london and mexico model tax conventions · adapted to the different conditions obtaining in...

FISCAL COMMITTEE

LONDON AND MEXICO

MODEL TAX CONVENTIONS

Commentary and Text

LEAGUE OF NATIONSG E N E V A

Official N o .: C . 8 8 . M . 88 .1946 . I I . A.

Geneva, Novem ber 1946.

LEAGUE OF NATIONS

FISCAL COMMITTEE

LONDON AND MEXICO

MODEL TAX CONVENTIONS

Commentary and Text

N O T E

The cost of p r in ting th is docum ent, w hich was prepared b y th e S ecre taria t of th e League of N ations, was borne by th e U n ited N ations.

Series of League of N ations Publications

II . ECONOMIC AND FINANCIAL 1946. II .A .7.

TA B LE O F CONTENTS

Page

F o r e w o r d ................................................................................................................. 5

I. Commentary on the Model Bilateral Convention on the P revention of the Double Taxation of Income and P r o per t y :

I n t r o d u c t i o n ................................................................................... 8

A d Article

I. Object and Scope of the Model Convention . . 10II. Income from Real P r o p e r ty .................................... 12

II I . Income from Mortgages ........................................ 13IV . Income from B u s i n e s s ............................................. 13V. Income from International Navigation . . . . 22

VI. Remuneration from Personal Services and P ri vate E m p lo y m e n t ................................................ 23

VII. Civil Service Salaries and P e n s io n s .......................... 24V III . Dividends ................................................. 24

IX. Interest on D e b t s .......................................... 26X. Royalties from Real Estate, Patents and Copy

rights ...................................................................... 26X I. Private Pensions and Life A n n u i t i e s ................ 28

X II. Capital G a i n s ........................................................... 28X III . Taxation Rights of the Country of “ Fiscal

Domicile ” ............................................................. 29XIV. Fiscal Domicile in Two C o u n t r i e s ......... 30XV. Taxes on Property and W e a l t h ............. 31

XV I. Equality of T r e a t m e n t ...................................... 31XV II. Taxpayers’ Rights of A p p e a l ............................... 31

XV III . General Preservation of Taxpayers’ Rights . . 32X IX . Relations between Tax Administrations . . . 32XX. Ratification and Duration of the Convention . 32

II. Commentary on the Model Bilateral Convention for the P revention of the D ouble T axation of E states and Successions:

General Structure of the Model C o n v e n t io n ........................ 34

A d Article

I. Object and Scope of the Model Convention . 36II. Real P r o p e r ty ............................................... 38

4704 — 1.725 (A.) 12/46 Imp. K undig , Genève.

4

PageA d Article

III . Business E s t a b l i s h m e n t s ............................... 38IV. Personal P r o p e r t y ............................................ 39V. Deduction of D e b t s ........................................ 40

VI. Domicile T a x a t io n ............................................. 42VII. Inter-Administrative C o-opera tion .............. 43

V III . Ratification and Duration of the Convention . 43

I I I . Commentary on the Model Bilateral Convention for the E stablishment of R eciprocal Administrative Assistance for the Assessment and Collection of T axes on I ncome, P roperty , E states and Successions :

I n t r o d u c t i o n ............................................................................... 44

A d Article

I. Object and Scope of the Model Convention . . 45II. Information to be Supplied on Request . . . . 49

II I . Exchange of readily available Information . . 51IV. Assistance in Tax Collection ............................. 52V. General Safeguards ............................................... 54

VI. Safeguards of Administrative Secrecy . . . . 54VII. Application of the C onven tion ....................... 55

V III. Ratification and Duration of the Convention . 55

** *

Annex : T e x t o f t h e M o d e l B i l a t e r a l T a x C onven t io n s :

1. Prevention of the Double Taxation of Incomeand Property :Mexico D r a f t ................................................... 58London D r a f t .................................................. 59

2. Prevention of the Double Taxation of Estatesand Successions :Mexico D r a f t ................................................... 86London D r a f t .................................................. 87

3. Reciprocal Administrative Assistance for theAssessment and Collection of Taxes on In come, Property , Estates and Successions :Mexico D r a f t ................................................... 100London D r a f t ................................................... 101

F O R E W O R D

In the r e p o r t 1 on the w ork of its te n th session held in London in M arch 1946, th e Fiscal Com m ittee of th e League of N ations expressed itself as follows :

