CA Final · Direct Tax Laws & International Taxation

Overview of Model Tax Conventions: formula sheet

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Key formulas

Nature of the Model: OECD Model = template for bilateral DTAAs; not binding law; The binding text is always the signed treaty between the two countries.
Residence-source allocation: Each distributive article gives: (a) exclusive right to one state, or (b) shared right, with source-state tax capped; Dividends (Article 10) and interest (Article 11) are shared, with a source-state cap that each treaty sets. Royalties under OECD Article 12 are taxable only in the residence state. The UN Model shares royalties.
Relief methods (Article 23): Exemption method or Credit method, applied by the residence state; Under the credit method, relief is usually limited to the tax that the residence state charges on that income.
Role of Commentary: Commentary = interpretive aid, not part of the treaty text; Use it to clarify meaning, but the treaty wording prevails.
Business profits and PE: Business profits taxable in the source state only if there is a PE there, and only to the extent attributable to that PE; This is the core rule of Articles 5 and 7.
Capital gains (Article 13): Source state may tax: gains from immovable property, gains from movable property forming part of a PE, and (with conditions) gains from shares deriving their value mainly from immovable property. Other gains (Article 13(5)): taxable only in the residence state; Do not apply the source-state rule to every gain. Gains on ordinary shares and other movable property are generally taxable only in the residence state. Gains from ships and aircraft in international traffic are taxable in the state of effective management. Check the signed treaty, as many treaties differ.
Core principle of the UN Model: Source-country taxing rights (UN) ≥ source-country taxing rights (OECD); Say 'wider or equal, not always wider'. On many articles the text is the same.
PE: building site or project: UN: PE if site, construction, assembly or installation project lasts more than 6 months; The OECD Model uses 12 months. Supervisory activities are also covered in the UN text.
PE: services (UN Article 5(3)(b)): UN Article 5(3)(b): services PE if services are furnished by an enterprise through employees or other personnel in a state for more than 183 days in any 12-month period, for the same project or a connected project, and the services are furnished within that state for a customer there; All conditions must be met: the 183-day count, the same or connected project, services performed in the state, and furnished through employees or other personnel. The OECD main text has no such rule.
PE: insurance (UN Article 5(6)): UN Article 5(6): an insurer may have a PE if it collects premiums in the state or insures risks situated there through a person other than an independent agent; Not in the OECD Model.
PE: stock deliveries (UN Article 5(5)(b)): UN Article 5(5)(b): a person who has no authority to conclude contracts but habitually maintains in the state a stock of goods from which he regularly delivers on behalf of the enterprise can create a PE for the enterprise; UN Article 5(5)(b) adds this stock-delivery limb for agents without authority to conclude contracts. The OECD dependent-agent rule applies only to agents who habitually conclude contracts (or play the principal role in concluding them). The PE arises through that person, not through plain storage. The Article 5(4) exceptions (storage, display or delivery of the enterprise's own goods) still apply to the enterprise's own activities.
Business profits: force of attraction: UN: source state may tax profits from sales or business activities of the same or similar kind as those through the PE; A limited force-of-attraction rule. The OECD Model does not have it.
Royalties (Article 12): UN: royalties taxable in both states; the source state's tax rate is left to bilateral negotiation; The OECD Model gives the sole taxing right on royalties to the residence state. Treaty rates in the actual treaty decide the tax.
Fees for technical services (Article 12A): UN Article 12A (added in the 2017 update): fees for technical services may be taxed in the source state; the rate is left to bilateral negotiation; Under the UN Model, FTS has its own Article 12A. The OECD Model has no FTS article. Many Indian DTAAs, especially older ones, include FTS (or fees for included services) in the royalties article (Article 12) instead, so read the treaty. Either way, source taxation with negotiated rates is the UN-style position.
Dividends and interest: rates: UN: no fixed percentage; rates are fixed in bilateral negotiation; The OECD ceilings are 5% or 15% on dividends and 10% on interest. Royalties are taxable only in the residence state under the OECD Model, so it has no royalty ceiling.
