Overview of Model Tax Conventions – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.
Overview of Model Tax Conventions – CA Final DT Question Bank
Explain the term “Royalty” as per UN Model Tax Convention. Is it different from the definition contained in OECD Model? Discuss? [CA Final May 2018 (New Syllabus)] [3 Marks]
The term “royalties” as used in UN Model Tax Convention means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broad-casting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.
The term “Royalty” as defined in UN Model Tax Convention is different from the OECD Model with regards to that the term “Royalty” as defined under OECD Model does not include within the definition of royalty, any consideration for the use of, or the right to use, any copyright of films or tapes used for radio or television broadcasting and any consideration for the use of, or the right to use, industrial, commercial or scientific equipment.
Every jurisdiction, in the domestic law, prescribes the mechanism to determine residential status of a person. In case, a person is considered to be resident of both contracting states, it becomes necessary to apply the tie-breaker rule. Discuss the manner for application of the tie-breaker rule. [CA Final Nov 2018 (New Syllabus)] [6 Marks]
Every jurisdiction, in its domestic tax law, prescribes the mechanism to determine residential status of a person. If a person is considered to be resident of both the Contracting States, relief should be sought from Article 4 of the Tax Treaty. A series of tie-breaker rules are provided in Paragraph 2 Article 4 of Model Convention to determine single state of residence for an individual.
The tie-breaker rule would be applied in the following manner:
(i) The first test is based on where the individual has a permanent home. Permanent home would mean a dwelling place available to him at all times continuously and not occasionally and includes place taken on rent for a prolonged period of time. Any place taken for a short duration of stay or for temporary purpose, may be for reasons such as short business travel, or a short holiday etc. is not regarded as a permanent home.
(ii) If that test is inconclusive for the reason that the individual has permanent home available to him in both Contracting States, he will be considered a resident of the Contracting State where his personal and economic relations are closer, in other words, the place where lies his centre of vital interests. Thus, preference is given to family and social relations, occupation, place of business, place of administration of his properties, political cultural and other activities of the individual.
(iii) Paragraph (it) establishes a secondary criterion for two quite distinct and different situations: The case where the individual has a permanent home available to him in both
- Contracting States and it is not possible to determine in which one he has his centre of vital interests;
- The case where the individual has a permanent home available to him in neither Contracting State.
In the aforesaid scenarios, preference is given to the Contracting State where the individual has an habitual abode.
(iv) If the individual has habitual abode in both Contracting States or in neither of them, he shall be treated as a resident of the Contracting State of which he is a national.
(v) If the individual is a national of both or neither of the Contracting States, the matter is left to be considered by the competent authorities of the respective Contracting States.