handbook-tb

Brian J. Arnoldsource country taxation of other income under Article 21 (3) is that theincome must have its source in that country. No rules are provided inArticle 21 or in the Commentary for determining the source of income.Article 21 (3) is potentially applicable to income from servicesalthough that should not frequently happen because such income willusually be dealt with in another article. In some circumstances, thescope of application of the other provisions depends on the domesticlaws of the source country. 494. Problem areas: opportunities for the erosion of the taxbase of developing countries through the provision ofservices by non-residents and possible responses4.1 IntroductionIn conceptual terms, the protection of a country’s tax base requirescoordination between the provisions of its domestic law and the provisionsof its tax treaties. It may also require coordination between thetreatment of the income under the domestic tax laws of the residenceand source countries. The provisions of a country’s domestic tax lawshould ensure that tax is levied effectively on any income from servicesderived by non-residents that the country wants to tax and thatthe tax so levied can be collected effectively. For this purpose, a countryshould also consider the deductibility of amounts paid by residents(and non-residents) to non-residents for services in computing income49For example, Article 7 applies only if a taxpayer is carrying on a businessand, as a partially defined term, the meaning of “business” must bedetermined under domestic law unless the context requires otherwise. Untilrecently, the Brazilian tax authorities took the position that payments to nonresidentsfor services and technical assistance were not business profits coveredby Article 7 and were, therefore, within the scope of Article 21. See Brazil,Internal Revenue Service, Ruling No. 1/2000. This position was changedon 20 June 2014 in Internal Revenue Service, Ruling No. 5/2014. According tothe latter ruling, income from services and technical assistance is consideredto be dealt with in the royalties article, the independent services article or,if neither of these applies, the business profits article. Such income will nolonger be considered to be subject to the other income article.72