Capital gains on shares: UN Article 13(4): source state may tax gains on shares that derive their value mainly from immovable property situated there. UN Article 13(5): source state may tax gains on shares of a company resident there if the holder owned at least a specified percentage during a stated period; The percentage and the period in Article 13(5) are left to negotiation, so check the threshold in the treaty.
Article 5: PE threshold for building site or construction project: OECD: more than 12 months | UN: more than 6 months; This is the usual comparison. A UN-style treaty creates a PE earlier.
Article 5: service PE: OECD: no separate service PE clause | UN: service PE if services are performed in the source state through employees or other personnel and continue for more than 183 days in any 12-month period for the same or a connected project; The services must be furnished in the source state. The PE exists only for that project, and the profits taxed are those attributable to it. The 183-day period is the UN Model threshold, but a bilateral treaty may set a different one.
Article 5: insurance agent: UN: an insurance enterprise is deemed to have a PE if it collects premiums or insures risks through a dependent person (excluding reinsurance) | OECD: no such specific rule; A useful extra point to add in a comparison answer.
Article 5: stock for delivery (dependent person): UN Article 5(5)(b): a PE is deemed where a person with no authority to conclude contracts maintains a stock of goods from which they regularly deliver goods on behalf of the enterprise | OECD: no such clause; This is a dependent-agent rule. It applies to a person who is not an independent agent acting in the ordinary course of business. Do not confuse it with the stock exclusion for a fixed place of business (Article 5(4)), which both models contain in similar form.
Article 7: attribution of profits: OECD: profits attributable to the PE only | UN: limited force of attraction (sales of same or similar goods or similar business activities also taxable in the source state); The OECD removed the old force-of-attraction idea. The UN Model keeps a limited form. Also, the UN Model does not allow deduction of notional payments such as royalties and interest paid by the PE to the head office.
Article 12: royalties: OECD: taxable only in the residence state | UN: taxable in both states, source tax limited to a rate negotiated bilaterally; The UN Model shares taxing rights and leaves the rate to the treaty partners. Article 12 covers royalties only.
Article 12A: fees for technical services: OECD: no separate article (generally business profits under Article 7 or independent services) | UN: Article 12A allows source taxation of technical service fees at a negotiated rate; The UN Model added Article 12A in later versions (2017 onward). Many Indian treaties already have a fees-for-technical-services clause.
Articles 10 and 11: withholding rates: OECD: the Model's own text limits source-state tax to 5% on dividends where a company holds at least 25% of the capital, 15% on other dividends, and 10% on interest | UN: rates left blank for bilateral negotiation; The OECD Model states a maximum rate for each, while the UN Model leaves the figures blank. Do not state UN rates as fixed numbers.
Article 14: independent personal services: OECD: deleted from the Model in 2000 (covered by Article 7) | UN: retained, source taxation if (i) a fixed base is regularly available, or (ii) the stay in the source state amounts to or exceeds 183 days in the fiscal year concerned, or (iii) the remuneration for services performed in the source state is paid by a resident of that state and exceeds an amount fixed in the treaty; Useful as a supporting point. The 183-day test is met at exactly 183 days, not only above it. The third UN trigger depends on the amount fixed in the treaty.
Saving clause (rule): US may tax its own residents and citizens as if the treaty had not come into effect, except for listed exceptions; Applies to US citizens and residents. Know that it has exceptions, so do not call it absolute.
Limitation on benefits (rule): Treaty benefits = Residence + Qualification under an LOB test; Residence alone does not entitle a person to treaty benefits under the US Model.
Vienna Convention, Article 31: General rule: good faith + ordinary meaning + context + object and purpose; Primary rule of interpretation. Apply it first.
Vienna Convention, Article 32: Supplementary means (preparatory work, circumstances of conclusion) if meaning is ambiguous, obscure, or manifestly absurd; Used only after Article 31 fails to give a clear meaning, or to confirm it.
Vienna Convention, Article 33: Treaty authenticated in two or more languages: each text equally authoritative unless the treaty says otherwise; Relevant where texts differ in meaning.
Static vs ambulatory approach: Static = commentary at date of treaty; Ambulatory = commentary as updated, if clarificatory; Frame as two views. Give reasons for each.

