02 Preferential Taxation. Study notes. Readings

TAX “Innovating
Educational
PREFERENTIAL TAXATION Services”
KHEEN V. BATINGAL
REVIEW NOTES
I. PREFERENTIAL TAXATION ON BUSINESS REGISTERED IN INVESTMENT

PROMOTION AGENCIES
a. Investment Promotion Agencies – government entities created by
law, executive order, decree or other issuance, in charge of promoting
investments, granting and administering tax and non-tax incentives, and
overseeing the operations of the different economic zones and freeports
in accordance with their respective special laws. These includes:
i. Board of Investments (BOI)
ii. Regional Board of Investments-Autonomous Region in Muslim
Mindanao (RBOI-ARMM)
iii. Philippine Economic Zone Authority (PEZA)
iv. Bases Conversion and Development Corporation (BCDA)
v. Subic Bay Metropolitan Authority (SBMA)
vi. Clark Development Corporation (CDC)
vii. John Hay Management Corporation (JHMC)
viii. Poro Point Management Corporation (PPMC)
ix. Cagayan Economic Zone Authority (CEZA)
x. Zamboanga City Special Economic Zone Authority (ZCSEZA)
xi. PHIVIDEC Industrial Authority (PIA)
xii. Aurora Pacific Economic Zone and Freeport Authority (APECO)
xiii. Authority of the Freeport Area of Bataan (AFAB)
xiv. Tourism Infrastructure and Enterprise Zone (TIEZA)
b. Fiscal Incentives Review Board – given the power to grant appropriate

tax incentives to be granted to registered business enterprises only to
the extent of their approved registered project or activity under the
Strategic Investment Priority Plan. Investment Promotion Agencies,
under delegated authority from the Fiscal Incentives Review Board, may
also exercise the same power of granting tax incentives.
www.certsedu.tech Agamata CERTS Online CPA Review 1

AFAR PREFERENTIAL TAXATION. Review notes
c. Covered businesses
i. Export enterprise – any individual, partnership, corporation,
Philippine branch of a foreign corporation, or other entity
organized and existing under Philippine laws and registered
with the Investment Promotion Agency to engage in
manufacturing, assembling or processing activity, and services
such as information technology (IT) activities and business
process outsourcing (BPO), and resulting in the direct
exportation, and/or sale of its manufactured, assembled or
processed product or IT/BPO services to another registered
export enterprise that will form part of the final export product or
export service of the latter, of at least seventy percent (70%) of
its total production or output.
d. Tax and Duty Incentives and Conditions for Availment

Incentive Conditions of Availment
Income Tax Holiday (ITH)
Special Corporate Income Tax (SCIT) The income tax holiday shall be followed
Rate – for export enterprise, a tax rate by the Special Corporate Income Tax rate
equivalent to five percent (5%) effective or Enhanced Deductions at the option of
July 1, 2020, based on the gross income the export enterprise.
earned, in lieu of all national and local
taxes. In no case shall the enhanced deductions
be granted simultaneously with the
Special Corporate Income Tax.
Enhanced Deductions (ED)

1. Depreciation allowance of shall be allowed for assets that are
assets acquired for the entity’s directly related to the registered
production of goods and enterprise's production of goods and
services (qualified capital services other than administrative and
expenditure) – additional 10% other support services.
for buildings; and additional 20%
for machineries and equipment
2. 50% additional deduction for shall not include salaries, wages,
labor expense incurred in the benefits, and other personnel costs
taxable year incurred for managerial, administrative,
indirect, labor, and support services.

3. 100% additional deduction on  only apply to research and
research and development development directly related to
expense incurred in the taxable the registered project or activity
year of the entity and
 shall be limited to local
expenditure incurred for salaries
of Filipino employees and
consumables and payments of
local research and development
organizations.
4. 100% additional deduction on shall only apply to trainings, as approved
training expense incurred in the by the Investment Promotion Agencies
taxable year based on the Strategic Investment
Priority Plan, given to the Filipino
employees engaged directly in the
registered business enterprise's
production of goods and services.
5. 50% additional deduction on shall only apply to domestic input that are
domestic input expense directly related to and actually used in the
incurred in the taxable year registered export project or activity of the
registered business enterprise.
6. 50% additional deduction on shall only apply to power utilized for the
power expense incurred in the registered project or activity.
taxable year
7. Deduction for reinvestment shall be determined in the Strategic
allowance to manufacturing Investment Priority Plan.
industry – when a manufacturing
registered business enterprise
reinvests its undistributed profit or
surplus in any of the projects or
activities listed in the Strategic
Investment Priority Plan, the
amount reinvested to a maximum
of fifty percent (50%) shall be
allowed as a deduction from its
taxable income within a period of
five (5) years from the time of
such reinvestment

8. Enhanced Net Operating Loss
Carry-Over (NOLCO) – The net
operating loss of the registered
project or activity during the first
three (3) years from the start of
commercial operation, which had
not been previously offset as
deduction from gross income,
may be carried over as deduction
from gross income within the next
five (5) consecutive taxable years
immediately following the year of
such loss
Duty exemption on importation of shall only apply to the importation of
capital equipment, raw materials, capital equipment, raw materials, spare
spare parts, or accessories parts, or accessories directly and
exclusively used in the registered project
or activity by registered business
enterprises.
Value-Added Tax (VAT) exemption on shall only apply to goods and services
importation and VAT zero-rating on directly and exclusively used in the
local purchases registered project or activity by a
registered business enterprise.
Other incentives the importation of COVID-19 vaccine
shall be exempt from import duties, taxes
and other fees, subject to the approval or
licenses issued by the Department of
Health or the Food and Drug
Administration.
Persons who directly import petroleum
products defined under Republic Act No.
8479, otherwise known as the
'Downstream Oil Industry Deregulation
Act of 1998,' for resale in the Philippine
customs territory and/or in free zones as
defined under Republic Act No. 10863,
otherwise known as the Customs
Modernization and Tariff Act, shall not be
entitled to the foregoing tax and duty
incentives, and shall be subject to
appropriate taxes imposed under
CREATE law.

Crude oil that is intended to be refined at
a local refinery, including the volumes that
are lost and not converted to petroleum
products when the crude oil actually
undergoes the refining process, shall be
exempt from payment of applicable duties
and taxes upon importation.
e. Period of Availment
Registered Enterprise Period of Availment
Export enterprise income tax holiday of four (4) to seven (7)
years, depending on location and industry
priorities, and followed by special
corporate income tax rate or enhanced
deductions for ten (10) years.
Domestic market enterprise under the income tax holiday for four (4) to seven
Strategic Investment Priority Plan (7) years followed by special corporate
income tax or enhanced deductions for
five (5) years.
f. Basis for length of income tax holidays (ITH)

i. Location of the registered project or activity
1. National Capital Region
2. Metropolitan areas or areas contiguous and adjacent to
the National Capital Region
3. All other areas
ii. Industry of the registered project or activity

1. Tier I shall include activities that
a. have high potential for job creation
b. take place in sectors with market failures
resulting in underprovision of basic goods and
services
c. generate value creation through innovation,
upgrading or moving up the value chain
d. provide essential support for sectors that are
critical to industrial development; or
e. are emerging owing to potential comparative
advantage.

