Developing countries around the world use the OECD model convention for framing their tax treaties. Today we will understand the components forming part of this model convention and how to approach the same. Broadly understanding the Model convention will provide the bird’s eye view of the Model Treaty.
Part 1: Scope of the Model Treaty
Part one of the Model treaty is the scope of the agreement. It includes Persons covered under the treaty and which income would be covered. It consists of two articles. Article 1 deals with the persons covered, and Article 2 deals with the taxes included.
Part 2: Definition of the terms used in the treaty.
Chapter II defines the terms commonly used across multiple articles. Words covered explicitly in an article, i.e., dividends, interest, etc., are included in the relevant article.
Chapter II consists of 3 Articles. Article 3 deals with general definitions, Article 4 defines who the resident is, and Article 5 establishes the concept of Permanent Establishment.
Part 3: Main Part of the treaty
The main body of the treaty includes three chapters and 19 articles dealing with the taxation of income and capital. The main body follows Two categories of rules:
Firstly, Article 6 to 21, deals with the taxing rights of the State of residence and the State of the source, for the different classes of income. Article 22 does the same for taxation of capital. Where one contracting State has the exclusive right to tax a category of income, another contracting State will not tax the same to avoid double taxation. As a general rule, the proprietary rights to tax the income lies with the State of residence.
Secondly, where the State of the source has the right to impose the tax on the income or capital, the State of residence has to allow the relief to avoid double taxation. The State of residence will provide relief either by following the exemption method, which is covered under article 23A or through the credit method mentioned under article 23B.
We can classify the income and capital in three classes based upon the taxation rights of the State of source or situs.
Part 4: Special Provisions
Chapter VI, consisting of 7 articles, covers special provisions of the model convention. Each article deals with specific concerns.
- Article 24 deals with the elimination of discrimination in various circumstances.
- Article 25 deals with the establishment of a mutual agreement procedure for the resolution of conflicts on the convention.
- Article 26 deals with the exchange of information among the tax authorities of the Contracting States.
- Article 27 deals with the procedure for assistance on the collection of taxes.
- Article 28 clarifies the tax treatments for the members of diplomatic missions and consular posts.
- Article 29 deals with the entitlement to the benefits of the convention
- Article 30 deals with the territorial extension of the convention.
Part 5: Final Provision
The final provisions of the Model convention have 1 chapter consisting of two articles. Article 31 states the date of enforcement of the treaty among the contracting states, and Article 32 states the date of termination.