tax only on their net income.Therefore, developing countries that tax income from servicesderived by non-residents significantly differently from the provisionsof Articles 7 and 14 of the United Nations Model Convention shouldconsider whether they wish to limit their taxing rights by entering intotax treaties.64In the case of Article 14 (1) (b) of the United Nations Model Convention,where an individual service provider stays in the source country for atleast 183 days, only income from services performed therein is taxable by thesource country.65Not all countries agree that net-basis taxation is required underArticle 14.85