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Page 43

The branch reports show that a large majority of jurisdictions accept that it is appropriate to include in tax treaties a threshold below which no source taxation will apply. For many countries, this threshold is either a place of business or a base through which the services activities are performed for a significant period (generally at least six months).

However, a significant minority of countries believe that income from services performed in a jurisdiction should be taxable in that jurisdiction where a time threshold is met. That time threshold may be based on days of presence of the SP in the jurisdiction, or days or months during which the SP provides the services in that jurisdiction, but in either case, most countries recognise 183 days (or 6 months) in any 12-month period as being the appropriate length of time to create a sufficient nexus to warrant source taxation. In some treaties, this additional nexus based on a time threshold applies only to independent personal services and not to other services. The research of Wijnen. de Goede and Alessi shows that 897 out of 1,585 treaties concluded in the last decade include a time threshold for independent personal services, while 680 include deemed services PE provisions based on a time threshold.

It is a widely recognised principle in Article 7 that if an enterprise carries on activities in a jurisdiction that are merely preparatory and auxiliary, that enterprise should not be regarded as having a PE in that jurisdiction such as to give rise to taxation in respect of income from those activities. There would seem no sufficient reason why income from such activities, if carried on by an SP, should not also be exempt from source taxation.

Where a fixed place of business threshold applies under Article 7, virtually all treaties provide that such a place, if maintained solely for the purpose of carrying on preparatory and auxiliary activities for the enterprise will not constitute a PE. This applies equally to activities of an SP as to those of any other kind of business enterprise.

However, there is no equivalent exclusion in relation to fixed bases under Article 14. Nor are such activities excluded in the case of a deemed services PE that follows paragraph 3(b) of Article 5 of the UN Model. Only the OECD alternative services PE provision specifically excludes preparatory and auxiliary activities which, if carried on through a fixed place of business, would be excluded from creating a PE.

Treaties that apply royalty treatment to income from services do not have an exclusion from this treatment for income from preparatory or auxiliary services.


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