Understand the differences between the UN and OECD Model Tax Conventions and their application in Indian tax treaties. Dive into article-by-article comparisons and India’s unique tax treaty policies.
I will begin by addressing the general part first i.e. the difference between the UN Model Convention (UN MC) and the OECD Model Convention (OECD MC). Prima facie the UN MC and the OECD MC use the same structure and terminology however, the UN MC has some departures from the OECD MC in order to focus on the ‘Source’ based taxation rule. Usually, it is said that the OECD MC is used to negotiate a treaty between two developed nations on the other hand the UN MC is used to negotiate a treaty between two developing nations or a developed and developing nation. Also, it is widely observed that the OECD model is more favorable towards capital-exporting countries than the UN which is more equitable towards capital-importing countries.
Before starting an article-by-article examination of the difference in both models, it is important to understand the basic approach of each of the two groups. First, the country (resident state) where the individual or entity is resident will bear the burden of eliminating double taxation by instituting either a foreign tax credit or by merely exempting foreign source income (methods article) from taxation altogether. Second, the source country will considerably limit both the extent of its jurisdiction to tax income as it arises at the source and also the rate of tax which is ultimately imposed where jurisdiction is retained.[1]
So now we will analyze the differences in both the model conventions article by article.[2]
Article 5- Permanent Establishment
- In Article 5(3)(a) there is a time limit of 12 months in the OECD MC on the contrary to 6 Months in the UN MC
- The UN MC in the Article 5(3)(a) include the ‘assembly and supervisory’ activities also
- Presence of the deemed PE concept of service PE in Article 5(3)(b) which reads as follows:
“(b) The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue within a Contracting State for a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.”
Article 7- Business Profits
- Presence of the ‘Force of attraction rule’ in the Article 7(1) of the UN MC
- In the UN MC paragraph 3, it specifies on how to calculate the profits attributable to the PE, which is missing in the OECD MC.
- Paragraph 5 of the UN MC, places emphasis on the consistency of the method of determining the profit attributable to the PE.
Article 8- International Shipping & Air Transport
- Alternate B of the UN MC allows the taxation by the source state if profits from such operations are ‘more than casual’
- The tax computed on the allocation of such net profits is to be reduced by certain percentage (established through bilateral negotiations)
Article 9- Associated Enterprises
- Insertion of Paragraph 3 in the Article 9 of the UN MC, which states as following:
“3. The provisions of paragraph 2 shall not apply where judicial, administrative or other legal proceedings have resulted in a final ruling that by actions giving rise to an adjustment of profits under paragraph 1, one of the enterprises concerned is liable to penalty with respect to fraud, gross negligence or wilful default.”
Article 10- Dividends
- The withholding tax rates are to be established through bilateral negotiations in the UN MC where as in the OECD MC the rates are predefined for the withholding tax on dividends.
Article 11- Interest
- The withholding tax rates are to be established through bilateral negotiations in the UN MC where as in the OECD MC the rates are predefined for the withholding tax on interest.
Article 12- Royalties
- Insertion of paragraph 2 in the Article 12 of the UN MC, which gives the source states the right to withhold tax on the payment of royalties at a rate which is to be established through bilateral negotiations. On the other hand, in the OECD MC only the resident state has the right to tax royalties and the source state has no rights to withhold tax.
- Insertion of paragraph 5 in Article 12 of the UN MC, which defines the term ‘royalties arising in a contracting state’. The paragraph is as under:
“5. Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment or fixed base, then such royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.”
Article 12A- Fees for Technical Services
- This Article is unique in the UN MC and doesn’t exist in the OECD MC. It has a similar structure as Article 12, allocating rights to tax to both the resident and the source states. It also defines the term ‘Fees for Technical Services’ in paragraph 3.
- For the OECD MC the rights to tax such incomes were allocated as per the Article 7 i.e. business profits as there is no special provisions for such incomes.
Article 13- Capital Gains
- Insertion of paragraph 5 in the UN MC which states as below
“5. Gains, other than those to which paragraph 4 applies, derived by a resident of a Contracting State from the alienation of shares of a company, or comparable interests, such as interests in a partnership or trust, which is a resident of the other Contracting State, may be taxed in that other State if the alienator, at any time during the 365 days preceding such alienation, held directly or indirectly at least ___ per cent (the percentage is to be established through bilateral negotiations) of the capital of that company or entity.”
It is a paragraph to give the right to tax to the source state for the companies in which the holding companies have a substantial interest.
Article 14- Independent Personal Services
- This Article is unique in the UN MC and doesn’t exist in the OECD MC. This is a specific Article for the services provided by the professionals like artists, authors, teachers, lawyers, doctors, engineers, architects, accountants.
- For the OECD MC the rights to tax such incomes were allocated as per the Article 7 i.e. business profits as there is no special provisions for such incomes.