“ During the last session which the Com m ittee held before the war, in June 1939, i t was suggested th at a revision should be undertaken o f th e m odel bilateral conventions on ta x m atters w hich had been prepared in 1928 b y the General M eeting o f G overnm ent Experts on Double T a x a t ion and Fiscal E v a s io n .2

“ These models h ad proved o f the greatest value in facilitating the negotia tion o f t a x treaties, and the Com m ittee sta ted in 1935 th a t :

“ * The ex isten ce o f m odel draft treaties o f th is k in d has proved o f real use in such circum stances in help ing to solve m a n y o f th e technical difficulties which arise in such n egotiations . This procedure has the dual m erit th at , on the one hand , in so far as the m odel con st itu tes the basis o f bilateral agreem ents, it creates a u tom atica lly a u n iform ity o f practice an d legislation , w hile, on th e other hand, inasm uch as it m a y be modified in a n y bilateral agreem ent reached, it is sufficiently elastic to be ad ap ted to th e different conditions ob ta in in g in different countries or pairs o f countries .’ 3

“ The numerous t a x treaties w hich wTere concluded during the decade w hich preceded the war contained, however, various im p ro v e m ents on the 1928 Model Conventions. The Fiscal C om m ittee , for its part, had been able to carrv further the work in it ia ted b y th e General M eeting o f G overn m en t E xperts . Moreover, new7 trends and new problem s had appeared in the fields o f in ternational trade and in vestm en t . C onsequently , i t seem ed desirable to prepare new m odel conventions th a t w ould reflect the technical progress ach ieved since 1928 and cod ify the v iews and recom m endations th a t had been expressed b y the F iscal Com m ittee in the course o f its various sessions.4

1 League of N ations docum en t C.37.M.37.1946.II .A . : Fiscal Committee— Report on the W ork of the Tenth Session of the Committee held in London fro m March 20th to March 26th, 1946.

2 League o f N ations docu m en t C.562.M .178.1928.I I : Double Taxation and Fiscal Evasion— Report presented by the General M eeting o f Government Experts on Double Taxation and T a x Evasion.

3 League of N ations docum en t C.252.M.124.1935.II.A : Fiscal Committee—■ Report to the Council on the Work o f the F ifth Session of the Committee. G eneva. Ju n e 1935.

4 See, in p a r ticu la r , League o f N ations docum ent C.252.M. 124.1935.II .A :Fiscal Committee— Report to the Council on the Work o f the F ifth Session o f theCommittee, pages 5 et seq. R evised t e x t of th e d ra ft Convention for the allocationof business income betw een S ta tes for the purpose of taxa t ion .

6 F O R E W O R D

“ This work o f revision and codification was undertaken b y a S ub-C om m ittee which m et at The H agu e in April 1940, and was con tin u ed b y tw o R egional T a x Conferences w hich were held under th e auspices o f th e F iscal C om m ittee , in Mexico City in June 1940 and J u ly 1943.

“ The C om m ittee has n o w stud ied th e result o f this w ork .1 I t wishes to express its agreem ent w ith m ost o f the conclusions which were reached b y the experts w ho m et in Mexico City in 1943 and is o f th e opinion th a t the Model C onventions prepared b y those experts represent a definite im p ro v em en t on th e 1928 Model Conventions. N everthe less , since th e m em bership o f the M exico City and London m eetings differed considerably , it is natural th a t the participants in th e London m eet in g held, on various po ints , different v iews from those w hich inspired the Model C onventions prepared in Mexico. The general structure o f the Model C onventions drafted at the present session is similar to th at o f the M exico m odels . A certain num ber of changes h a v e been m ade in th e wording, and som e articles have been suppressed because th e y conta ined provis ions already implied in other clauses. On other po ints , n ew articles h a v e been inserted to m ake use o f certain in n o v at ion s con ta in ed in con v en tio n s , such a< those betw een th e U nited K in g d o m and th e U n ited S ta tes , concluded since the 1943 m eeting. V irtually , th e on ly clauses where there is an effective d ivergence betw een th e v ie w s o f the 1943 Mexico meeting and those o f the 1946 L on d on m eet in g are those re lating to the ta x a t io n o f interest, d iv idends, royalties , annuities and pensions. The C om m ittee is aware o f the fact th a t the provisions conta ined in the 1943 Model C onventions m a y appear more a ttractive to some S ta tes— in L atin A m erica for in s ta n ce— th a n those w hich it has agreed during its present session. The tw o te x t s are therefore given on opposite pages in A n n ex A. The Model Conventions, as th e y now stand , can afford guidance to n egotiators o f ta x treaties . T he Comm ittee th in k s th a t the work done b o th in Mexico and in London could be usefu lly rev iew ed and d eveloped b y a balanced group o f tax adm inistrators an d experts from b oth cap ita l- im port ing and capital- exp ortin g countries and from econ om ica lly -ad va n ced and less- ad van ced countries, w hen th e League w ork on in ternational t ax problem s is ta k e n over b y th e U nited N ation s . A com m en tary on the new Model C onventions will be published separate ly in the near future, in accordance w ith the procedure fo llow ed in connection with the 1943 M exico Model C onventions."