2. Tier II shall include activities that produce supplies,
parts and components, and intermediate services that
are not locally produced but are critical to industrial
development and import-substituting activities,
including crude oil refining.
3. Tier III activities shall include:
a. research and development resulting in
demonstrably significant value-added, higher
productivity, improved efficiency,
breakthroughs in science and health, and high-
paying jobs
b. generation of new knowledge and intellectual
property registered and/or licensed in the
Philippines
c. commercialization of patents, industrial
designs, copyrights and utility models owned or
co-owned by a registered business enterprise
d. highly technical manufacturing; or
e. are critical to the structural transformation of the
economy and require substantial catch-up
efforts.
II. DOUBLE TAXATION AGREEMENTS

a. General Principles
i. Residence and source-based taxation
1. Residence based taxation – the country can tax
persons if they are residents or domiciled in the country,
regardless of the source of income. In cases of
corporations, the place of incorporation or registration
of the entity is located is its place of residence.
2. Source based taxation – the country which provides
the opportunity and facilities to generate income or
profits should also have the right to tax the same.
ii. Methods for elimination of double taxation

1. Exemption method – a taxpayer is exempt from tax in
their residence country or jurisdiction regardless of
where the income is generated. However, taxpayers
are liable to pay tax in the host country where income is
generated.

2. Credit method – the income of residents regardless of
where it arises are taxable. Under this method, the
country of the resident allow a credit against domestic
tax liability from where a resident pays tax in another
country where the revenue arises.
b. Covered model tax treaties

i. Organization for Economic Co-operation and Development
(OECD) Model Tax Convention (2017)
ii. United Nations (UN) Model Double Taxation Convention (2017)
iii. United States (US) Model Income Tax Convention (2016)
c. Royalties
OECD UN US
1. Royalties arising in a 1. Royalties arising in a 1. Royalties arising in a
Contracting State and Contracting State and paid Contracting State and
beneficially owned by a to a resident of the other beneficially owned by a
resident of the other Contracting State may be resident of the other
Contracting State shall be taxed in that other State. Contracting State shall be
taxable only in that other taxable only in that other
State. 2. However, such royalties Contracting State.
may also be taxed in the
2. The term “royalties” as Contracting State in which 2. Notwithstanding the
used in this Article means they arise and according to provisions of paragraph 1
payments of any kind the laws of that State, but if of this Article:
received as a the beneficial owner of the
consideration for the use royalties is a resident of a) a royalty arising in a
of, or the right to use, any the other Contracting Contracting State and
copyright of literary, artistic State, the tax so charged beneficially owned by a
or scientific work including shall not exceed ___ per resident of the other
cinematograph films, any cent (the percentage is to Contracting State that is a
patent, trade mark, design be established through connected person with
or model, plan, secret bilateral negotiations) of respect to the payor of the
formula or process, or for the gross amount of the royalty may be taxed in the
information concerning royalties. The competent first-mentioned
industrial, commercial or authorities of the Contracting State in
scientific experience. Contracting States shall by accordance with domestic
mutual agreement settle law if such resident
3. The provisions of the mode of application of benefits from a special tax
paragraph 1 shall not this limitation. regime with respect to the
apply if the beneficial royalty in its Contracting
owner of the royalties, 3. The term “royalties” as State of residence; and
being a resident of a used in this Article means

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Contracting State, carries payments of any kind b) in the case of the United
on business in the other received as a States, royalties paid by an
Contracting State in which consideration for the use expatriated entity and
the royalties arise through of, or the right to use, any beneficially owned by a
a permanent copyright of literary, artistic company resident in
establishment situated or scientific work including __________ that is a
therein and the right or cinematograph films, or connected person with
property in respect of films or tapes used for respect to such expatriated
which the royalties are radio or television entity may be taxed in
paid is effectively broadcasting, any patent, accordance with the law of
connected with such trademark, design or the United States for a
permanent establishment. model, plan, secret period of ten years
In such case the formula or process, or for beginning on the date on
provisions of Article 7 shall the use of, or the right to which the acquisition of the
apply. use, industrial, commercial domestic entity is
or scientific equipment or completed. For purposes
4. Where, by reason of a for information concerning of applying this paragraph:
special relationship industrial, commercial or
between the payer and the scientific experience. i) no effect shall be given to
beneficial owner or any amendment to section
between both of them and 4. The provisions of 7874 of the Internal
some other person, the paragraphs 1 and 2 shall Revenue Code after the
amount of the royalties, not apply if the beneficial date of signature of this
having regard to the use, owner of the royalties, Convention; and
right or information for being a resident of a
which they are paid, Contracting State, carries ii) no entity shall be treated
exceeds the amount which on business in the other as an expatriated entity
would have been agreed Contracting State in which that:
upon by the payer and the the royalties arise, through
beneficial owner in the a permanent A) is a connected person
absence of such establishment situated with respect to the
relationship, the provisions therein, or performs in that domestic entity
of this Article shall apply other State independent immediately after the date
only to the last-mentioned personal services from a on which the acquisition of
amount. In such case, the fixed base situated therein, the domestic entity is
excess part of the and the right or property in completed; and
payments shall remain respect of which the
taxable according to the royalties are paid is B) prior to that date, was
laws of each Contracting effectively connected with never a connected person
State, due regard being (a) such permanent with respect to the
had to the other provisions establishment or fixed domestic entity.
of this Convention. base, or with (b) business
activities referred to in (c)

