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CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions

Under the OECD Model Convention, Article 7 on business profits, which statement correctly describes taxation of profits of a non-resident enterprise carrying on business in India through a PE?

India may tax only the profits attributable to the permanent establishment. Article 7 of the OECD Model restricts source taxation of business profits to what the PE would have earned as a separate and independent enterprise, so global profits of the non-resident enterprise cannot be taxed.

  1. AIndia may tax only the profits attributable to the PECorrect
  2. BIndia may tax all global profits of the enterprise
  3. CIndia may tax only profits if the enterprise is incorporated in India
  4. DIndia may tax profits only if the PE exists for more than 12 months, irrespective of nature

Explanation

Article 7(1) allows the source State to tax business profits of a non-resident enterprise only to the extent attributable to the PE there. Taxing global profits contradicts this. Incorporation in India would make it resident, and the 12-month test applies only to specific PE types, not general business profits.

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