handbook-tb

Hugh J. Ault and Brian J. Arnold8.5 Treaty aspectsIf the decision is made to tax capital gains on the sale of shares in domesticor foreign corporations (as well as interests in partnerships and otherentities), it is important to consider the extent to which that right shouldbe preserved in tax treaties. Many treaties limit the right of the sourcecountry to tax gains on the sale of shares to shares in companies thevalue of whose assets consists principally of real or immovable propertylocated in the source country. Article 13 (5) of the United Nations ModelConvention provides for source State taxing rights where the percentageownership of shares in a domestic corporation exceeds a certainamount, regardless of the nature of the underlying assets. In addition, asdiscussed in section 7.3 above, treaty anti-abuse rules may be applicableto protect a source country’s right to tax gains from the sale of shares ofeither domestic or foreign corporations.9. Services9.1 GeneralThe use of services payments to erode the tax base of developing countriesis a serious issue that involves several types of services and theprovisions of both domestic law and tax treaties. The provisions ofthe domestic law of developing countries dealing with income fromservices vary enormously. Some countries impose tax on virtually allbusiness services provided by non-residents in the country or to residentsof the country; others impose tax only if a non-resident has a PEor fixed base in the country. Some countries impose tax on incomefrom services by way of a final gross-based withholding tax, whileother countries tax income from services on a net basis.It is relatively easy for multinational enterprises operating ina developing country through a subsidiary resident in the country toreduce the tax payable to that country through payments for servicesrendered to that subsidiary by other non-resident group companies.The payments will generally be deductible in computing the incomeof the company resident in the source country, but may not be taxableby the developing country in the hands of the non-resident service36