Tax Treaty Series

ITQ T-

066

November 20, 2020

Question

ACo (a company resident in A) carries on a business of collecting, organising and maintaining various databases, to which it grants access in return for fees.

ACo has 2 clients in B.

The first client (BCo 1) pays a fee to ACo to access its various databases.

The second client (BCo 2) pays a fee to ACo for ACo to create a specialised database customised for BCo 2’s use only. Some of the information in the database is provided by BCo 2, and the remainder is collected by ACo.

The A/B treaty is identical to the 2017 UN model treaty.

ACo has no tangible assets, employees or agents in B.

Does the A/B treaty permit B to levy income tax on the fees paid by BCo 1 and BCo 2 to ACo?

Answer

This question is based on Example 3 in the 2017 UN Comm. on Art. 12A.

The question raises issues under Art. 12 and Art. 12A. It is clear that ACo does not have a PE in B.

Art. 12A

Art. 12A(3) relevantly defines "fees for technical services" (FTS) to mean any payment in consideration for any service of a managerial, technical or consultancy nature. According to the UN Comm.: "…the fundamental concept underlying the definition of [FTS] is that the services must involve the application by the service provider of specialized knowledge, skill or expertise on behalf of a client or the transfer of knowledge, skill or expertise to the client, other than a transfer of information covered by the definition of 'royalties' in [Art. 12(3)]. Services of a routine nature that do not involve the application of such specialized knowledge, skill or expertise are not within the scope of [Art. 12A]."

According to the UN Comm.'s analysis of Example 3:

BCo 1's fees are not covered by Art. 12A, because "[although ACo] used its knowledge, skill and expertise in creating the database, the services that [ACo] provides to BCo 1 – access to the database – are routine services that do not involve the application of [ACo’s] knowledge, skill and expertise for [BCo 1's benefit]."
BCo 2's fees are covered by Art. 12A, because "[ACo] would be applying its knowledge, skill and expertise for the benefit of [BCo 2]."

Art. 12

The Art. 12(3) definition of "royalties" includes payments "for information concerning industrial, commercial or scientific experience".

The OECD Comm. (which is relevantly repeated in the UN Comm.) infers that this phrase is limited to information which is not in the public domain and which has significant value. However, there is no clear statement to that effect. Also, it is known that many developing countries use a wide interpretation of this phrase.

The question does not indicate whether the information in ACo's databases is or is not in the public domain and whether or not it is significantly valuable. If the information is not in the public domain and is significantly valuable, BCo 1's fee should be covered by the "royalties" definition.

The question does not suggest that ACo grants BCo 1 a right to use copyright in the database material.

Conclusion

The A/B treaty allows B to levy tax on BCo 2's fees (Art. 12A), and might allow B to levy tax on BCo 1's fees (Art. 12).

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