Special Features of the UN Model Convention

1. S. 306Introduction

The cross-border providing of services has become a normal part of the economy and is a growing factor in international economy and trade. Companies are able to provide services for an extended period of time without a physical presence in a country to the residents of that country.

The major goal of Art. 12A is to avoid base eroding payments to other countries through the levying of a withholding tax on fees for technical services. This is important for developing countries because they are disproportionately importers of technical services and mostly have a lack of administrative capacities. Non-resident enterprises can earn substantial income in the source country without being subject to the local tax system. Especially for developing countries, the concept of permanent establishment (PE) poses difficulties in relation to fees for technical services which cause base erosion. Rapid economic changes in cross-border services have enabled companies to be substantially economically active in the source country with no taxation right for the source country through a PE or fixed base. To address this problem, Art. 12A was newly introduced in the U.N. Model Convention 201...