Introduction:
Article 1 of the United Nations Model Convention on Income and Capital (the Model) provides the scope and application of the Convention. It outlines the persons and entities to which the Model applies, as well as the types of taxes to which it is applicable.
The Convention also provides rules for determining the residence of a person in cases where a person is considered a resident of both Contracting States. In such cases, the Convention provides for a tie-breaker rule based on the person’s permanent home, place of effective management, centre of vital interests, habitual abode, and nationality, among other factors.
Application of the Model:
The Model applies to persons who are residents of one or both of the Contracting States. The term “resident” is defined broadly in Article 4 of the Model, and includes any person who, under the laws of that State, is liable to tax therein by reason of their domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. This means that a resident is someone who is subject to tax in a Contracting State because of their connection to that State.
The definition of “resident” is important because it determines which state has the right to tax a person’s income. For example, if a person is a resident of India and earns income in the United States, both India and the United States may have the right to tax that income. However, the Convention provides rules to determine which state has the primary right to tax the income and to avoid double taxation.
The Model applies to income and capital, including gains from the alienation of movable or immovable property, income from agriculture or forestry, income from industrial or commercial profits, and income from professional services. The Model also applies to taxes on capital, such as taxes on the capital value of assets, and taxes on the total net wealth of an individual.
It is worth noting that the Convention only applies to taxes on income and capital, and not to other taxes such as sales tax, customs duties, excise duties, and value-added tax. Additionally, the Convention only applies to residents of Contracting States, and not to non-residents.
Types of Taxes Covered:
The Model covers two types of taxes: (i) taxes on income, and (ii) taxes on capital. The taxes on income include taxes on wages, salaries, and other types of income earned by individuals, as well as taxes on profits earned by companies and other entities. The taxes on capital include taxes on the capital value of assets, as well as taxes on the total net wealth of an individual.
The Model provides for the allocation of taxing rights between the Contracting States and the elimination of double taxation. The allocation of taxing rights is based on the principle of residence, which means that a Contracting State has the right to tax its residents on their worldwide income and capital. However, the Model also provides for the avoidance of double taxation through various mechanisms, such as the credit method, exemption method, and tax sparing credits.
Purpose:
The purpose of the Model is to prevent double taxation of income and capital by the Contracting States. The Model provides for the allocation of taxing rights between the Contracting States and the elimination of double taxation through various mechanisms, such as the credit method, exemption method, and tax sparing credits.
The Model is widely used as a template for bilateral tax treaties between countries. Its provisions are not binding on countries, but it is intended to provide a framework for countries to negotiate and agree on the allocation of taxing rights and the elimination of double taxation
Conclusion:
In conclusion, Article 1 of the United Nations Model Convention on Income and Capital provides the scope and application of the Convention. It applies to persons who are residents of one or both of the Contracting States and covers two types of taxes: taxes on income and taxes on capital. The article defines a “person” broadly and includes natural persons, corporations, partnerships, trusts, and any other entities that are recognized as legal persons under the laws of the Contracting States.
The Model provides for the allocation of taxing rights between the Contracting States and the elimination of double taxation through various mechanisms.
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