handbook-tb

Taxation of income from servicespayments for certain services to residents of tax havens. Such a measurewould not be effective if the country enters into a tax treaty witha tax haven that contains a provision similar to Article 24 (4) of theUnited Nations Model Convention. However, Article 24 would notprevent a country from denying a deduction of amounts paid by aresident to a non-resident where the resident does not withhold taxproperly in accordance with the law.Third, Article 24 (5) prohibits a contracting State from taxing aresident enterprise that is owned or controlled, directly or indirectly,by residents of the other contracting State differently (that is to say,through other or more burdensome taxation) from other residententerprises. This provision applies to both taxation and connectedrequirements, such as information reporting and enforcement measures.Thus, if an enterprise resident in one contracting State establishesa company in the other State to provide services, that company mustbe treated in the same manner for tax purposes as other similar companiesresident in that State.From this overview of the provisions of Article 24 relevant toincome from services, it is apparent that Article 24 does not preventdeveloping countries from adopting measures to protect theirdomestic tax base. For example, as noted above, several countriestax income derived by non-residents on a net basis if the services areprovided through a PE, but otherwise on a gross withholding taxbasis. This method of taxation of income from services complies withArticle 24 (3) with respect to income earned through a PE, assumingthat the domestic definition of a PE is the same or narrower thanthe definition in Article 5 of the United Nations Model Convention.Further, Article 24 (3) does not impose any constraints on a country’sability to tax income from services earned by a non-resident other thanthrough a PE. Therefore, if a developing country adopts a gross-basedwithholding tax on fees for technical services, that tax would violateArticle 24 (3) to the extent that it applies to income from technicalservices earned through a PE in the country.For those countries that have a specific article in their treatiesdealing with fees for technical services, taxation of such fees inaccordance with that article cannot be discriminatory in violation of103