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of paragraph 1 of Article 7. However, an entity
In such cases the described in the preceding
provisions of Article 7 or sentence shall become an
Article 14, as the case may expatriated entity if,
be, shall apply. subsequent to the date on
which the acquisition of the
5. Royalties shall be domestic entity is
deemed to arise in a completed, the entity joins
Contracting State when in filing a U.S. consolidated
the payer is a resident of return with either the
that State. Where, domestic entity or another
however, the person entity that was a connected
paying the royalties, person with respect to the
whether he is a resident of domestic entity
a Contracting State or not, immediately prior to the
has in a Contracting State date on which the
a permanent acquisition of the domestic
establishment or a fixed entity was completed.
base in connection with
which the liability to pay 3. Notwithstanding the
the royalties was incurred, provisions of paragraph 1
and such royalties are of this Article, in the case of
borne by such permanent a company seeking to
establishment or fixed satisfy the requirements of
base, then such royalties paragraph 4 of Article 22
shall be deemed to arise in (Limitation on Benefits) of
the State in which the this Convention regarding
permanent establishment a royalty, if such company
or fixed base is situated. fails to satisfy the criteria of
that paragraph solely by
6. Where by reason of a reason of the requirement
special relationship in subclause (B) of clause
between the payer and the (i) of subparagraph (e) of
beneficial owner or paragraph 7 of Article 22
between both of them and (Limitation on Benefits) of
some other person, the this Convention, such
amount of the royalties, company may be taxed in
having regard to the use, the Contracting State of
right or information for which the royalty arises
which they are paid, and according to the laws
exceeds the amount which of that Contracting State,
would have been agreed except that the tax so
upon by the payer and the charged shall not exceed
beneficial owner in the the highest rate among the

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absence of such rates of tax to which
relationship, the provisions persons described in
of this Article shall apply subparagraph (e) of
only to the last-mentioned paragraph 7 of Article 22
amount. In such case, the (Limitation on Benefits) of
excess part of the this Convention
payments shall remain (notwithstanding the
taxable according to the requirement of subclause
laws of each Contracting (B) of clause (i) of
State, due regard being subparagraph (e) of
had to the other provisions paragraph 7 of Article 22
of this Convention. (Limitation on Benefits))
would have been entitled if
such persons had received
the royalty directly. For
purposes of this
paragraph, a person
described in clause (iii) of
subparagraph (e) of
paragraph 7 of Article 22
(Limitation on Benefits)
shall be treated as entitled
to the limitation of tax to
which such person would
be entitled if such person
were a resident of the
same Contracting State as
the company receiving the
royalties.
4. The term “royalty” as

used in this Article means
payments of any kind
received as consideration
for the use of, or the right
to use, any copyright of
literary, artistic, scientific or
other work (including
cinematographic films);
any patent, trademark,
design or model, plan,
secret formula or process;
or for information

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concerning industrial,
commercial or scientific
experience.
5. The provisions of
paragraphs 1 through 3 of
this Article shall not apply if
the beneficial owner of the
royalties, being a resident
of a Contracting State,
carries on business in the
other Contracting State in
which the royalties arise
through a permanent
establishment situated
therein and the right or
property in respect of
which the royalties are paid
is effectively connected
with such permanent
establishment. In such
case the provisions of
Article 7 (Business Profits)
shall apply.
6. Royalties shall be
deemed to arise in a
Contracting State when
they are in consideration
for the use of, or the right
to use, property,
information or experience
in that Contracting State.
7. Where, by reason of a
special relationship
between the payor and the
beneficial owner or
between both of them and
some other person, the
amount of the royalties,
having regard to the use,
right, or information for
which they are paid,

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exceeds the amount that
would have been agreed
upon by the payor and the
beneficial owner in the
absence of such
relationship, the provisions
of this Article shall apply
only to the last-mentioned
amount. In such case the
excess part of the
payments shall remain
taxable according to the
laws of each Contracting
State, due regard being
had to the other provisions
of this Convention.
d. Dividends
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1. Dividends paid by a 1. Dividends paid by a 1. Dividends paid by a
company which is a company which is a company that is a resident
resident of a Contracting resident of a Contracting of a Contracting State to a
State to a resident of the State to a resident of the resident of the other
other Contracting State other Contracting State Contracting State may be
may be taxed in that other may be taxed in that other taxed in that other
State. State. Contracting State.
2. However, dividends 2. However, such 2. However, such

paid by a company which dividends may also be dividends may also be
is a resident of a taxed in the Contracting taxed in the Contracting
Contracting State may State of which the State of which the
also be taxed in that State company paying the company paying the
according to the laws of dividends is a resident and dividends is a resident and
that State, but if the according to the laws of according to the laws of
beneficial owner of the that State, but if the that Contracting State, but
dividends is a resident of beneficial owner of the if the beneficial owner of
the other Contracting dividends is a resident of the dividends is a resident
State, the tax so charged the other Contracting of the other Contracting
shall not exceed: State, the tax so charged State, except as otherwise
a) 5 per cent of the gross shall not exceed: provided, the tax so
amount of the dividends if charged shall not exceed:
the beneficial owner is a

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company which holds (a) ___ per cent (the a) 5 percent of the gross
directly at least 25 per cent percentage is to be amount of the dividends if,
of the capital of the established through for the twelve-month
company paying the bilateral negotiations) of period ending on the date
dividends throughout a the gross amount of the on which the entitlement to
365 day period that dividends if the beneficial the dividends is
includes the day of the owner is a company (other determined:
payment of the dividend than a partnership) which
(for the purpose of holds directly at least 25 i) the beneficial owner has
computing that period, no per cent of the capital of been a company that was
account shall be taken of the company paying the a resident of the other
changes of ownership that dividends throughout a Contracting State or of a
would directly result from a 365 day period that qualifying third state. The
corporate reorganisation, includes the day of the term “qualifying third state”
such as a merger or payment of the dividend means a state that has in
divisive reorganisation, of (for the purpose of effect a comprehensive
the company that holds the computing that period, no convention for the
shares or that pays the account shall be taken of avoidance of double
dividend); changes of ownership that taxation with the
b) 15 per cent of the gross would directly result from a Contracting State of the
amount of the dividends in corporate reorganisation, company paying the
all other cases. such as a merger or dividends that would have
The competent authorities divisive reorganisation, of allowed the beneficial
of the Contracting States the company that holds the owner to benefit from a
shall by mutual agreement shares or that pays the rate of tax on dividends
settle the mode of dividend); that is less than or equal to
application of these (b) ___ per cent (the 5 percent; and
limitations. This paragraph percentage is to be
shall not affect the taxation established through ii) at least 10 percent of the
of the company in respect bilateral negotiations) of aggregate vote and value
of the profits out of which the gross amount of the of the shares of the payor
the dividends are paid. dividends in all other of the dividends was
cases. owned directly by the
3. The term “dividends” as beneficial owner or a
used in this Article means The competent authorities qualifying predecessor
income from shares, of the Contracting States owner. The term
“jouissance” shares or shall by mutual agreement “qualifying predecessor
“jouissance” rights, mining settle the mode of owner” means a company
shares, founders’ shares application of these from which the beneficial
or other rights, not being limitations. This paragraph owner acquired the shares
debt-claims, participating shall not affect the taxation of the payor of the
in profits, as well as of the company in respect dividends, but only if such
income from other of the profits out of which company was, at the time
corporate rights which is the dividends are paid. the shares were acquired,

