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Cross-border trade in services often now exceeds cross-border trade in goods. Yet tax rules for trade in services are often less developed and uniform than the rules for trade in goods.

The provision of services raises issues across a broad range of tax rules, including determination of the source of income from services, what constitutes a sufficient nexus for taxation of such income derived by non-residents, classification issues in the context of transfer pricing and tax treaty rules, as well as issues relating to indirect taxation. Even such fundamental questions as whether certain activities constitute the provision of services, and the significance of the place of performance or consumption of services, do not always have clear answers.

The purpose of this topic is to consider the policy and practical aspects of how jurisdictions apply their income tax rules to the provision of services by enterprises.

The first part of the report examines the way in which income from services is dealt with under domestic law in the 38 jurisdictions on which branch reports were submitted. The branch reports show that there are different rules for determining the source of income from services, and widely differing views on what constitutes an appropriate nexus for source taxation of income from services derived by non-resident service providers (SPs). The majority of countries in respect of which branch reports were submitted would tax such income on a net basis. However, a significant number of jurisdictions tax income from services on a gross basis (either by direct application of withholding tax to the gross payment, or by application of the general tax rate to presumed profit calculated as a percentage of the gross payment).

Whatever the general rule under domestic law, there are usually exceptions or different treatments for certain categories of services, such as international transport, entertainment, exploration or exploitation of natural resources, insurance or construction.

The second part of the report looks at how tax treaties address the taxation of income from services (other than specific categories of services dealt with under special articles in the treaty), and how the different approaches compare.

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