T he present docum ent is in tended to furnish th e commenta r y th u s requested by th e F iscal Com m ittee. I t has been p repared b y th e Secre taria t a n d should n o t be tak e n as a

1 League of N a tions do cu m en t C.2.M.2.1945.II.A : Fiscal Committee— Model Bilateral Conventions fo r the Prevention o f International Double Taxation and Fiscal Evasion. Second Regional T a x Conference, M exico, D .F ., J u ly 1943. Geneva. 1945.

F O R E W O R D 7

s ta tem en t in all its p a rts of th e views of th e Com m ittee. I t is merely in tended to provide a w orking in s tru m en t in th e s tudy of the tex ts p repared b y th e Com m ittee. The Model Conventions which a re going to be considered and a re reproduced in the A nnex refer respectively to th e following sub jec t-m atters :

(а) P reven tion o f th e double ta x a tio n of income and p ro p er ty ;

(б) P reven tion of th e double ta x a tio n of esta tes and successions ;

(c) R eciprocal ad m in is tra tive assistance for th e assessm en t a n d collection of taxes on income, property , e s ta tes and successions.

The Model Conventions on th e P reven tion of Double T a x ation are also in tended to avoid ex tra -te rr ito r ia l and discrim inatory ta x a t io n of foreigners.

In te rn a tio n a l double or m ultip le ta x a tio n arises when th e taxes o f tw o or m ore countries overlap in such a m anner th a t persons liable to ta x in m ore th a n one co u n try bear a h igher tax burden th a n if th ey were sub jec t to one t a x jurisd ic tion only. The add itiona l bu rden so incurred m ust, of course, be due no t m erely to differences in t a x ra tes for th e countries concerned, b u t to th e fac t th a t tw o or more jurisdictions concurrently impose taxes hav ing the same bases and incidence w ithout regard to th e claims of the o ther ta x jurisdictions.

8 C O M M E N T A R Y

I . CO M M ENTA RY ON T H E M O D EL B IL A T E R A L C O N V E N T IO N ON T H E P R E V E N T IO N OF TH E D O U B LE T A X A T IO N O F INCOM E AND P R O P E R T Y

I n t r o d u c t i o n

The cases of in te rnationa l double ta x a tio n th a t m ay arise in connection w ith taxes on income a n d p ro p er ty fall into th ree classes. The first and m ost im p o rtan t category includes th e cases due to the co-existence of personal and impersonal ta x liability . T ax liability is said to be personal w hen i t is based on th e personal s ta tu s of th e tax p a y e r him self—e.g., his n a tiona lity , domicile, residence. Im personal t a x liability exists w hen a coun try taxes income earned or received w ith in its te rr ito ry regardless of th e personal s ta tu s of th e recipient. A ny person who is tax ab le in one coun try on account of his personal s ta tu s an d who receives incom e from ano ther country or holds p ro p er ty there in is exposed to such double taxation. This resu lt can be avoided only if one or b o th of th e jurisdictions concerned lim it th e ir fiscal claims or allow a credit aga in s t th e ir t a x on account of th e foreign tax .

Lender a second category come the cases of double taxation due to the fac t t h a t countries ap p ly different criteria as regards personal t a x liability , or define differently th e bases of such liability . T axpayers whose personal allegiance is divided betw een tw o or m ore countries or is doub tfu l m ay be subject to double ta x a t io n of th is kind, as, for instance: nationals of one c o u n try having th e ir domicile or residence in another, persons w ith a domicile or residence in tw o different countries, persons sim ultaneously regarded by tw o ta x jurisdictions as domiciled o r resident in th e ir respective territories.

A th ird k ind of in te rna tiona l double ta x a t io n of income and p ro p er ty includes th e cases where two or m ore countries regard a given kind o f incom e or p roperty as taxab le in their respective territo ries because th e y app ly different tes ts of im personal ta x liability . Double tax a tio n of th is k ind may

IN C O M E A N D P R O P E R T Y 9

occur, for instance, when th e assets or activ ities th a t produce a given income are located o r carried o u t in m ore th a n one country, or when th e income is collected elsewhere th a n in th e country where it is earned or from which it is due.