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subjected to the same a connected person with
taxation treatment as 3. The term “dividends” as respect to the beneficial
income from shares by the used in this Article means owner of the dividend, and
laws of the State of which income from shares, a resident of a state that
the company making the “jouissance” shares or has in effect a
distribution is a resident. “jouissance” rights, mining comprehensive convention
shares, founders’ shares for the avoidance of double
4. The provisions of or other rights, not being taxation with the
paragraphs 1 and 2 shall debt claims, participating Contracting State of the
not apply if the beneficial in profits, as well as company paying the
owner of the dividends, income from other dividends that would have
being a resident of a corporate rights which is allowed such company to
Contracting State, carries subjected to the same benefit from a rate of tax on
on business in the other taxation treatment as dividends that is less than
Contracting State of which income from shares by the or equal to 5 percent. For
the company paying the laws of the State of which this purpose, a company
dividends is a resident the company making the that is a resident of a
through a permanent distribution is a resident. Contracting State shall be
establishment situated considered to own directly
therein and the holding in 4. The provisions of the shares owned by an
respect of which the paragraphs 1 and 2 shall entity that:
dividends are paid is not apply if the beneficial
effectively connected with owner of the dividends, A) is considered fiscally
such permanent being a resident of a transparent under the laws
establishment. In such Contracting State, carries of that Contracting State;
case the provisions of on business in the other and
Article 7 shall apply. Contracting State of which
the company paying the B) is not a resident of the
5. Where a company dividends is a resident, other Contracting State of
which is a resident of a through a permanent which the company paying
Contracting State derives establishment situated the dividends is a resident;
profits or income from the therein, or performs in that
other Contracting State, other State independent in proportion to the
that other State may not personal services from a company’s ownership
impose any tax on the fixed base situated therein, interest in that entity; and
dividends paid by the and the holding in respect
company, except insofar of which the dividends are b) 15 percent of the gross
as such dividends are paid paid is effectively amount of the dividends in
to a resident of that other connected with such all other cases.
State or insofar as the permanent establishment
holding in respect of which or fixed base. In such case This paragraph shall not
the dividends are paid is the provisions of Article 7 affect the taxation of the
effectively connected with company in respect of the

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a permanent or Article 14, as the case profits out of which the
establishment situated in may be, shall apply. dividends are paid.
that other State, nor
subject the company’s 5. Where a company 3. Notwithstanding the
undistributed profits to a which is a resident of a provisions of paragraph 2
tax on the company’s Contracting State derives of this Article, dividends
undistributed profits, even profits or income from the shall not be taxed in the
if the dividends paid or the other Contracting State, Contracting State of which
undistributed profits that other State may not the company paying the
consist wholly or partly of impose any tax on the dividends is a resident if:
profits or income arising in dividends paid by the
such other State. company, except in so far a) the beneficial owner of
as such dividends are paid the dividends is a pension
to a resident of that other fund that is a resident of
State or in so far as the the other Contracting
holding in respect of which State; and
the dividends are paid is
effectively connected with b) such dividends are not
a permanent derived from the carrying
establishment or a fixed on of a trade or business
base situated in that other by the pension fund or
State, nor subject the through a person that is a
company’s undistributed connected person with
profits to a tax on the respect to the pension
company’s undistributed fund.
profits, even if the
dividends paid or the 4. a) Subparagraph (a) of
undistributed profits paragraph 2 of this Article
consist wholly or partly of shall not apply in the case
profits or income arising in of dividends paid by a U.S.
such other State. Regulated Investment
Company (RIC) or a U.S.
Real Estate Investment
Trust (REIT). In the case of
dividends paid by a RIC,
subparagraph (b) of
paragraph 2 and
paragraph 3 of this Article
shall apply. In the case of
dividends paid by a REIT,
subparagraph (b) of
paragraph 2 and
paragraph 3 of this Article
shall apply only if:

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i) the beneficial owner of

the dividends is an
individual or pension fund,
in either case holding an
interest of not more than
10 percent in the REIT;
ii) the dividends are paid

with respect to a class of
shares that is publicly
traded and the beneficial
owner of the dividends is a
person holding an interest
of not more than 5 percent
of any class of the REIT’s
shares; or
iii) the beneficial owner of

the dividends is a person
holding an interest of not
more than 10 percent in
the REIT and the REIT is
diversified.
b) For purposes of this

paragraph, a REIT shall be
“diversified” if the value of
no single interest in real
property (immovable
property) exceeds 10
percent of its total interests
in real property
(immovable property). For
the purposes of this rule,
foreclosure property shall
not be considered an
interest in real property
(immovable property).
Where a REIT holds an
interest in a partnership, it
shall be treated as owning
directly a proportion of the

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partnership’s interests in
real property (immovable
property) corresponding to
its interest in the
partnership.
5. In the case of the United

States, notwithstanding
the provisions of
paragraph 2 of this Article,
dividends paid by an
expatriated entity and
beneficially owned by a
company resident in
__________ that is a
connected person with
respect to such expatriated
entity may be taxed in
accordance with the law of
the United States for a
period of ten years
beginning on the date on
domestic entity is
completed. For purposes
of applying this paragraph:
a) no effect shall be given

to any amendment to
section 7874 of the Internal
Revenue Code after the
date of signature of this
Convention; and
b) no entity shall be treated

as an expatriated entity
that:
i) is a connected person
with respect to the
domestic entity
immediately after the date
on which the acquisition of

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the domestic entity is
completed; and
ii) prior to that date, was

never a connected person
with respect to the
domestic entity.
However, an entity
described in the preceding
sentence shall become an
expatriated entity if,
subsequent to the date on
domestic entity is
completed, the entity joins
in filing a U.S. consolidated
return with either the
domestic entity or another
entity that was a connected
person with respect to the
domestic entity
immediately prior to the
date on which the
acquisition of the domestic
entity was completed.
6. Notwithstanding the
provisions of paragraphs 1
and 2 of this Article, in the
case of a company seeking
to satisfy the requirements
of paragraph 4 of Article 22
regarding a dividend, if
such company fails to
satisfy the criteria of that
paragraph solely by reason
of:
a) the requirement in
subclause (B) of clause (i)
of subparagraph (e) of

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(Limitation on Benefits) of
this Convention; or
b) the requirement in
clause (ii) of subparagraph
(e) of paragraph 7 of Article
22 (Limitation on Benefits)
that a person entitled to
benefits under paragraph 5
of Article 22 (Limitation on
Benefits) would be entitled
to a rate of tax with respect
to the dividend that is less
than or equal to the rate\
applicable under
paragraph 2 of this Article;
such company may be

taxed in the Contracting
State of which the
company paying the
dividends is a resident and
according to the laws of
that Contracting State. In
these cases, however, the
tax so charged shall not
exceed the highest rate
among the rates of tax to
which persons described in
subparagraph (e) of
this Convention
(notwithstanding the
requirements referred to in
subparagraphs (a) and (b)
of this paragraph) would
have been entitled if such
persons had received the
dividend directly. For
purposes of this
paragraph, (i) such
persons’ indirect

OECD UN US
ownership of the shares of
the company paying the
dividends shall be treated
as direct ownership, and
(ii) a person described in
clause (iii) of subparagraph
dividends.
7. For purposes of this

Article, the term
“dividends” means income
from shares or other rights,
not being debt-claims,
participating in profits, as
well as income that is
subject to the same
taxation treatment as
income from shares under
the laws of the Contracting
State of which the
company making the
distribution is a resident.
The term does not include
distributions that are
treated as gain under the
laws of the Contracting
State of which the
company making the
distribution is a resident. In
such case, the provisions
of Article 13 (Gains) shall
apply.

