handbook-tb

Taxation of income from servicesa non-resident can avoid having a PE or fixed base by fragmenting itsactivities among related enterprises. Some of these situations can bedealt with by anti-avoidance rules in domestic law or by the inclusion ofspecific anti-avoidance rules in tax treaties.To avoid having a PE under Article 5 (3) (b) of the United NationsModel Convention, a non-resident service provider may simply limitits service activities in the source country to a period or periods ofless than 183 days in any 12-month period. Thus, a multinationalenterprise with a group company carrying on business in a developingcountry may use another group company resident in a low-tax countryto provide various services to the company in the developing country.These services, which often include legal, accounting, management andtechnical services, 68 may not require employees of the non-residentservice provider to be present in the developing country for longperiods of time. It is difficult for developing countries to counteractthis type of tax planning even with effective anti-avoidance rules inplace. Some countries have insisted on a shorter period than 183 daysto minimize the limitation on their ability to tax. A non-resident canalso avoid having a PE under Article 5 (3) (b) by using related nonresidententerprises to carry out connected projects. Under Article5 (3) (b) any services performed for the same or a connected projectare aggregated for purposes of counting the number of days on whichservices are provided in the source country. There is no rule, however,to take into account services provided by related enterprises withrespect to the same or connected projects. Specific anti-avoidancerules in domestic law or tax treaties might be useful in this regard, 69although the application of such rules requires effective informationgatheringby the tax administration of the developing country.4.8 ConstructionUnder the domestic law of most developing countries, constructionactivities conducted by non-residents in the developing country areusually subject to tax by that country, although in some countries68The treatment of technical services is discussed in more detail below.69See paragraph 11 of the Commentary on Article 5 of the UnitedNations Model Convention, quoting paragraph 18 of the Commentary onArticle 5 of the OECD Model Convention.87