According to th e proposals embodied in th e Mexico and London Model Conventions, double tax a tio n of income and property is p reven ted b y two sets of clauses which are m u tua lly com plem entary. I n th e first place, a definition is given of the conditions under which each kind of income as characterised by the ty p e of p ro p erty or ac tiv ity from which it is derived m ay be tax ed in a c o u n try according to th e criterion of impersonal t a x liability. In th e second place, it is provided th a t taxes so paid a re to be deducted from , or cred ited against, the ta x due b y th e tax p a y e r in th e coun try where he has his residence or “ fiscal domicile ”.

B oth in th e Mexico and London drafts, A rticle I o f the Model Convention on incom e and p ro p erty taxes defines th e general object and scope of the instrum en ts . Articles I I to X I I ind ica te th e conditions under which th e various k inds of income, as defined by th e ir economic source, m ay be taxed in a coun try when th e beneficiary has his residence o r “ fiscal domicile ” in the o ther coun try . In the Mexico d raft, these articles follow th e principle th a t incom e m ay be taxed in a country w hen i t has its source there in : i.e., when i t results from p ro p er ty or activ ities located in th a t coun try . This principle is also ad m itted in th e London d raft , b u t i t is modified as regards in terest, dividends, royalties, annuities and p riva te pensions.

In bo th drafts, Articles X I I I an d X IV refer to tax a tio n in the co u n try of perm anen t residence or fiscal domicile. In the London d raft, a new Article X V has been inserted to cover taxes on p roperty , capita I and w ealth . D iscrim inatory tax a tio n is dealt witli in Article X V of th e Mexico d ra f t a n d Article X V I of the L ondon draft, which have the same wording. P ro tec tion of tax p ay ers’ rights is th e special sub jec t of Article X V I of the Mexico d ra f t an d Articles X V II and X V II I of th e London draft. F inally , th e las t tw o articles of bo th drafts refer to the im plem entation an d d u ra tion of th e convention.

In bo th d rafts, th e Model Convention is followed b y a Protocol contain ing definitions of such phrases as “ fiscal


dom icile ”, “ p e rm anen t es tab lishm ent ” and rules of procedure on such m atte rs as th e allocation of business profits. The articles of th e Pro tocol will be considered in th e com m entary which follows togethe r w ith th e articles of the Model Conven tion to which th ey respectively refer. H enceforth , separate reference to th e Mexico or L ondon d rafts will be m ade only w hen th e y differ. Moreover, when an article is referred to, i t should be tak e n as an artic le of th e Model Convention and w hen reference is m ade to an article of th e Protocol, i t will be explicitly s ta ted .

Ad Article I .— O b j e c t a n d S c o p e o f t h e M o d e l C o n v e n t i o n

According to A rticle I , th e Convention is to ap p ly to all n a tu ra l and ju rid ica l persons who have th e ir “ fiscal domicile in one of th e con trac ting S ta tes and , a t th e same tim e, derive incom e which is tax ab le in th e te r r ito ry of th e o ther State. F u r th e r , A rticle X V of th e L ondon d ra f t ex tends th e applica tion of th e C onvention to “ taxes on p roperty , cap ita l or increm ent o f w ealth ”.

T he question of defining an d determ ining “ fiscal domicile " is dealt w ith in A rticle I I of th e Protocol. This seemed desirable because na tiona l ta x laws an d practices differ in those respects.

According to A rticle I I o f th e Protocol, th e phrase “ fiscal domicile ” signifies, in th e case of individuals, th e place where a person has his norm al residence or p e rm anen t home. This definition is th a t used in th e earlier m odel conventions drafted by th e Fiscal Com m ittee. I t is, however, added th a t , in case th e tax p a y e r has several residences, his fiscal domicile will be his m ain residence, which will be determ ined in th e light o f th e dura tion , regu larity , frequency of his s tays, th e place where th e fam ily of th e ta x p a y e r is usually present, the p rox im ity to th e place w here th e p a r ty concerned carries on his occupation. Accordingly, in de term in ing the “ fiscal domicile ” of an ind iv idual, reference woidd have to be made no t only to th e m ere possession or ava ilab ility of a dwelling b u t also th e fam ily, social a n d economic connections binding a person to a given place.