OECD UN US
dividends, being a resident
of a Contracting State,
other Contracting State, of
which the company paying
the dividends is a resident,
through a permanent
therein, and the holding in
respect of which the
dividends are paid is
effectively connected with
such permanent
shall apply.
9. A Contracting State may

not impose any tax on
dividends paid by a
resident of the other
Contracting State, except
insofar as the dividends
are paid to a resident of the
first-mentioned
Contracting State or the
dividends are attributable
to a permanent
therein, nor may it impose
tax on a corporation’s
undistributed profits,
except as provided in
paragraph 10 of this
Article, even if the
dividends paid or the
undistributed profits
consist wholly or partly of

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profits or income arising in
that Contracting State.
10. a) A company that

is a resident of one of the
Contracting States and
that has a permanent
establishment in the other
Contracting State or that is
subject to tax in the other
Contracting State on a net
basis on its income that
may be taxed in the other
Contracting State under
Article 6 (Income from Real
Property (Immovable
Property)) or under
(Gains) may be subject in
that other Contracting
State to a tax in addition to
the tax allowable under the
other provisions of this
Convention.
b) Such tax, however, may

be imposed:
i) on only the portion of the

business profits of the
company attributable to the
permanent establishment
and the portion of the
income referred to in
subparagraph (a) of this
paragraph that is subject to
tax under Article 6 (Income
from Real Property
(Immovable Property) or
under paragraph 1 of
Article 13 (Gains) that, in
the case of the United
States, represents the

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dividend equivalent
amount of such profits or
income and, in the case of
__________, is an amount
that is analogous to the
dividend equivalent
amount; and
ii) at a rate not in excess of

the rate specified in
subparagraph (a) of
paragraph 2 or paragraph
6 of this Article, but only if
for the twelve-month
period ending on the date
on which the entitlement to
the dividend equivalent
amount is determined, the
company has been a
Contracting State or of a
qualifying third state. The
term “qualifying third state”
has the same meaning as
in clause (i) of
subparagraph (a) of
paragraph 2 of this Article.
e. Interests
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1. Interest arising in a 1. Interest arising in a 1. Interest arising in a
Contracting State and paid Contracting State and paid Contracting State and
to a resident of the other to a resident of the other beneficially owned by a
Contracting State may be Contracting State may be resident of the other
taxed in that other State. taxed in that other State. Contracting State shall be
taxable only in that other
2. However, interest 2. However, such interest Contracting State.
arising in a Contracting may also be taxed in the
State may also be taxed in Contracting State in which 2. Notwithstanding the
that State according to the it arises and according to provisions of paragraph 1
laws of that State, but if the the laws of that State, but of this Article:
beneficial owner of the if the beneficial owner of
interest is a resident of the the interest is a resident of

OECD UN US
other Contracting State, the other Contracting a) interest arising in
the tax so charged shall State, the tax so charged __________ that is
not exceed 10 per cent of shall not exceed ___ per determined with reference
the gross amount of the cent (the percentage is to to receipts, sales, income,
interest. The competent be established through profits or other cash flow of
authorities of the bilateral negotiations) of the debtor or a connected
Contracting States shall by the gross amount of the person with respect to the
mutual agreement settle interest. The competent debtor, to any change in
the mode of application of authorities of the the value of any property of
this limitation. Contracting States shall by the debtor or a connected
mutual agreement settle person with respect to the
3. The term “interest” as the mode of application of debtor or to any dividend,
used in this Article means this limitation. partnership distribution or
income from debt-claims similar payment made by
of every kind, whether or 3. The term “interest” as the debtor or a connected
not secured by mortgage used in this Article means person with respect to the
and whether or not income from debt claims of debtor may be taxed in
carrying a right to every kind, whether or not __________, and
participate in the debtor’s secured by mortgage and according to the laws of
profits, and in particular, whether or not carrying a __________, but if the
income from government right to participate in the beneficial owner is a
securities and income from debtor’s profits, and in resident of the United
bonds or debentures, particular, income from States, the interest may be
including premiums and government securities and taxed at a rate not
prizes attaching to such income from bonds or exceeding 15 percent of
securities, bonds or debentures, including the gross amount of the
debentures. Penalty premiums and prizes interest;
charges for late payment attaching to such
shall not be regarded as securities, bonds or b) interest arising in the
interest for the purpose of debentures. Penalty United States that is
this Article. charges for late payment contingent interest of a
shall not be regarded as type that does not qualify
4. The provisions of interest for the purpose of as portfolio interest under
paragraphs 1 and 2 shall this Article. the law of the United
not apply if the beneficial States may be taxed by the
owner of the interest, 4. The provisions of United States, but if the
being a resident of a paragraphs 1 and 2 shall beneficial owner is a
Contracting State, carries not apply if the beneficial resident of __________,
on business in the other owner of the interest, the interest may be taxed
Contracting State in which being a resident of a at a rate not exceeding 15
the interest arises through Contracting State, carries percent of the gross
a permanent on business in the other amount of the interest;
establishment situated Contracting State in which

