handbook-tb

Brian J. Arnoldany possible responses to the problems. The potential application ofArticle 24 of the United Nations Model Convention to prevent thediscriminatory treatment of non-residents earning income from servicesis discussed subsequently.3.2 Business profits derived from services provided byenterprisesUnder Article 7 of the United Nations Model Convention, incomefrom services provided in a contracting State (the source country) byan enterprise resident in the other contracting State may be taxed inthe source country only if the enterprise carries on business in thesource country through a PE situated therein. If the enterprise carrieson business through a PE in the source country, that countryis entitled to tax the profits that are attributable to the PE and alsocertain other profits that are attributable to activities similar to thosecarried on through the PE. This limited force of attraction rule allowsthe source country also to tax profits derived from sales of goods andmerchandise and from other business activities similar to those madeor carried on through the PE if the sales or activities take place inthe source country. At present, this limited force of attraction ruleis included in only about 10 per cent of all bilateral tax treaties. It isintended to function as an anti-avoidance rule.Under Article 7 (2), the determination of the profits attributableto a PE is premised on two important legal fictions, namely:‣ ¾ The PE is a separate entity engaged in the same activities underthe same conditions as the enterprise; and‣ ¾ The PE deals independently with the other parts of the enterpriseof which it is a part.These legal fictions effectively ensure that the profits attributableto a PE are determined in accordance with the arm’s length principlethat applies under Article 9 of the United Nations Model Conventionto transactions between related or associated enterprises. Article 7 (3)of the United Nations Model Convention allows that any expensesincurred by an enterprise for the purposes of the PE are deductible incomputing the profits of the PE irrespective of whether the expensesare incurred in the PE State or exclusively for the purposes of the PE.64