Management and consulting services under the UN Model Tax Convention
This Leiden Law Blog handles the relevance of the taxation of cross-border management and consulting services under the UN Model and the Dutch approach to this.
The so-called permanent establishment is a common issue in international tax law. For example, a Dutch legal entity performs business activities in Morocco. These activities are not performed by a Moroccan legal entity, but by means of a fixed place of business through which the business of an enterprise is wholly or partly carried on. It can be compared with a Dutch supermarket that also has a shop in Belgium, without structuring by a Belgian legal entity.
The consequence of a permanent establishment is that the source state, in the example above Morocco, has the right to tax the profits which are allocable to the Moroccan part of the enterprise. However, the Netherlands wants to tax the profits of the Dutch legal entity, since that legal entity is a resident according to Dutch domestic tax laws, so the Netherlands can tax the Dutch legal entity on its worldwide income. Based on the double tax convention concluded between Morocco and the Netherlands, the Netherlands has to withdraw its taxing rights and provide for the avoidance of double taxation.
This is in short how businesses by means of permanent establishments are taxed within the international tax environment. As already mentioned in my previous blog, two model tax conventions are known. The first is prepared by the OECD, the second is developed by the UN. The commercial services industry is a large part of the global economy and important for developing countries. This is the reason why developing countries have negotiated in the UN that the source state may tax the profits derived from management and consulting services. In paragraph 9 of the commentary to Article 5 of the UN Model the following statement is written down: “Many developing countries believe that management and consulting services should be covered because the provision of those services in developing countries by enterprises of industrialized countries can generate large profits.” This resulted in a separate paragraph in Article 5 of the UN Model, i.e. that the furnishing of services of an enterprise can constitute a permanent establishment in the source country, resulting in taxing rights for the source state where the management and consulting services are furnished. And the source state is mostly the developing country.
Here, the UN Model clearly deviates from the OECD Model. The question is, what is the importance of this difference? This can be explained in just a few words. The Dutch government has endorsed the OECD Model and not the UN Model. However, the specific paragraph on the furnishing of services permanent establishment is included in not less than 15 double tax conventions that were concluded by the Netherlands. For reference purposes, the Netherlands has concluded approximately 90 double tax conventions on income and on capital in total. In specific cases and when explicitly demanded by developing countries, the Dutch government is willing to deviate from the OECD Model. It appears to me that things are never as black as they seem and that the resistance of the Dutch government to apply the UN Model could be considered as relative. Therefore, I would like to call on the government, in the current economic and financial crisis when cuts on the development aid budget are being considered, to be even more willing to apply the UN Model, following the example of the furnishing of services permanent establishment.