Tax Treaty Case Law around the Globe 2016

S. 313Chapter 27 Australia: Royalties and Business Profits in the IT Sector

Graeme S. Cooper

27.1. Introduction

One of the most obvious differences between the UN Model Convention and the OECD Model Convention is the “force of attraction” proposition in the UN Model: article 7 of the UN Model allows the country where a permanent establishment (PE) is located to tax not only the profits that are attributable to that PE, but also profits arising from, “sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment [and] other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment.”

Typically, where such a provision is included in a treaty, it will be at the request of a developing country, which will typically assume that it is the country where the PE is located and therefore views the “force of attraction” principle as a valuable extension of its taxing rights. One interesting aspect of Tech Mahindra Limited v. Commissioner of Taxation is the attempt by the Australian revenue authorities to use this clause against the developing country. Fortunately...