Quick revision

A model tax convention is a template for bilateral treaties, not a binding treaty itself.
Its main aims are to prevent double taxation and to allocate taxing rights between countries.
Residence country taxes based on where the person is resident; source country taxes based on where income arises.
The OECD Model generally favours the residence country.
The UN Model generally favours the source country, which suits capital-importing developing countries.
The UN Model departs from the OECD Model mainly in business profits, permanent establishment and service-related provisions.
The US Model reflects US treaty policy and puts weight on anti-abuse and limitation-on-benefits rules.
Commentaries on the models are used as aids when interpreting treaty text.
Under OECD Article 3(2), a term not defined in the treaty is read with reference to the domestic law of the state applying the treaty, unless the context requires otherwise. Separately, Section 90(3) of the Income-tax Act, 1961 lets the Central Government notify the meaning of a term used in the agreement but not defined in the Act or the agreement, provided the meaning is not inconsistent with the treaty. The Income-tax Act, 2025 replaces the 1961 Act from 1 April 2026 and carries the corresponding provision.
In any answer, first name the model, then the article or principle, then apply it to the facts.
In India, under Section 90(2) of the Income-tax Act, 1961 (and the corresponding provision of the Income-tax Act, 2025), the assessee may choose the Act or the treaty, whichever is more beneficial. GAAR and other anti-abuse provisions can still apply.

Common mistakes

Treating the OECD Model as a binding law or treaty. Fix: Write that it is a model text. Only a bilateral DTAA signed by two countries has legal effect.
Saying the Commentary is part of the treaty. Fix: Describe it as an interpretive aid that is persuasive, not binding. The treaty wording prevails.
Saying the UN Model is completely different from the OECD Model. Fix: State that the structure and most articles are similar. The UN Model modifies specific articles to favour the source state.
Writing 12 months for a building-site PE under the UN Model. Fix: Remember it as UN = 6 months, OECD = 12 months.
Stating that the UN Model fixes higher withholding rates. Fix: Say that the UN Model leaves the rates blank to be negotiated. It only allows more source taxation, not fixed rates.
Reversing the PE thresholds for building sites (saying 12 months for UN, 6 months for OECD). Fix: Link the threshold to the stance. UN favours the source state, so the UN period is shorter (6 months). OECD is longer (12 months).
Saying the saving clause protects US citizens from US tax. Fix: Remember it saves the US right to tax its own citizens and residents, subject to listed exceptions.
Treating residence in a treaty country as enough for treaty benefits under the US Model. Fix: Add the LOB step: residence plus passing a qualification test.

Exam tips

In theory questions, begin with one line: model, not law; bilateral treaty is binding.
Learn the article-to-income map. Case MCQs often hinge on matching income to an article.
For PE-based cases, always test Article 5 (including a dependent agent PE) before applying Article 7.
Write the role of Commentary in two sentences: aid to interpretation, not part of the text.
Link your answer to India's treaty relief rule in the Income-tax Act, 2025: the assessee may choose the treaty or the Act, whichever is more beneficial. Cite the section number only as given in the ICAI study material.
For capital gains, do not say the source state taxes every gain. Name the exceptions (immovable property, PE assets, property-rich shares) and say other gains go to the residence state.
Learn the five high-yield differences: site PE months, services PE, insurance and stock PE, force of attraction, and royalties/FTS with negotiated rates.
In comparison questions, write each point in the order of Article, UN position, OECD position, reason.