handbook-tb

Brian J. Arnoldreflect the different circumstances of residents and nonresidents.16 These computational rules are different from,but closely related to, source rules. 17 Tax treaties generallyrely on domestic law to provide the detailed computationalrules, subject only to broad principles of non-discrimination,separate accounting, and the arm’s length standard. 18If a country taxes income from services derived by nonresidentsthrough a withholding tax imposed on the grossamount of the payments, detailed rules for the computationof a non-resident’s net income are unnecessary.(6) Finally, a country must have rules to determine the tax payableand to collect the tax. 19 These rules may be different forresidents and non-residents to reflect the greater difficultyin collecting tax from non-residents.16For example, non-residents are typically not entitled to the personaldeductions or credits available to residents. Also, as discussed below, severaldeveloping countries have rules that prescribe the amount of a non-resident’sincome (so-called presumptive taxation).17The computational rules deal with what amounts are included inincome, what amounts are deductible in computing income, and the timingof such inclusions and deductions. In general, these types of provisionsapply irrespective of the geographic source of the income or expenses. Forexample, the deduction of entertainment expenses may be prohibited evenif they are incurred inside the country. Source rules, on the other hand, areused to determine the revenue and expenses to be taken into account in calculatingthe income from a particular country. For example, payments forservices might be considered to be derived from a country if the services areperformed in the country; and interest expenses might be considered to besourced in a country if the borrowed funds are used in that country.18The only detailed rules for the computation of the income of a PE inthe United Nations Model Convention are in Article 7 (3) and (5). Article 7 (3)requires a source country to allow deductions for expenses incurred for thepurposes of a PE wherever the expenses are incurred and denies the deductionof notional expenses. Article 7 (5) requires the same method of computingthe business profits of a PE to be used consistently from year to year.19See Robert Couzin, “Imposing and Collecting Tax,” in The Taxation ofBusiness Profits Under Tax Treaties, supra note 13.54