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Page 44

It seems self-evident that net taxation should be the preferred method of taxing income from services. The provision of services will almost always involve significant expenses. Some countries which tax services income on a gross basis under domestic law attempt to address the issue of expenses by imposing tax on a fixed percentage of the gross payment. Others limit the rate of tax applicable to the payment, either under domestic law or under treaties.

Net taxation applies to income from services where that income is dealt with under Article 7. This treatment obtains, irrespective of whether the treaty follows the OECD Model or the UN Model, and whether or not a deemed services PE is included.

Where Article 14 applies, most countries will also apply net taxation to the income, although this is not universal. Treaties with jurisdictions which tax independent personal services on a gross basis will sometimes include a limit on the rate of tax that can be imposed.

For services income that is subject to royalty-type treatment under a treaty, gross taxation is permitted, but a limit on the tax rate is specified.

For the purposes of Articles 7 and 14, there seemed to be general agreement that the source of income from services is the place where the services are physically performed.

There were mixed views among branch reporters as to whether income from services performed outside their jurisdiction could be attributed to a fixed place of business or fixed base situated in the jurisdiction. However, in the absence of a fixed place of business or fixed base, almost all countries accept that only income from services that are physically performed in their jurisdiction has sufficient nexus with that jurisdiction to warrant source taxation under Articles 7 and 14.

This is not the case where royalty treatment applies to income from services. Where Article 12, or a stand-alone technical fees article, provides for source taxation, the article usually also includes a source rule based on where the payer is a resident, or if paid through a PE, where the PE is situated. The place where the services are physically performed is irrelevant.


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