handbook-tb

Taxation of income from servicessolution because it penalizes payers with respect to legitimate incomeearningexpenses. However, in certain situations in which it is difficultor impossible for developing countries to impose tax effectivelyon non-resident service providers, the denial of deductions might bejustified as the only effective way to protect the tax base. This mightbe the case, for example, where the non-resident service provider isresident in a tax haven.It should be emphasized that in these three situations base erosionand profit shifting are acceptable if they result from deliberate taxpolicy choices made by developing countries. If a developing countrydecides not to tax certain income from services derived by nonresidentsas a deliberate tax policy decision or enters into a tax treatywith another country or countries in which it gives up its right to taxsuch income under domestic law, there can be no issue of inappropriatebase erosion or profit shifting.Base erosion and profit shifting are especially problematic withrespect to services rendered by a non-resident company to a companyresident in a developing country where both companies are membersof a multinational group. In such situations, the payments for servicesare usually deductible in computing the resident company’s incomesubject to tax by the developing country; however, the income earnedby the non-resident service provider may not be subject to tax by thedeveloping country. If, as may be the case, the group company providingthe services is resident in a low-tax country, the payment for theservices is deductible against the developing country’s tax base at relativelyhigh rates but is taxed at relatively low rates, so that the tax savingsfrom the deduction substantially exceed any tax on the income.Moreover, multinational companies have considerable flexibility tostructure their affairs in a tax-efficient manner by manipulating thecharacter of intragroup payments. In these situations, intragrouppayments may be characterized as payments for services or royalties,whichever yields the best tax result. Fees from technical, managementand consulting services are especially problematic.In sum, the problems of base erosion and profit shifting withrespect to income from services are complex and multifaceted. Manydifferent types of services are involved and the legal form (for example,employment or independent services) in which they are provided varies.105