The wording o f p a rag rap h 4 of Article I I of th e Protocol differs in th e Mexico an d L ondon d rafts . According to the Mexico form ula, th e fiscal domicile of a partnersh ip , company


or o ther sim ilar e n ti ty would be s itua ted in th e co u n try under the laws of which it was organised. According to the London formtda, th e fiscal domicile of such entities would be th e country in which their real cen tre of m anagem ent is s itua ted . In favour of th e Mexico definition, it was s ta ted th a t i t agreed bette r w ith A m erican legal system s. Fo r its p a rt , th e London definition is th a t contained in the earlier w ork of th e Fiscal Com m ittee an d i t appears in m ost ta x trea ties concluded between E u ropean countries.

The Convention is in tended to app ly to all tax p ay ers in th e contracting S ta tes , w hether nationals or foreigners, provided they have th e ir “ fiscal domicile ” in one of th e tw o con tracting States. Indeed, since foreigners w ith the ir fiscal domicile in a country are generally sub jec t there in to a general ta x liability on their to ta l incom e from dom estic and foreign sources, it is legitim ate th a t th e y should enjoy th e doub le-taxa tion relief provided by th e Convention.

N ationals of th e con tracting S ta tes who have th e ir “ fiscal domicile ” in a th ird S ta te do not come under th e provisions of the Convention, since m ost countries do no t t a x the ir nationals having th e ir fiscal domicile abroad , except, of course, on the income th ey derive from th e ir coun try . The s ta tu s of such persons would have to be considered by ta x t re a ty negotiators w hen one or bo th of th e S ta tes concerned bases personal liab ility to income ta x on na tio n a lity as well as on “ fiscal domicile ”,

The Convention is in tended to app ly to all o rd inary an d special taxes on indiv idual a n d corporate income, w hatever m ay be th e ir denom ination a n d m ethod of assessm ent. In the London d raft, its provisions ex tend also to taxes on property , capital and w ealth to which a reference is m ade in A rticle X V of th a t d raft. The s tru c tu re of Article I is such as to enable tax negotiators to ind icate, th rough an enum eration , th e taxes to which the Convention should apply . Such an enum eration might include, in add ition to national taxes levied by the central o r federal G overnm ent, taxes levied by political su b divisions and local au tho rities such as th e S ta tes of a federation, provinces and m unicipalities.

P a rag raph 2 o f Article I o f th e C onvention contains a provision w hich is in tended to assure th e au to m a tic a d a p ta tio n


of th e C onvention to changes in th e taxes of th e contracting S ta tes . I t does so by provid ing for th e extension of th e provisions of th e Convention to taxes or increases of taxes in tro duced a fte r th e signature of th e in strum en t, p rovided such new levies res t upon su b s tan tia lly th e sam e bases as th e taxes enum erated in th e convention. I t is m oreover specified in A rticle X I X of the L ondon d ra f t t h a t “ ... in th e even t of subs tan tia l changes o f ta x laws of e ither o f th e contracting S ta tes , th e com peten t au th o rities of th e tw o contracting S ta tes shall confer toge the r an d tak e th e m easures required in accordance w ith th e spirit of th e Convention

Ad Article I I . — I n c o m e f r o m R e a l P r o p e r t y

In b o th the Mexico and London versions, th e Model Conven tion follows the generally accepted principle th a t income from real p ro p erty is tax ab le in the c o u n try where th e real p ro p e r ty is s itua ted . In th is con tex t, income from real prop e r ty m eans the income th a t resu lts d irec tly from th e ownership or possession of real p roperty , as such income an d property are defined in th e coun try w here th e la t te r is s itua ted , according to Article 111 of th e Protocol. T he incom e in question is m ain ly represen ted b y th e ren t received from a te n a n t and also th e ren ta l value of th e p ro p er ty when it is occupied by th e ow ner or possessor personally , in case th is ren ta l value is sub jec t to incom e ta x or to a su b s ti tu te form of ta x a t io n under th e laws of the c o u n try concerned.

I t m ay be no ted th a t “ royalties from im m ovable p roperty or in respect of th e operation o f a m ine, a q u a rry or o ther natural resource ” a ie m entioned separa te ly in A rticle X . T h a t article, however, follows th e sam e principle as is con ta ined in Article II, an d s ta tes th a t such royalties a re tax ab le in th e c o u n try where th e p ro p e r ty in respect of which th ey are due is s itua ted .

P rofits resulting from th e sale and exchange of real property are governed b y A rticle X I I , b u t th is article applies th e same principle as in Article I I an d provides for th e ta x a t io n of such profits in th e co u n try where the p ro p e r ty concerned is situated.

