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Under the OECD Model, the general rule with respect to taxation of income from services is that such income derived by a resident of one jurisdiction may not be taxed in the other jurisdiction unless that income is attributable to a PE in that other jurisdiction (as defined in Article 5, Permanent Establishment). Where it is attributable to such a PE, it must be taxed on a net (profits) basis.

Paragraph 1 of Article 5 of both the OECD Model and the UN Model defines a PE as a fixed place of business through which the business of an enterprise is wholly or partly carried on, while paragraph 2 sets out a number of examples of such places of business.

In the OECD Model, no specific provision is made in respect of income from services, except with respect to construction services in paragraph 3 (discussed below). It follows that, for the purposes of this model, the criteria for determining the existence of a PE in the context of services activities (other than those categories of activities covered in specific articles) are the same as those that apply to other business activities.

This is the rule most favoured by non-resident SPs. It ensures that services income derived by a resident of one jurisdiction will only be taxed in the other jurisdiction if and when the SP establishes a significant physical and economic presence in that other jurisdiction. Under the OECD Model approach, force of attraction is not permitted. Furthermore, by ensuring that the income is taxed on a net basis, problems of excessive taxation (e.g. in cases where the non-resident SP incurs significant costs in providing the services) are avoided.

It would appear that just over half of the reporting jurisdictions seek to follow the OECD Model approach to taxation of services income. These countries provide for taxation of income derived by non-resident SPs from most types of services only when it is attributable to a fixed place of business PE.


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