OECD Launched Consultation on Model Tax Convention

OECD Launched Consultation on Model Tax Convention

The Organization for Economic Cooperation and Development released for discussion two updated drafts clarifying the interpretation of 'beneficial ownership' and 'permanent establishment' used by tax authorities in order to assess where and at what rates corporates should be taxed by withholding taxes on passive income received from cross-border business, covered by an OECD model double tax agreement.

The first draft is the result of the previous consultation, started on April 29, 2011. Current consultation is aimed to clarification when an entity should be deemed to be the beneficial owner of a dividend, royalty or interest payment, as provided in Articles 10, 11, and 12 of the Model Convention. Many double taxation agreements concluded in line with the OECD model agreement provide a lower rate of withholding tax in cases where the recipient is the 'beneficial owner' of the asset from which the passive income (royalty, dividend or interest) is derived. However, there is a lack of a universally agreed definition of 'beneficial ownership', therefore this area presents substantial challenge for tax practitioners and tax authorities.

In spite of the fact that there is no precise and universal ‘beneficial ownership’ interpretation, generally beneficial ownership provisions are incorporated into double tax agreements as an anti-avoidance mechanism, which restricts application of the provisions of lower withholding tax rates. The provision was designed to prevent entities from transit payments through other countries that have more beneficial double tax arrangements with the country in which the receiving entity resides.

The purpose of the current consultation is not amending of Articles 10, 11 and 12 of the OECD Model Tax Convention, but developing of the proposal to revise the OECD commentary used to interpret these Articles. The comments regarding the first draft should be submitted to OECD till December 15, 2012, and will be reviewed in February 2013.

As for the second draft clarifying the definition of 'permanent establishment' that is used to determine a recipient's residence for tax purposes, the results of consultation of it will be included in the next revision of the OECD Model Tax Convention due to be released in 2014. Comments on the second draft should be submitted by January 31, 2013.

The text of first and second draft consultation papers and the e-mail to which comments can be sent are available on the official OECD’s web-site.

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