Tax Treaty Series

ITQ T-

021

November 15, 2019

Question

ACO, a company resident in country A, carries on a video streaming business. In return for monthly subscription fees, customers are able to watch videos online, and are able to download copies of videos on to their mobile devices in order to watch the videos offline (for a limited period). ACO is the owner or licensee of the copyright in its library of videos.

ACO has many individual customers in country B. The individual customers enter into subscription contracts with ACO on ACO's website. Monthly subscription payments are made to ACO by the charging of customers' credit cards (evidenced by invoices which ACO sends to customers' email addresses). ACO has no physical presence in country B.

ACO is registered for VAT in country B, and has appointed an unrelated accounting firm (BCO) in country B to act as its VAT agent. In accordance with country B law, ACO charges VAT on its invoices to country B customers.

The A/B treaty is identical to the 2011 UN model treaty, and the MLI does not apply to the A/B treaty.

What country B income tax treatment of ACO does the A/B treaty allow?

Answer

(i) PE status:

ACO does not have a PE in B as defined in Art. 5 of the A/B treaty: (a) BCO’s activities do not cause an agency PE for ACO; and (b) ACO’s VAT registration does not cause a PE for ACO (see para. 5 of 2017 OECD Comm. on Art. 5; India has registered a contrary position).

(ii) Royalties:

Art. 12(3) defines “royalties” to mean “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 broadcasting, …”.
Watching the videos online does not involve the use of copyright by the customer.
Downloading the videos on to the customer’s mobile device in order for the customer to watch them offline would not be considered, in many countries, as a relevant use of copyright, for the purpose of the definition of “royalties” in Art. 12(3). This view is reflected in paras. 17.1 to 17.4 of the OECD Comm. on Art. 12; those paragraphs are reproduced in the 2011 and 2017 UN Comm. on Art. 12. Contrary views have been registered by some OECD members (Mexico, Portugal, Spain and Greece) and some non-OECD members (Brazil, India and Colombia).
If the OECD Comm. view on customer downloading is accepted in B, then Art. 12 will not apply. If B takes the opposite view, then Art. 12 would allow B to impose tax on the payments, subject to the limit expressed in Art. 12(2) – if B law actually imposes such a tax, collection by customer withholding would be problematic.

(iii) Business profits:

If Art. 12(2) does not allow B tax, the payments would be exempt from B tax under Art. 7(1).

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