OECD UN US
therein and the debt claim the interest arises, through c) interest arising in a
in respect of which the a permanent Contracting State and
interest is paid is establishment situated beneficially owned by a
effectively connected with therein, or performs in that resident of the other
such permanent other State independent Contracting State that is a
establishment. In such personal services from a connected person with
case the provisions of fixed base situated therein, respect to the payor of the
Article 7 shall apply. and the debt claim in interest may be taxed in
respect of which the the first-mentioned
5. Interest shall be interest is paid is Contracting State in
deemed to arise in a effectively connected with accordance with domestic
Contracting State when (a) such permanent law if such resident
the payer is a resident of establishment or fixed benefits from a special tax
that State. Where, base, or with (b) business regime with respect to
however, the person activities referred to in (c) such interest in its
paying the interest, of paragraph 1 of Article 7. Contracting State of
whether he is a resident of In such cases the residence;
a Contracting State or not, provisions of Article 7 or
has in a Contracting State Article 14, as the case may d) in the case of the United
a permanent be, shall apply. States, interest paid by an
establishment in expatriated entity and
connection with which the 5. Interest shall be beneficially owned by a
indebtedness on which the deemed to arise in a company resident in
interest is paid was Contracting State when __________ that is a
incurred, and such interest the payer is a resident of connected person with
is borne by such that State. Where, respect to such expatriated
permanent establishment, however, the person entity may be taxed in
then such interest shall be paying the interest, accordance with the law of
deemed to arise in the whether he is a resident of the United States for a
State in which the a Contracting State or not, period of ten years
permanent establishment has in a Contracting State beginning on the date on
is situated. a permanent which the acquisition of the
establishment or a fixed domestic entity is
6. Where, by reason of a base in connection with completed. For purposes
special relationship which the indebtedness on of applying this paragraph:
between the payer and the which the interest is paid
beneficial owner or was incurred, and such i) no effect shall be given to
between both of them and interest is borne by such any amendment to section
some other person, the permanent establishment 7874 of the Internal
amount of the interest, or fixed base, then such Revenue Code after the
having regard to the debt- interest shall be deemed to date of signature of this
claim for which it is paid, arise in the State in which Convention; and
exceeds the amount which the permanent

OECD UN US
upon by the payer and the establishment or fixed ii) no entity shall be treated
beneficial owner in the base is situated. as an expatriated entity
absence of such that:
relationship, the provisions 6. Where, by reason of a
of this Article shall apply special relationship A) is a connected person
only to the last-mentioned between the payer and the with respect to the
amount. In such case, the beneficial owner or domestic entity
excess part of the between both of them and immediately after the date
payments shall remain some other person, the on which the acquisition of
taxable according to the amount of the interest, the domestic entity is
laws of each Contracting having regard to the debt completed; and
State, due regard being claim for which it is paid,
had to the other provisions exceeds the amount which B) prior to that date, was
of this Convention. would have been agreed never a connected person
upon by the payer and the with respect to the
beneficial owner in the domestic entity.
absence of such
relationship, the provisions However, an entity
of this Article shall apply described in the preceding
only to the last-mentioned sentence shall become an
amount. In such case, the expatriated entity if,
excess part of the subsequent to the date on
payments shall remain which the acquisition of the
taxable according to the domestic entity is
laws of each Contracting completed, the entity joins
State, due regard being in filing a U.S. consolidated
had to the other provisions return with either the
of this Convention. domestic entity or another
entity that was a connected
person with respect to the
domestic entity
immediately prior to the
date on which the
acquisition of the domestic
entity was completed;
e) interest arising in a
Contracting State and
Contracting State that is a
connected person with
respect to the payor of the

OECD UN US
interest may be taxed in
the first-mentioned
Contracting State in
accordance with domestic
law if such resident
benefits, at any time during
the taxable year in which
the interest is paid, from
notional deductions with
respect to amounts that the
Contracting State of which
the beneficial owner is
resident treats as equity;
f) interest arising in a
Contracting State and
Contracting State that is
entitled to the benefits of
this Article only by reason
of paragraph 5 of Article 22
may be taxed in the first-
mentioned Contracting
State, but the tax so
charged shall not exceed
10 percent of the gross
amount of the interest; and
g) interest that is an excess

inclusion with respect to a
residual interest in a real
estate mortgage
investment conduit may be
taxed by each Contracting
State in accordance with
its domestic law.
3. Notwithstanding the
provisions of paragraph 1
of this Article, in the case of
a company seeking to
satisfy the requirements of

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this Convention regarding
a payment of interest, if
such company fails to
satisfy the criteria of that
paragraph solely by reason
of:
a) the requirement in
subclause (B) of clause (i)
of subparagraph (e) of
this Convention; or
b) the requirement in
clause (ii) of subparagraph
that a person entitled to
benefits under paragraph 5
of Article 22 (Limitation on
Benefits) would be entitled
to a rate of tax with respect
to the interest that is less
than or equal to the rate
applicable under
paragraph 2 of this Article;
such company may be

taxed by the Contracting
State in which the interest
arises according to the
laws of that Contracting
State. In these cases,
however, the tax so
charged shall not exceed
the highest rate among the
rates of tax to which
persons described in
subparagraph (e) of

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this Convention
(notwithstanding the
requirements referred to in
subparagraphs (a) and (b)
of this paragraph) would
have been entitled if such
persons had received the
interest directly. For
purposes of this
paragraph, a person
described in clause (iii) of
subparagraph (e) of
interest.
4. The term “interest” as

used in this Article means
income from debt-claims of
every kind, whether or not
secured by mortgage, and
whether or not carrying a
right to participate in the
debtor’s profits, and in
particular, income from
government securities and
income from bonds or
debentures, including
premiums or prizes
attaching to such
securities, bonds or
debentures, and all other
income that is subjected to
the same taxation
treatment as income from
money lent under the law

OECD UN US
of the Contracting State in
which the income arises.
Income dealt with in Article
10 (Dividends) and penalty
charges for late payment
shall not be regarded as
interest for the purposes of
this Convention.
interest, being a resident of
a Contracting State,
other Contracting State in
which the interest arises
through a permanent
therein, and the debt-claim
in respect of which the
interest is paid is
effectively connected with
such permanent
shall apply.
6. For purposes of this

Article, interest shall be
deemed to arise in a
Contracting State when the
payor is a resident of that
Contracting State. Where,
however, the person
paying the interest,
whether a resident of a
Contracting State or not,
has in a Contracting State
a permanent
establishment or derives

OECD UN US
profits that are taxable on a
net basis in a Contracting
State under paragraph 5 of
Article 6 (Income from Real
Property (Immovable
Property)) or paragraph 1
of Article 13 (Gains), and
such interest is borne by
such permanent
establishment or allocable
to such profits, then such
interest shall be deemed to
arise in the Contracting
State in which the
is situated or from which
such profits are derived.
7. The excess, if any, of the

amount of interest
allocable to the profits of a
company resident in a
Contracting State that are:
a) attributable to a
in the other Contracting
State (including gains
Article 13 (Gains)); or
b) subject to tax in the

other Contracting State
under Article 6 (Income
from Real Property
(Immovable Property)) or
(Gains);
over the interest paid by

that permanent
establishment, or in the
case of profits subject to
tax under Article 6 (Income