Incom e derived from th e exp lo ita tion o f lands, buildings, an d sub-soil as a p a r t of a business, including m ining, forestry and agricu ltu re , does n o t come w ith in th e purv iew of Article II, b u t o f A rticle IV , concerning business income.


A d Article I I I .— I n c o m e f r o m M o r t g a g e s

The effect of A rticle I I I , parag raph 1, is to m ake th e rule governing th e income from real p roperty a p p ly also to tax a tio n of income from m ortgages on such p roperty . This ru le would, however, no t app ly to those so-called m ortgage bonds which are not guaran teed by a n y specific real p ro p erty and which are issued b y credit in stitu tions in order to finance the loans th ey grant on m ortgages d raw n up in the ir nam es. Such bonds would come ra th e r under the provisions of Article IX , which applies to incom e from m ovable capital in general, in th e Mexico d raft , and to in terest on debts in th e L ondon draft.

By ana logy w ith th e above-m entioned rule on income from mortgages on real p roperty , th e second p a rag raph of Article I I I provides th a t income from m ortgages on sea and a ir vessels is taxab le in th e c o u n try of registry, since such vessels are generally regarded as being legally s itua ted in th a t country .

Ad Article I V . — I n c o m e f r o m B u s i n e s s

B oth in th e London an d Mexico drafts, “ incom e from an y industrial, com m ercial or agricu ltu ra l en terprise and from an y other gainful occupation ” is governed by Article IV of the Model C onvention and Articles IV to V I I I o f th e Protocol. Such incom e is m ain ly represented by business profits and this phrase shall be used for b rev ity ’s sake.

The first question which arises in in te rna tiona l ta x practice concerning business profits is th e following: W hat are the facts which render an en terprise liable to ta x a tio n on its profits in a foreign co un try ? This question is dealt w ith in p a ra graphs 1 and 2 of A rticle IV in b o th drafts. According to th e Mexico version, an en terprise will be liable to t a x on its profits in a foreign coun try if i t has carried ou t its business or activ ities in th a t c o u n try provided such activ ities did not m erely tak e the form of isolated or occasional transactions . On th e o ther hand, th e L ondon d ra f t requires th a t an en terprise should have a “ perm anen t estab lishm ent ” in a coun try to becom e subject to the incom e-tax laws o f t h a t country .

I t was argued in favour of the criterion con ta ined in the Mexico d ra f t th a t , if an enterprise were to be tax ab le on its profits in a foreign c o u n try only if it had a pe rm anen t establish-


m ent in th a t coun try , some countries would lose revenue. Moreover, ce rta in form s of fiscal evasion m ight be encouraged. Indeed , some enterprises m igh t seek to avoid ta x a t io n in a c o u n try by carry ing ou t th e ir business in th a t coun try w ithout m ain ta in ing a perm anen t estab lishm en t there in or b y concealing th e existence of such an estab lishm ent.

How ever, w hen th e Fiscal C om m ittee considered in London the Mexico d raft , it referred to th e fac t t h a t th e criterion of th e “ p e rm anen t estab lishm ent ” m ore or less as defined by th e C om m ittee in its earlier w ork 1, was con ta ined in nearly all doub le-taxa tion trea ties re la ting to business income. On th a t occasion, it was s ta ted th a t th e use of th is criterion was no t in itself a p t to fac ilita te fiscal evasion since, in v irtue of Article X I I I of th e Model T ax Convention, th e to ta l tax liab ility of an enterprise rem ains, as a rule, th e same, no m a t te r in w hat proportion its incom e is divided betw een its own co u n try an d th e foreign co u n try w here i t m ay do business. F u r th e r , i t was recalled t h a t th e detec tion o f enterprises concealing th e ir business from th e ta x au tho rities was essentia lly a m a t te r for in te rn a l ta x adm in is tra tion . F inally , past experience was said to show th a t it is ex trem ely difficult to t a x foreign enterprises efficiently and equ itab ly when th ey do no t possess a p e rm anen t estab lishm en t in a country .

The ph rase “ pe rm anen t e s tab lishm en t ” is defined in A rticle V, p a rag rap h 1. of th e Protocol. Two conditions are required in order for an en terprise to be considered as possessing a “ p erm anen t estab lishm en t ” in a c o u n try : i t must have some “ fixed place ” of business in th e coun try ; and that p lace of business m u st have a p roductive charac te r— i.e.. co n tr ib u te to business earnings.