Article 16- Directors Fees
- Insertion of paragraph 2 in the UN MC, which not only covers the members of the board as in paragraph 1, but also covers the top-level managerial position. Hence, the right to tax the salary of the top-level executives is also with the source state.
Article 18- Pension
- In the UN MC there are two(2) alternatives available for the Article as compared to just one(1) in the OECD MC.
- Alternative B of the UN MC contains the PE proviso.
- The UN MC also covers the social security payments being made as compared to just the pension in the OECD MC
Article 21- Other Incomes
- Insertion of paragraph 3 in the UN MC, which also gives the source states the right to tax the other income which arise in that state, whereas in the OECD MC only the resident state has the right to tax the other incomes.
Article 25- Mutual Agreement Procedures
- There are 2 alternatives in UN MC, in the alternative A there is no arbitration clause, thus, any unresolved issues remain unresolved unless solved by the domestic law.
- Under the OECD MC, if the MAP issue is unresolved for 2 years then it is referred to arbitration on the request of the taxpayer only. However, in the UN MC if the MAP issue is unresolved for 3 years then it can be referred to arbitration under the alternative B on the request of any of the competent authority.
Tax treaty policy of India
Even though India is quoted to be an upcoming economy and a developing nation, India has not been completely dominated by any of the other nations during the treaty negotiation process.[3] India has always had a focus on the exchange of information, to tackle the generation and circulation of black money and round-tripping. Further, India also introduced provisions in domestic law “to discourage transactions between residents and persons located in jurisdictions that do not effectively exchange information with India”[4]. Generally, most of the tax treaties of India are based on the UN MC as it is a developing nation and supports the source rule for taxation. Also, many treaties have an Article for the fees for technical services in it, which has the same structure as Article 12 B of the UN MC. Also, there are provisions in domestic law that give the tax treaty an advantageous position when it interacts with the domestic tax law of India, the domestic provision of Indian tax law lets the taxpayer apply the treatment which is more beneficial between the tax treaty and the domestic law. Another special feature of the Indian tax treaties are that it usually have a provision for assistance in tax collections and they were present in the tax treaties even before such provisions were introduced in the model conventions.[5]
Below is a comparative analysis of the withholding tax rates in the Indian tax treaties
| Country | Interest | Dividend | FTS/FIS | Royalty |
| Australia | 15% | 15% | 10% | 10%-15% |
| Austria | 10% | 10% | 10% | 10% |
| Belgium | 10% if interest on loan from bank 15% others |
15% | 10% | 10% |
| Cyprus | 10% | 10% | 10% | 10% |
| Denmark | 10% if interest on loan from bank 15% others |
15% if a Co. owns at least 25% shares 25% others |
20% | 20% |
| France | 10% | 10% | 10% | 10% |
| Germany | 10% | 10% | 10% | 10% |
| Greece | only in India | only in India | N/A | only in India |
| Hong Kong | 10% | 5% | 10% | 10% |
| Ireland | 10% | 10% | 10% | 10% |
| Italy | 15% | 15% if a Co. owns at least 10% shares 25% others |
20% | 20% |
| Luxembourg | 10% | 10% | 10% | 10% |
| Mauritius | 7.50% | 5% if a Co. owns at least 10% shares 15% others |
10% | 15% |
| Netherlands | 10% | 10% | 10% | 10% |
| Poland | 10% | 10% | 15% | 15% |
| Portugal | 10% | 10% if a Co. owns at least 25% shares 15% others |
10% | 10% |
| Singapore | 10% if interest on loan from bank 15% others |
10% if a Co. owns at least 25% shares 15% others |
10% | 10% |
| Slovakia | 15% | 15% if a Co. owns at least 25% shares 25% others |
30% | 30% |
| Slovenia | 10% | 5% if a Co. owns at least 10% shares 15% others |
10% | 10% |
| Spain | 15% | 15% | 20% | 10%-20% |
| Sweden | 10% | 10% | 10% | 10% |
| UAE | 5% if interest on loan from bank 12.5% others |
10% | N/A | 10% |
| USA | 10% if interest on loan from bank 15% others |
15% if a Co. owns at least 10% shares 25% others |
10%-15% | 10%-15% |
[1] Donald. R. Whittaker, An Examination of the O.E.C.D. and U.N. Model Tax Treaties: History, Provisions and Application to U.S. Foreign Policy, 8 N.C. J. Int’l L. & Com. Reg. 39 (2016)
[2] OECD Model Tax Convention on Income and on Capital (2017) & UN Model Double Tax Convention Between Developed and Developing Countries (2017)
[3] D.P. Sengupta, Chapter 6: BRICS and the Emergence of International Tax Coordination
[4] Ibid p. 96
[5] Ibid p. 111
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