handbook-tb

Jinyan Li3.4.3 Characterization of transactionsDematerialization blurs the traditional distinction between “goods”and “services.” A traditional sale of tangible goods can be transformedinto a licence for downloading a digital file. The maturation andincreasing use of 3D printing technology may further convert “goods”(sales profit) into “intangibles” (royalties or fees for technical services)if direct manufacturing for delivery evolves into a licence of designsfor remote printing directly by purchasers.Traditional royalties can be converted into services fees and canavoid withholding tax by transforming technical services or provisionof software or other technologies into services delivered online.As stated in the OECD Action 1 — 2014 Deliverable, the character ofpayments for cloud computing and application hosting can be controversialin the context of tax treaties. 71The question for tax treaty purposes is often whether suchpayments should be treated as royalties (particularly under treatiesin which the definition of royalties includes payments for rentals ofcommercial, industrial or scientific equipment), fees for technical services(under treaties that contain specific provisions in that respect), orbusiness profits. More specifically, questions arise regarding whetherInfrastructure-as-a-Service transactions should be treated as services(and hence payments characterized as business profits for treaty purposes),as rentals of space on the cloud service provider’s servers byothers (and hence be characterized as royalties for purposes of treatiesthat include in the definition of royalties payments for rentals ofcommercial, industrial, or scientific equipment), or as the provision oftechnical services. The same questions arise regarding payments forSoftware-as-a-Service or Platform-as-a-Service transactions.Controversial characterization of payments is not unique topayments in an e-commerce context. Payments for the use of satellite,transponder, cable or optic fibre are characterized as “rental fees” in71OECD, Action 1 — 2014 Deliverable, supra note 3, at 132.432