2017 OECD Model Tax Convention (MTC) Assignment Sample

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• Subject Name : Taxation Law

2017 OECD Model Tax Convention (MTC)

Answer to Question 2:

Question: Discuss whether country B is allowed to tax the income received by ACO from its customers in country B under the A/B treaty?

Discussion

Indeed, under the 2017 OECD Model Tax Convention (MTC), country B is allowed to tax the income received by ACO from its customers in the country. This convention applies to customers of one or both of the contracting states, regardless of the nationality. Despite the fact that ACO does not harbour physical presence in country, it has registered for goods and services tax (VAT) in country B while also appointing an accounting firm known as BCO in country B to act as its VAT agent. Therefore, the company is eligible for taxation considering that both countries have entered into a double tax treaty in identical terms to the 2017 OECD MTC.

Under the double taxation convention enshrined in paragraph 1 of the MTC, a state, its political sub-divisions or its local authority (comprising of departments, regions, districts, municipalities, constituent states, provinces, kingdoms etc) have got authority to impose taxes on a company operating within their territory. In other words, a competent authority does not always have to be the highest authority; rather, the tax collection responsibility could simply be relegated to other authority. Therefore, the contracting state has powers to designate some preferred authority for this role.

Furthermore, they are also allowed to choose the method they will use in levying the taxes, whether it is deduction at the source (such as from payment made by customers when purchasing), direct assessment, use of surcharges or surtaxes etc. It is therefore, a prerogative of a country to decide the form of taxation to use against a company (OECD, 2010). In this context, country B has authority to tax the income received by ACO from its customers in country B either as VAT from monthly payments or from the total income generated by the company.

Paragraph 2 of the 2017 MTC gives an explicit definition of taxes to be levied. From the article, the taxes should be from the total income as well as the elements of income, elements of capital, as well as the total capital. These taxes also extend to gains and profits made from goods or services alongside capital appreciation (United Nations, 2017). In this regard, it ought to be considered that ACO derives its income from the monthly subscription payments made by its customers in country B who are charged through its customer credit cards. In other words, this company solely depends on this form of payments for its entire income. Obviously, while deducting taxes from ACO, the target income is on payments made by ACO customers to this company. In this case, the total income received by ACO through the monthly subscriptions alongside the elements of the income, such as the VAT charges to individual customers is eligible for taxation by country B.

In line with 2017 MTC, the tax measure may be applied to a citizen or national of a contracting state(United Nations, 2017). In this case, country A and country B are both contracting states, having concluded a double tax in identical terms to the MTC. The implication here is that since the company ACO is engaging with business with citizens in country B, the eligibility here lies in the sense that countries B citizens are still within the double taxation convention treaty signed by both country A and B. In this regard, whether or not the company ACO has a physical presence in country B, it is still mandated to be tax compliant to country B since that is where it derives its income from.

Paragraph 2 of the 2017 MTC, considers a business as including the performance of professional services and or other activities undertaken by an independent character. In the case of ACO Company, the services it offers customers in country B are not regarded as professional services but rather can best be categorized under other activities. However, under the double taxation convention, the contracting states are required to make a bilateral agreement on whether the “other activities” performed by an independent party and which generates income to it can be construed as business(OECD, 2010). Therefore, in this case, it will depend on whether there was an agreement by country A and country B on the same. Nonetheless, taking into consideration that country A and country B have concluded a double tax treaty on MTC, it will be assumed that an activity such as those performed by ACO is also known to be part of the business or services.

According to article 5 of the 2017 MTC, in order for a company to full a contract under this treaty, there is a need for that company to maintain a presence in the contracting state. However, such a presence ought to be more than merely a transitory one for it to be considered as having maintained a permanent establishment and hence; a taxable presence in that particular state. In the event that such a company is unable to maintain a presence in the contracting state, then it is required to appoint an agent who is allowed to “habitually” implement the authority to conclude the contract.

Furthermore, the frequency and extent to which the operation needed in concluding that the company’s agent so appointed is habitually and rightly exercising the duties aimed at concluding the contracts without the physical presence of the enterprise or contradicting authority largely depends on two key factors. The first one is the nature of the business being carried by the principals/enterprises and second one is the nature of the contract (United Nations, 2017). In this case therefore, country A and B had a signed a double tax treaty in identical terms to the 2017 MTC implying that the ACO company for domestic country and host country taxation laws.

It also means that the operations of this entity are governed by the business and taxation laws of the two countries. Moreover, it is evident that the company already appointed an accounting firm (BCO) in country B to act as its VAT agent. Alongside this company has registered for goods and services tax (known as VAT) in country B, thus meeting the permanent presence requirement of the treaty.

Another consideration to be made is that the nature of business undertaken by ACO does not necessarily require a physical presence in order to effectively serve its customers or become tax compliance. Rather, the services can always be transferred to the customers via its website while the money can be sent through emails or other channels. In this case, country B can pursue the financial reports and summaries from the tax agent or undertaken the auditing from the company’s invoices which are always sent via emails. Therefore, all conditions that warrant tax compliance of ACO Company to country B are met under existing treaty and regulations.

References

United Nations. (2017). Model double taxation convention. Retrieved from https://www.un.org/esa/ffd//wp-content/uploads/2018/05/MDT_2017.pdf

OECD (2010). Commentaries on the articles of the model tax convention. Retrieved from http://www.oecd.org/berlin/publikationen/43324465.pdf

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