by Julie Martin
The long-awaited 2017 update to the United Nations Model Double Taxation Convention between Developed and Developing Countries was released last Friday during a UN Economic and Social Council meeting in New York.
The new treaty and commentary update the UN’s 2011 model tax treaty, reflecting changes approved in April 2017 by the UN Committee of Experts on International Cooperation in Tax Matters.
Steve Towers, an international tax partner at Deloitte, noted that the new UN model incorporates virtually all the changes made to the 2017 OECD model tax convention by the OECD/G20 base erosion profit shifting (BEPS) plan, including adding a principal purpose test and limitation on benefits test to counter tax treaty shopping.
One of the more important aspects of the revised UN model, Towers said, is new Article 12A, which permits countries to impose withholding tax on payments of fees for technical services made to non-residents. The 2017 UN model defines these fees as “any payment in consideration for any service of a managerial, technical or consultancy nature.”
Towers noted that the new article provides three exceptions to this definition of technical services fees, including one for payments by individuals for services for personal use. He said that a fundamental concept of the new definition is that the services must involve the application by the service provider of specialized knowledge, skill, or expertise on behalf of a client or the transfer of knowledge, skill, or expertise to the client, other than a transfer of information covered by the Article 12 “royalties” definition.
The new model provides guidance defining managerial, technical, and consultancy services, but states also that these terms do not have precise meanings and may overlap, Towers observed. Moreover, domestic law definitions should not be used, he said. Also, while the commentary offers a lengthy discussion of expense reimbursements in this context, no definitive conclusions are reached, Towers said.
Towers noted that the 2017 UN model tax convention includes commentary on the “beneficial ownership” condition. The commentary in Articles 10, 11, and 12 adopt the 2010 OECD commentary, whereas the commentary to new Article 12A on fees for technical services adopts the 2014 OECD commentary, he observed. Thus, it will be easier to fail the beneficial ownership condition under Articles 10, 11, or 12, than to fail under Article 12A, Towers noted.
Towers said another important aspect of the 2017 UN update is that Article 5(3)(b), dealing with the creation of a permanent establishment through the furnishing of services, deletes the words, “for the same or a connected project.”
Also, the commentary on Article 5 is a combination of the 2014 and 2017 OECD commentary, Towers observed, which has resulted in some aspects of the 2017 OECD commentary not being included, such as the statement that VAT registration does not cause a permanent establishment under Article 5(1); the discussion of whether an employee’s home office can be an Article 5(1) permanent establishment of the employer; and the new “principles” for the “at the disposal” test.
Finally, Towers noted that the new UN model treaty commentary includes a discussion on the “conflicts of qualification” taken from the OECD commentary, thus providing a “rule” for disagreements on income characterization.