OECD UN US
from Real Property
(Immovable Property)) or
(Gains), over the interest
paid by that company, shall
be deemed to arise in that
other Contracting State
and to be beneficially
owned by a resident of the
first-mentioned
Contracting State. The tax
imposed under this Article
on such interest shall not
exceed the rates provided
in paragraphs 1 through 3
of this Article.
8. Where, by reason of a
special relationship
between the payor and the
beneficial owner or
between both of them and
some other person, the
amount of the interest,
having regard to the debt-
claim for which it is paid,
exceeds the amount that
upon by the payor and the
beneficial owner in the
absence of such
relationship, the provisions
of this Article shall apply
only to the last-mentioned
amount. In such case the
excess part of the
payments shall remain
taxable according to the
laws of each Contracting
State, due regard being
had to the other provisions
of this Convention.

f. Capital gains
OECD UN US
1. Gains derived by a 1. Gains derived by a 1. Gains derived by a
resident of a Contracting resident of a Contracting resident of a Contracting
State from the alienation of State from the alienation of State from the alienation of
immovable property immovable property real property (immovable
referred to in Article 6 and referred to in Article 6 and property) situated in the
situated in the other situated in the other other Contracting State
Contracting State may be Contracting State may be may be taxed in that other
taxed in that other State. taxed in that other State. Contracting State.
2. Gains from the 2. Gains from the 2. For the purposes of this
alienation of movable alienation of movable Article the term “real
property forming part of the property forming part of the property (immovable
business property of a business property of a property) situated in the
permanent establishment permanent establishment other Contracting State”
which an enterprise of a which an enterprise of a shall include:
Contracting State has in Contracting State has in
the other Contracting the other Contracting State a) real property
State, including such gains or of movable property (immovable property)
from the alienation of such pertaining to a fixed base referred to in Article 6
a permanent available to a resident of a (Income from Real
establishment (alone or Contracting State in the Property Immovable
with the whole enterprise), other Contracting State for Property));
may be taxed in that other the purpose of performing
State. independent personal b) where that other
services, including such Contracting State is the
3. Gains that an enterprise gains from the alienation of United States, a United
of a Contracting State that such a permanent States real property
operates ships or aircraft in establishment (alone or interest; and
international traffic derives with the whole enterprise)
from the alienation of such or of such fixed base, may c) where that other
ships or aircraft, or of be taxed in that other Contracting State is
movable property State. __________,
pertaining to the operation
of such ships or aircraft, 3. Gains that an enterprise i) shares, including rights
shall be taxable only in that of a Contracting State that to acquire shares, other
State. operates ships or aircraft in than shares in which there
international traffic derives is regular trading on a
4. Gains derived by a from the alienation of such stock exchange, deriving
resident of a Contracting ships or aircraft, or of 50 percent or more of their
State from the alienation of movable property value directly or indirectly
shares or comparable pertaining to the operation from real property referred
interests, such as interests of such ships or aircraft, to in subparagraph (a) of
in a partnership or trust,

OECD UN US
may be taxed in the other shall be taxable only in that this paragraph situated in
Contracting State if, at any State. __________; and
time during the 365 days
preceding the alienation, 4. Gains derived by a ii) an interest in a
these shares or resident of a Contracting partnership or trust to the
comparable interests State from the alienation of extent that the assets of
derived more than 50 per shares or comparable the partnership or trust
cent of their value directly interests, such as interests consist of real property
or indirectly from in a partnership or trust, situated in __________, or
immovable property, as may be taxed in the other of shares referred to in
defined in Article 6, Contracting State if, at any clause (i) of this
situated in that other State. time during the 365 days subparagraph.
preceding the alienation,
5. Gains from the these shares or 3. Gains from the
alienation of any property, comparable interests alienation of movable
other than that referred to derived more than 50 per property forming part of the
in paragraphs 1, 2, 3 and cent of their value directly business property of a
4, shall be taxable only in or indirectly from permanent establishment
the Contracting State of immovable property, as that an enterprise of a
which the alienator is a defined in Article 6, Contracting State has in
resident. situated in that other State. the other Contracting
State, including such gains
5. Gains, other than those from the alienation of such
to which paragraph 4 a permanent
applies, derived by a establishment (alone or
resident of a Contracting with the whole enterprise),
State from the alienation of may be taxed in that other
shares of a company, or Contracting State.
comparable interests,
such as interests in a 4. Gains derived by an
partnership or trust, which enterprise of a Contracting
is a resident of the other State from the alienation of
Contracting State, may be ships or aircraft operated
taxed in that other State if or used in international
the alienator, at any time traffic or personal property
during the 365 days pertaining to the operation
preceding such alienation, or use of such ships or
held directly or indirectly at aircraft shall be taxable
least ___ per cent (the only in that Contracting
percentage is to be State.
established through
bilateral negotiations) of 5. Gains derived by an
enterprise of a Contracting

OECD UN US
the capital of that company State from the alienation of
or entity. containers (including
trailers, barges and related
6. Gains from the equipment for the transport
alienation of any property of containers) used for the
other than that referred to transport of goods or
in paragraphs 1, 2, 3, 4 merchandise shall be
and 5 shall be taxable only taxable only in that
in the Contracting State of Contracting State, unless
which the alienator is a those containers are used
resident. for transport solely
between places within the
other Contracting State.
6. Gains from the

alienation of any property
other than property
referred to in paragraphs 1
through 5 of this Article
shall be taxable only in the
Contracting State of which
the alienator is a resident.
7. Where an individual
who, upon ceasing to be a
resident (as determined
Article 4 (Resident)) of one
of the Contracting States,
is treated under the
taxation law of that
Contracting State as
having alienated property
for its fair market value and
is taxed in that Contracting
State by reason thereof,
the individual may elect to
be treated for purposes of
taxation in the other
Contracting State as if the
individual had,
immediately before
ceasing to be a resident of
the first-mentioned

OECD UN US
Contracting State,
alienated and reacquired
such property for an
amount equal to its fair
market value at such time.
g. Business profits
OECD UN US
1. Profits of an enterprise 1. The profits of an 1. Profits of an enterprise
of a Contracting State shall enterprise of a Contracting of a Contracting State shall
be taxable only in that State shall be taxable only be taxable only in that
State unless the enterprise in that State unless the Contracting State unless
carries on business in the enterprise carries on the enterprise carries on
other Contracting State business in the other business in the other
through a permanent Contracting State through Contracting State through
establishment situated a permanent a permanent
therein. If the enterprise establishment situated establishment situated
carries on business as therein. If the enterprise therein. If the enterprise
aforesaid, the profits that carries on business as carries on business as
are attributable to the aforesaid, the profits of the aforesaid, the profits that
permanent establishment enterprise may be taxed in are attributable to the
in accordance with the the other State but only so permanent establishment
provisions of paragraph 2 much of them as is in accordance with the
may be taxed in that other attributable to (a) that provisions of paragraph 2
State. permanent establishment; of this Article may be taxed
(b) sales in that other State in that other Contracting
2. For the purposes of this of goods or merchandise State.
Article and Article [23 A] of the same or similar kind
[23 B], the profits that are as those sold through that 2. For the purposes of this
attributable in each permanent establishment; Article, the profits that are
Contracting State to the or (c) other business attributable in each
permanent establishment activities carried on in that Contracting State to the
referred to in paragraph 1 other State of the same or permanent establishment
are the profits it might be similar kind as those referred to in paragraph 1
expected to make, in effected through that of this Article are the profits
particular in its dealings permanent establishment. it might be expected to
with other parts of the make, in particular in its
enterprise, if it were a 2. Subject to the provisions dealings with other parts of
separate and independent of paragraph 3, where an the enterprise, if it were a
enterprise engaged in the enterprise of a Contracting separate and independent
same or similar activities State carries on business enterprise engaged in the
under the same or similar in the other Contracting same or similar activities