T here are estab lishm ents w hich fulfil only the first condition. These should therefore n o t give rise to incom e-tax liability in th e c o u n try where th ey a re s itua ted . This class includes es tab lishm ents w hich do n o t d irec tly con tr ibu te to business earnings, such as research laboratories, experim ental plants, in fo rm ation bu reaux , storehouses, purchasing offices, advertising displays an d showrooms where no goods are sold. lo

1 See, in p a r ticu la r , League of N ations do cu m en t C.252.M .124.1935.II .A : Fiscal Committee— Report to the Council on the Work of the F ifth Session of the Committee. Geneva, Ju n e 1935.


apply income ta x on a n assum ed profit in th e case of such establishm ents would easily lead to a rb itra ry or ex tra -te rr ito r ia l taxation.

The case of purchasing offices deserves special m ention an d various ta x trea ties con ta in specific provisions in th e ir connection. F rom a general po in t of view, it is sometim es argued tha t, when goods a re bought in a coun try , th e profits should be divided betw een th e tw o functions of purchase an d sale ju s t as they are divided betw een m anufactu re and sale. I t is added th a t to exem pt purchasing estab lishm ents of foreign e n te r prises would constitu te a d iscrim ination aga inst dom estic exporters. On th e o th e r hand , i t has been po in ted ou t th a t the act of purchasing in itself yields no profits. Indeed , unlike producing, converting, processing, m anufactu ring , sorting, p re serving, assem bling, packing an d tran sporting , a purchase adds no value to th e th in g bought. Consequently , it seems tha t the tax a tio n of a so-called purchasing profit by th e country where th e purchasing estab lishm ent is s itua ted , except perhaps w hen incom e is a t t r ib u te d to a purchasing estab lishment on a commission basis— i.e., as if th a t es tab lishm ent were an independen t agen t w orking for a foreign firm— would give an ex tra -te rr ito r ia l scope to its incom e tax .

Though th e Mexico and London drafts do no t con ta in an y explicit ride abou t th e incom e-tax t re a tm e n t of such es tab lish ments, it m ay be m entioned th a t an earlier unpublished d ra f t stipulated th a t th e “ m ere purchase of goods by an estab lish ment in one co u n try for th e supp ly of selling or processing establishments in th e o ther coun try ” could not be regarded as a basis for incom e-tax liab ility in th e coun try w here th e purchase was m ade. I t seemed understood th a t th is rule would apply only if th e purchasing estab lishm en t which th e e n te rprise concerned m ain ta ined in t h a t coun try confined its activities to purchasing only, and rendered no o ther services such as sorting, grading, or packing goods to th e en terprise to which it belonged.

The Mexico and L ondon Model Conventions have tak en over from the earlier work of the Fiscal C om m ittee th e p ro visions which allow a d istinction to be m ade betw een dealings through an au tonom ous agen t and dealings th ro u g h a p e rmanent estab lishm ent or branch. According to Article V,


p a rag rap h 3, of th e Protocol, a foreign enterprise is not, in principle, liable to incom e ta x in a coun try if its operations in t h a t coun try are exclusively carried ou t th rough a broker, commission agent, or o ther agen t of a genuinely independent s ta tu s in t h a t country . A n agent, however, will n o t be considered as independent, according to Article Y, paragraph 4. of th e P rotocol, a n d th e enterprise for which he acts will be liable to income ta x in th e coun try where he is established in cases such as th e following: th e agen t hab itua lly ac ts in the nam e of the enterprise concerned as a du ly accredited agent an d en ters in to con tracts on its behalf; th e agen t is a salaried em ployee of th e en terprise a n d hab itua lly tran sac ts business on its acco u n t; th e agen t hab itua lly holds, for th e purpose of sale, a stock of goods t h a t belong to the enterprise.

Article V, p a rag raph 5, of th e P rotocol adds th a t , when the office a n d business expenses of the agen t—in particular, the r e n t of th e prem ises used by h im w hen w orking for th e enterprise conferned—are paid b y th a t enterprise, th is fact will be regarded as proof of a co n trac t of em ploym ent, indicating th a t th e enterprise possesses a n estab lishm ent in th e country.

According to th e above-m entioned provisions, there seem to be consequen tly four d istinct criteria according to which a foreign enterprise m ay be deemed to have an establishm ent in th e coun try where it deals th rough an agen t:

(a) Pow er of th e local agen t to b ind th e enterprise :(b) Existence o f a co n trac t of em ploym ent with a

local agen t;(c) M aintenance in th e coun try o f a stock of goods un

der th e control of an agen t for sales in th a t country ;(d) P ay m en t of the ren t of the premises used by the

agent and of his office expenses.

