While income from services is most commonly dealt with in treaties under Article 7 or Article 14, some countries adopt a different approach altogether. Under this approach, income from certain services (most commonly technical services) is given the same tax treatment as royalties under the treaty and is subject to limited source taxation on a gross basis. Although under the OECD Model royalties may only be taxed in the country of residence of the beneficial owner of the royalties, many jurisdictions (including 14 OECD countries) insist on retaining source taxing rights over royalties in their treaties.
Under UN Model Article 12, royalties may be taxed in the jurisdiction in which they arise, but if the beneficial owner of the royalties is a resident of the other State, source taxation is limited. The UN Model does not specify a rate, but for many countries the treaty rate would typically be between 5 and 15 per cent of the gross amount of the royalties. Paragraph 4 of Article 12 provides that if the right or property in respect of which the royalties are paid is effectively connected with a PE or fixed base or activities referred to in subparagraph 1(c) of Article 7 (limited force of attraction), Article 7 or 14 applies.
Paragraph 5 of Article 12 of the UN Model deems royalties to arise in a jurisdiction when the payer is a resident of that jurisdiction or if the royalties are borne by a PE or fixed base in that jurisdiction. Where income from services comes within the scope of this article, the place in which the services are performed is not relevant.
Accordingly, where income from services is encompassed within the scope of the royalties article, and paragraph 4 does not apply, very different tax outcomes from those applicable under Article 7 will result.
In UN Model Article 12 royalties are defined as:
“payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.”