Taxation of Services Case Studies - Country A and Country B Tax Treaty Analysis

Detailed case study on the taxation implications of cross-border activities involving companies in Country A and Country B. The study delves into various scenarios involving employees and contractors working across borders and analyzes how the tax treaty between the two countries impacts their tax obligations.

• Taxation
• Services
• Case Study
• Cross-border
• Tax Treaty

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1. Case studies on the taxation of services 13 June 2019, Session 6 Capacity Building Unit Financing for Sustainable Development Office Department of Economic and Social Affairs 1 http://www.un.org/esa/ffd/

2. CASE STUDY 1 ACo, resident in Country A, owns all the shares of BCo, resident in Country B BCo manufactures automobiles under license from ACo Country A and Country B have concluded a tax treaty identical to the 2017 UN Model ACo sends Guilia, a quality-control engineer, to supervise BCo s activities and ensure that it adheres to the standards in the license agreement Guilia spends 2 years in Country B and has the use of an office in BCo s plant 2

3. CASE STUDY 1 Guilia is assisted by a team of employees of ACo, each of whom spends 5 months in Country B and works out of Guilia s office in BCo s plant Michael and Robert are engineers employed by ACo and resident in Country A They spend 14 months each in Country B assisting BCo in modernizing its manufacturing operations; they also spend considerable time in Country A working for BCo Michael becomes an employee of BCo but Robert remains an employee of ACo; BCo reimburses ACo for the cost of Robert s salary and fringe benefits 3

4. CASE STUDY 1 BCo hires Marta and Omar, engineers resident in Country A, to provide advice concerning robotics used by BCo in its manufacturing operations; they both spend 5 months working in Country B and 8 months working in Country A for BCo Omar is described as an independent contractor in his contract with BCo Marta is an employee of Engineers International, a firm resident in Country A that supplies engineers for short- term overseas assignments Marta and Omar work with BCo s full-time employees, receive the same compensation and are subject to the same control 4

5. CASE STUDY 1 Assuming that Guilia, Guilia s team,Michael, Robert, Marta and Omar are subject to tax under Country B s domestic law, do the provisions of the treaty between Country A and B prevent or limit Country B s right to tax: Guilia? Guilia s team of ACo s employees? Michael? Robert? Marta? Omar? 5

6. CASE STUDY 2 TCo, a resident of State T, is a member of a multinational group that provides various cleaning and waste management services to businesses in State T and also in other states. TCo enters into a contract with SCo, a company resident of State S to provide its services at three of SCo s business facilities in State S for a period of 180 working days. 6

7. CASE STUDY Subsequently, at a time when TCo has spent 150 working days in State S, TCo and SCo begin negotiations to extend the contract for an additional 90 days. As allowed by the amended contract, TCo assigns its rights and obligations under the contract to SUBCo, a wholly-owned subsidiary of TCo and also a resident of State T. SUBCo performs the required services to SCo for 90 days under the amended contract with the assistance of personnel supplied by TCo 7

8. CASE STUDY 2 Subco performs services for SCo in State S for 90 days with personnel supplied by TCo after TCo finishes its 180 days of work The treaty between States T and S contains a provision identical to Art. 5(3)(b) of the UN Model, which provides that a PE includes: The furnishing of services . . . by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days . . . 8

9. CASE STUDY 2 Both TCo and SubCo claim the benefit of Article 5(3)(b) on the basis that neither of them furnishes services in State S for more than 183 days in any 12-month period. Are TCo and SUBCo entitled to the benefit of the treaty? 9

10. CASE STUDY 3 RCo, a resident of State R, has won a contract to construct a power plant in State S for SCo The construction project is expected to last 10 months The contract is split into 2 contracts for 5 months each: one with RCo and the other with a new subsidiary of RCo, Subco At the insistence of SCo, RCo is jointly liable with Subco under the contract between SCo and Subco Is RCo subject to tax in State S? 10

11. CASE STUDY 4 Google, a company resident in the United States, has subsidiaries in Ireland and Singapore The Singapore subsidiary sells ads to clients in State X Google establishes a company in State X which has several employees who service Google s customers in State X the State X subsidiary is compensated by way of reimbursement for its costs plus a small mark-up The Singapore sub pays royalties to the Irish sub 11

12. CASE STUDY 4 Google United States Ireland State X Singapore services royalties sells ads to clients in State X 12

13. CASE STUDY 5 X, a resident of Singapore, is a senior officer of ACo, a company resident in Singapore ACo has subsidiaries in Country A and State S X is a director and CEO of the sub in State S X receives $US1,000 to attend each board meeting of the State S sub Half of the meetings are held in State S and half in Singapore 13

14. CASE STUDY 5 X also receives $US20,000 for each of the board meetings in Country A X also receives a salary of $US 1m as CEO of the State S sub X spends about 90 days each year in State S What are the tax consequences? 14

15. CASE STUDY 6 Bill Clinton and his wife own all the shares of THCo, a company resident in Country TH, a low- tax country Clinton gives talks for a fee of $US 1.5m each Clients enter into contracts with THCo under which THCo agrees to provide Clinton s services Clinton is an employee of THCo and receives a salary of $US 500,000 annually 15

16. CASE STUDY 6 Clinton visits State S in 2017 to give 3 speeches over a period of 2 weeks THCo receives $US 4.5m Are the fees taxable in State S assuming the US and State S have a treaty similar to the UN Model Convention? 16

17. Thank you TaxffdCapDev@un.org 17 http://www.un.org/esa/ffd/