OECD UN US
conditions, taking into State through a permanent under the same or similar
account the functions establishment situated conditions, taking into
performed, assets used therein, there shall in each account the functions
and risks assumed by the Contracting State be performed, assets used
enterprise through the attributed to that and risks assumed by the
permanent establishment permanent establishment enterprise through the
and through the other the profits which it might be permanent establishment
parts of the enterprise. expected to make if it were and through the other
a distinct and separate parts of the enterprise.
3. Where, in accordance enterprise engaged in the
with paragraph 2, a same or similar activities 3. Where, in accordance
Contracting State adjusts under the same or similar with paragraph 2 of this
the profits that are conditions and dealing Article, a Contracting State
attributable to a permanent wholly independently with adjusts the profits that are
establishment of an the enterprise of which it is attributable to a permanent
enterprise of one of the a permanent establishment of an
Contracting States and establishment. enterprise of one of the
taxes accordingly profits of Contracting States and
the enterprise that have 3. In the determination of taxes accordingly profits of
been charged to tax in the the profits of a permanent the enterprise that have
other State, the other State establishment, there shall been charged to tax in the
shall, to the extent be allowed as deductions other Contracting State,
necessary to eliminate expenses which are the other Contracting State
double taxation on these incurred for the purposes shall, to the extent
profits, make an of the business of the necessary to eliminate
appropriate adjustment to permanent establishment double taxation, make an
the amount of the tax including executive and appropriate adjustment if it
charged on those profits. general administrative agrees with the adjustment
In determining such expenses so incurred, made by the first-
adjustment, the competent whether in the State in mentioned Contracting
authorities of the which the permanent State; if the other
Contracting States shall if establishment is situated Contracting State does not
necessary consult each or elsewhere. However, no so agree, the Contracting
other. such deduction shall be States shall eliminate any
allowed in respect of double taxation resulting
4. Where profits include amounts, if any, paid therefrom by mutual
items of income which are (otherwise than towards agreement.
dealt with separately in reimbursement of actual
other Articles of this expenses) by the 4. Where profits include
Convention, then the permanent establishment items of income that are
provisions of those Articles to the head office of the dealt with separately in
shall not be affected by the enterprise or any of its other Articles of this
provisions of this Article. other offices, by way of Convention, then the
royalties, fees or other provisions of those Articles

OECD UN US
similar payments in return shall not be affected by the
for the use of patents or provisions of this Article.
other rights, or by way of
commission, for specific 5. In applying this Article,
services performed or for paragraph 8 of Article 10
management, or, except in (Dividends), paragraph 5
the case of a banking of Article 11 (Interest),
enterprise, by way of paragraph 5 of Article 12
interest on moneys lent to (Royalties), paragraph 3 of
the permanent Article 13 (Gains) and
establishment. Likewise, paragraph 3 of Article 21
no account shall be taken, (Other Income), any
in the determination of the income, profit or gain
profits of a permanent attributable to a permanent
establishment, for establishment during its
amounts charged existence is taxable in the
(otherwise than towards Contracting State where
reimbursement of actual such permanent
expenses), by the establishment is situated
permanent establishment even if the payments are
to the head office of the deferred until such
enterprise or any of its permanent establishment
other offices, by way of has ceased to exist.
royalties, fees or other
similar payments in return
for the use of patents or
other rights, or by way of
commission for specific
services performed or for
management, or, except in
the case of a banking
enterprise, by way of
interest on moneys lent to
the head office of the
enterprise or any of its
other offices.
4. In so far as it has been

customary in a Contracting
State to determine the
profits to be attributed to a
on the basis of an

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apportionment of the total
profits of the enterprise to
its various parts, nothing in
paragraph 2 shall preclude
that Contracting State from
determining the profits to
be taxed by such an
apportionment as may be
customary; the method of
apportionment adopted
shall, however, be such
that the result shall be in
accordance with the
principles contained in this
Article.
5. For the purposes of the

preceding paragraphs, the
profits to be attributed to
the permanent
establishment shall be
determined by the same
method year by year
unless there is good and
sufficient reason to the
contrary.
6. Where profits include

items of income which are
dealt with separately in
other Articles of this
Convention, then the
provisions of those Articles
shall not be affected by the
provisions of this Article.
(NOTE: The question of

whether profits should be
attributed to a permanent
establishment by reason of
the mere purchase by that
of goods and merchandise
for the enterprise was not

OECD UN US
resolved. It should
therefore be settled in
bilateral negotiations.)
III. TAX IMPLICATIONS OF TRANSACTIONS APPLYING THE TAX RULES AND

REGULATIONS, AND SOUND TAX PLANNING STRATEGIES WITHIN
LEGAL AND ETHICAL BOUNDS TO EFFICIENTLY MANAGE TAX
LIABILITIES

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02 Preferential Taxation. Study notes. Readings

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TAX “Innovating

I. PREFERENTIAL TAXATION ON BUSINESS REGISTERED IN INVESTMENT

b. Fiscal Incentives Review Board – given the power to grant appropriate

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d. Tax and Duty Incentives and Conditions for Availment

Enhanced Deductions (ED)

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f. Basis for length of income tax holidays (ITH)

ii. Industry of the registered project or activity

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II. DOUBLE TAXATION AGREEMENTS

ii. Methods for elimination of double taxation

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b. Covered model tax treaties

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4. The term “royalty” as

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2. However, dividends 2. However, such 2. However, such

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i) the beneficial owner of

ii) the dividends are paid

iii) the beneficial owner of

b) For purposes of this

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5. In the case of the United

a) no effect shall be given

b) no entity shall be treated

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ii) prior to that date, was

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such company may be

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7. For purposes of this

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9. A Contracting State may

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10. a) A company that

b) Such tax, however, may

i) on only the portion of the

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ii) at a rate not in excess of

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g) interest that is an excess

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such company may be

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4. The term “interest” as

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6. For purposes of this

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7. The excess, if any, of the

b) subject to tax in the

over the interest paid by