Tax Treaty Series

ITQ T-

084

April 23, 2021

Question

ACo, a company resident in A, owns and operates a gold mine in A.

Under the B income tax law, all resident companies, and non-resident companies which operate in B via a branch, are subject to a 30% tax rate on their taxable profits (i.e., after deducting expenses) – subject to one exception. That exception concerns non-resident companies which conduct mining operations in B – such companies are subject to income tax at the rate of 20% applied to their gross mining revenue (i.e., no deductions).

In ACo's case, the B income tax it pays at the 20% rate applied to gross mining revenue, significantly exceeds the B income tax it would pay if it were subject to the "30% on taxable profits" regime.

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

ACo asks you whether it can use Art. 7(1) to claim deductions in computing B income tax.

What do you say?

Answer

Although ACo's gold mine would constitute a PE in B, ACo's B taxation will be governed by Art. 6, and not by Art. 7: see Art. 7(4). Art. 6 does not provide any limitation in regard to the B taxation. In particular, Art. 6 does not prevent B from levying tax on ACo's gross revenue from the gold mine. Thus, the short answer to ACo's question is that Art. 7(1) cannot be used to claim deductions in computing its B income tax.

However, as ACo's gold mine would constitute a PE in B, Art. 24(3) is relevant: see para. 9 of OECD Comm. on Art. 5.

Art. 24(3) requires that B's taxation of ACo's PE is not "less favourably levied" than the taxation levied on B-resident enterprises carrying on the same activities. Under the B income tax law, a resident company which owns and operates a gold mine in B would be subject to a 30% tax rate on its taxable profits (i.e., after deducting expenses). As Art. 24(3) operates in only one direction (i.e., it refers only to "less favourably levied" – it does not seek to equalise the tax treatment), it should provide ACo with this outcome in B: ACo will be subject to B tax which is computed as the LESSER of (i) 20% of gross revenue, and (ii) 30% of taxable profits.

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