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The Resource The new services PE provision of the Canada-US tax treaty

The new services PE provision of the Canada-US tax treaty

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Summary
The service sector is the fastest-growing economic sector in the world today, and service exports are an important component of the Canadian economy. Canada's principal trading partner with respect to services is the United States. The provision of cross-border services has significant tax implications. Canada, like most countries, taxes the income earned from business activities carried on within its territory. Under international tax treaties, however, this right is modified by the concept of the permanent establishment (PE). Treaties that follow the Organisation for Economic Co-operation and Development (OECD) model tax convention define a PE as, essentially, 'a fixed place of business through which the business of an enterprise is wholly or partly carried on'. In a global service-based economy, however, substantial business activity can occur within a country's territory without any need for a fixed place of business. The fifth protocol to the Canada-US income tax treaty, which came into force on December 15, 2008, amends article V of the treaty to deem services to be provided through a PE if certain conditions are met where the provision of the services would not otherwise create a fixed place of business. Canada is not the only country to be concerned that the traditional concept of a PE as a fixed place of business does not adequately address the taxation of cross-border services. For example, the UN model tax convention, which addresses the economic concerns of developing countries, has long included a services PE provision. In addition, in 2008, the commentary on article V of the OECD model was updated to include an alternative provision with respect to services for member countries that wish to include such additional taxation rights in their treaties. The term 'services' can encompass a broad range of activities; therefore, it is important that all businesses involved in cross-border trade between Canada and the United States be aware of and understand the new services PE provision of the Canada-US treaty. The consequences of having a services PE in Canada are significant. The profits attributable to the services PE will be subject to Canadian income tax. The services PE will also create a tax liability for non-resident employees working at the PE, which will result in additional compliance and compensation costs. There may be indirect tax consequences as well. This article reviews the services PE provision of the Canada-US treaty in light of the OECD alternative provision and the UN model provision, discusses the implications for providers of cross-border services, and makes recommendations to assist businesses in monitoring compliance
Language
eng
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Instance
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The new services PE provision of the Canada-US tax treaty
Title
The new services PE provision of the Canada-US tax treaty
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Subject
Language
eng
Summary
The service sector is the fastest-growing economic sector in the world today, and service exports are an important component of the Canadian economy. Canada's principal trading partner with respect to services is the United States. The provision of cross-border services has significant tax implications. Canada, like most countries, taxes the income earned from business activities carried on within its territory. Under international tax treaties, however, this right is modified by the concept of the permanent establishment (PE). Treaties that follow the Organisation for Economic Co-operation and Development (OECD) model tax convention define a PE as, essentially, 'a fixed place of business through which the business of an enterprise is wholly or partly carried on'. In a global service-based economy, however, substantial business activity can occur within a country's territory without any need for a fixed place of business. The fifth protocol to the Canada-US income tax treaty, which came into force on December 15, 2008, amends article V of the treaty to deem services to be provided through a PE if certain conditions are met where the provision of the services would not otherwise create a fixed place of business. Canada is not the only country to be concerned that the traditional concept of a PE as a fixed place of business does not adequately address the taxation of cross-border services. For example, the UN model tax convention, which addresses the economic concerns of developing countries, has long included a services PE provision. In addition, in 2008, the commentary on article V of the OECD model was updated to include an alternative provision with respect to services for member countries that wish to include such additional taxation rights in their treaties. The term 'services' can encompass a broad range of activities; therefore, it is important that all businesses involved in cross-border trade between Canada and the United States be aware of and understand the new services PE provision of the Canada-US treaty. The consequences of having a services PE in Canada are significant. The profits attributable to the services PE will be subject to Canadian income tax. The services PE will also create a tax liability for non-resident employees working at the PE, which will result in additional compliance and compensation costs. There may be indirect tax consequences as well. This article reviews the services PE provision of the Canada-US treaty in light of the OECD alternative provision and the UN model provision, discusses the implications for providers of cross-border services, and makes recommendations to assist businesses in monitoring compliance
Citation source
In: Canadian tax journal = Revue fiscale canadienne. - Toronto. - Vol. 58 (2010),
http://library.link/vocab/creatorName
Reid, M.L
Geographic coverage
North America
Language note
English
http://library.link/vocab/subjectName
  • OECD Model
  • PE
  • services PE
  • tax treaty
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The new services PE provision of the Canada-US tax treaty
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The new services PE provision of the Canada-US tax treaty
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