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In countries where services income derived by non-residents is subject to withholding tax under domestic law, the treaty source rules are often consistent with domestic law. Thus, Mexico, Peru and Uruguay would be able to apply withholding tax in respect of such payments. On the other hand, in Israel, withholding tax would only apply to income of non-resident SPs from services performed in Israel.

Several branch reporters noted that, in their jurisdiction, it would generally not be possible to exercise a taxing right in respect of services performed outside their jurisdiction. The domestic laws of these countries would not treat income from such services as having a source in their jurisdiction, except, in some jurisdictions, where the income was attributable to a PE situated in their territory. Even where the income is considered to have a source in the jurisdiction, e.g. where the services are performed in the jurisdiction, many countries would have difficulties in applying a provision along the lines of Article 12. Where the income is taxed on a net basis under the domestic law of a jurisdiction, it can be difficult to apply a tax limit which is calculated by reference to the gross amount of the payment.

A corollary of a source rule that is based on the residence of the payer is that services performed by a non-resident SP within a jurisdiction that are paid for by another non-resident would not come within the royalties article. This could occur, for example, where a non-resident SP was contracted by a non-resident company to provide management training to all subsidiaries of the company, including a subsidiary which was a resident. Income derived under such a contract would fall within Article 7, and not Article 12, notwithstanding that the services could be regarded as technical services. The jurisdiction in which the services are performed would not be permitted to tax the income derived by the non-resident SP unless the SP had a PE in that jurisdiction with which the services were effectively connected.


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