handbook-tb

Taxation of income from servicesnot be taxable by the source country in the hands of the non-residentservice provider. For example, even if payments for services performedby the non-resident company are taxable under the domestic tax lawof the source country, an applicable tax treaty along the lines of theUnited Nations Model Convention would prevent the source countryfrom taxing such payments unless the non-resident has a permanentestablishment (PE) or fixed base in the source country. The same typeof base erosion may occur with respect to developed countries; however,if the flow of services is relatively equal between the two countries,the erosion of the tax base of the source country may not be aserious concern because that country’s tax revenues are increased inits capacity as the country of residence.The present chapter begins with a brief discussion of the taxationof income from services performed by non-residents under thedomestic law of developing countries. It emphasizes that protectingthe tax base of developing countries involves both the provisions ofdomestic law and tax treaties. The chapter then provides an overviewof the provisions of the United Nations Model Convention dealingwith income from services. This overview is intended to provide thenecessary background to determine which provisions of the UnitedNations Model Convention may be problematic in terms of base erosionthrough the provision of services. These overviews of the provisionsof the United Nations Model Convention and domestic law dealingwith income from services are followed by a detailed discussion of theopportunities for base erosion through the performance of servicesby non-residents and the possible responses to prevent such base erosion.It is organized on the basis of various types of services includingthe treatment of fees for technical services. This chapter does not dealwith digital services, which are the subject of a separate chapter. 5 Thepotential responses of developing countries to the problem of base erosioninclude changes to tax treaties and domestic law and some typeof coordinated international action. This chapter does not make anyrecommendations for action by developing countries to protect theirtax bases against base erosion; it simply identifies possible actions andprovides some brief comments on their advantages and disadvantages.5See chapter VIII, Protecting the tax base in the digital economy, byJinyan Li.49