Introduction to the Law of Double Taxation Conventions
3. Aufl. 2021
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S. 93. The effects of DTCs
3.1. The allocation of taxing rights
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In DTCs the two contracting states commit themselves to relinquishing or restricting their taxing rights. This should result in the elimination of double taxation. According to some DTC rules, certain income or capital can be taxed only in one of the two contracting states. Other income or capital can be taxed by both states proportionately: the right to tax for the source state, however, is usually limited to a certain percentage. Via the application of the so-called method articles, the state of residence has to avoid double taxation (exemption method, cf. m.no. 412 et seq and credit method, cf. m.no. 430 et seq.).
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Example
Under Art. 12(1) OECD Model, royalties can only be taxed in the state of residence. The source state is precluded from taxing. Dividends can, however, be taxed by the source state (Art. 10(2) OECD Model). Depending on the percentage of participation and the beneficial owner, the source state may tax dividends at 5 or 15% of the gross amount. The state of residence will also tax but will credit the taxes paid in the source state.
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In tax literature, it is frequently said that DTCs allocate jurisdiction to tax. This terminology has been criticized (cf. Vogel,