Tax Treaty Series

ITQ T-

072

January 15, 2021

Question

ACo, a company resident in A, has conducted business through a branch in B for many years. The branch qualifies as a PE under the A/B treaty.

Until recently, the B income tax law included these elements:

Income tax rate on taxable profits of resident companies and branches of non-resident companies: 25%
Withholding tax on dividends paid to non-residents: 15%
Tax on profit remittances by branches of non-resident companies: nil

The B income tax law was recently changed to impose a branch profits remittance tax of 20%.

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

Does the treaty allow the B branch profits remittance tax to be levied on profit remittances by ACo’s branch? If yes, at what rate?

Answer

The branch profits remittance tax ("BPRT") is a tax on income, and therefore it would be a tax covered by the treaty: Art. 2(1). It would also probably be covered by Art. 2(4), but that is unnecessary. Also, note that Art. 24 is not limited to taxes covered by Art. 2: Art. 24(6).

Art. 7(1) allows B to tax the profits attributable to the PE. It does not restrict the tax rate, or the manner of imposing tax, on those profits. Thus, Art. 7(1) should be interpreted as allowing the BPRT to be imposed – subject to my comments below.

Art. 24(3) is more difficult. The effect of the BPRT is that the total B tax on the profits attributable to the PE exceeds the B tax which would be levied on a B-resident company carrying on the same activities. Thus, prima facie, the BPRT appears to breach Art. 24(3).

However, para. 60 of the OECD Comm. on Art. 24 says this:

"In some States, the profits of a [PE] of an enterprise of another Contracting State are taxed at a higher rate than the profits of enterprises of that State…Where such tax is simply expressed as an additional tax payable on the profits of the [PE], it must be considered as a tax levied on the profits of the activities of the [PE] itself and not as a tax on the enterprise in its capacity as owner of the [PE]. Such a tax would therefore be contrary to [Art. 24(3)]."

The phrase, "not as a tax on the enterprise in its capacity as owner of the [PE]", suggests (but does not actually state!) that such a tax would not breach Art. 24(3). B's BPRT is such a tax, and thus there is some support in the OECD Comm. that the BPRT would not breach Art. 24(3).

But that then begs the question: if the BPRT is a tax which is imposed on ACo in its capacity as owner of the PE, and is not a tax on the profits of the activities of the PE itself, does the BPRT comply with Art. 7(1)?

At least one thing is clear: Art. 24 does not require the BPRT rate to be equal to the Art. 10 rate on dividends.

But whether Art. 7(1) and Art. 24(3) allow the BPRT to be imposed at all, is (IMHO) not clear. It's interesting to note that the 2016 US model treaty specifically allows the US's version of B’s BPRT: Art. 10(10).

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.