Article 7 - Business Profits - International Taxation - Income Tax

Article 7 - Business Profits Business profit of an enterprises can only be taxed by the Residence State. Right of source State to tax Business Profit of an enterprises only exists in its jurisdiction. As per OECD Model Tax Convention Taxability of Business Profit Profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment (PE) situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State. [ Para 1 of Article 7 ] Attribution of Profit and Elimination of Double taxation For the purposes of this Article and Article [23A] [23B] , the profits that are attributable in each Contracting State to the PE referred to in paragraph 1 are the profits it might be expected to make, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the PE and through the other parts of the enterprise. [ Para 2 of Article 7 ] Where, a Contracting State adjusts the profits that are attributable to a PE an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in the other State, the other State shall, to the extent necessary to eliminate double taxation on these profits, make an appropriate adjustment to the amount of the tax charged on those profits. In determining such adjustment, the competent authorities of the Contracting States shall if necessary consult each other. [ Para 3 of Article 7 ] Does not effected by other Articles Provisions Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. [ Para 4 of Article 7 ] As per UN model Tax Convention Article 7 of the United Nations Model Convention reproduces Article 7 of the OECD Model Convention except The UN Model Convention varies from the OECD Model convention in the Following aspect Determination of State for taxability of business profit The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. [ Para 1 of Article 7 ] Determination of Business Profit and allowed deduction of expenses Determination of business profit - Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. [ Para 2 of Article 7 ] Actual expenses allowed as deduction - In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. Exclude - Reimbursement of actual expenses to the head office of the enterprise or any of its other offices No such deduction shall be allowed in respect of amounts if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment (PE). No account shall be taken , in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices . [ Para 3 of Article 7 ] Adoption of Method for Apportionment of Profit In so far as it has been customary in a Contracting State to determine the profits to be attributed to a PE on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article. [ Para 4 of Article 7 ] The profits to be attributed to the PE shall be determined by the same method year by year unless there is good and sufficient reason to the contrary. [ Para 5 of Article 7 ] The question of whether profits should be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment (PE) of goods and merchandise for the enterprise was not resolved. It should therefore be settled in bilateral negotiations.