A ny of these four conditions is sufficient to render an enterprise liable to income ta x in its own nam e in th e co u n try where an agen t operates, p rovided th a t th e condition which is fulfilled corresponds to a pe rm anen t s ta te of th ings or an habitual p ractice.

On th e o th e r hand , pa rag raphs 6 and 7 of Article V of the P ro toco l s tipu la te th a t foreign enterprises doing business in a

I N C O M E A N D P R O P E R T Y 17

country th rough brokers a n d commissioned agents of a genuinely independent s ta tu s , or th rough comm ercial t ra v e llers visiting custom ers or suppliers in a country , should not be liable to income ta x in th a t country.

P arag raph 8 of Article V of the Protocol refers to subsidiary companies. I t s ta tes th a t a subsidiary cannot be regarded as a perm anent estab lishm ent of th e pa ren t enterprise. This p ro vision has tw o m ain effects. In th e first place, the coun try where th e subsid iary is s itua ted is no t en titled to ta x the parent com pany except, of course, on the dividends which the parent com pany m ay receive from its subsidiary, in accordance with the provisions of Article IX of th e Mexico d raft and Article V II I , parag raph 2, of the L ondon Model Convention, to which reference is m ade on page 25. Secondly, in tax ing the parent com pany, th e au thorities of th e coun try in which such company is s itu a ted m ay no t tak e into account th e ac tua l profits m ade by th e subsidiary com pany in the o ther country , but only the dividends an d o ther income paid by the subsidiary to the p a ren t com pany. These rules follow th e principle th a t a subsidiary constitu tes a d istinct legal e n ti ty an d should therefore be tax ed separately . A t th e same tim e, Article V II of the Protocol indicates the criteria according to which the correctness of the m u tu a l relations betw een pa ren t and sub sidiary companies can be checked so as to avoid abuses resulting in th e diversion of profits or losses from one com pany to the other.

While parag raphs 1 a n d 2 of Article IV of th e Model Convention and th e com plem entary provisions in A rticle V of th e Protocol, which have been considered above, define th e conditions under which an enterprise m ay be subject to income ta x in a foreign country , paragraphs 3 an d 4 of Article IV of th e Model Convention and Article V I of th e P ro tocol refer to th e m ethod of de term ining th e share of its total profits on which an enterprise m ay be taxed in a foreign coun try when it possesses an estab lishm ent in th a t country.

The m ain principle regard ing allocation of profits is th a t the profits on which a b ranch or perm anen t estab lishm ent of a. foreign enterprise m ay be tax e d in the co u n try where such establishment is s itua ted cannot exceed th e earnings th a t a re


th e direct resu lt of the ac tiv ities of th e estab lishm ent concerned or th e yield of th e assets pe rta in ing to it. Concerning the m ethod of app lication of th is principle, section A of parag raph 1 o f A rticle VI of th e P ro toco l s ta tes t h a t “ there shall be a t t r ib u te d to each p e rm anen t estab lishm ent th e n e t business incom e which i t m igh t be expected to derive if i t were an independen t en terprise engaged in th e sam e or sim ilar activities, under th e sam e or sim ilar conditions ”. This m ethod of determ ining or allocating th e profits a tt r ib u ta b le to a perm anent e stab lishm ent is know n as th e m ethod of separa te accounting. I ts in tended resu lt is t h a t each estab lishm en t or branch is tax ed as if i t cons titu ted a d istinct independent enterprise a n d th e profits of th e estab lishm en t are assessed independently o f th e results of th e business done elsewhere by th e enterprise to which it belongs. This m ethod implies as a rule t h a t records a n d accounts are kep t for each estab lishm ent on the same basis as in th e case of an independen t en terprise engaged under sim ilar conditions in th e sam e line of business. The purpose o f these accounts is to express dealings m ade w ith other estab lishm ents of th e en terprise as if those dealings were with o th e r firms unconnected w ith th e estab lishm ent and were conducted in accordance w ith th e m ark e t conditions relevant to such dealings.

The use of th e m ethod of separa te accounting as th e fundam en ta l p rocedure for th e de te rm ina tion o f th e profits a ttr ib u tab le to each c o u n try in which an en terprise has an establishm en t is in tended to serve four purposes : first, by trea ting a b ranch estab lishm ent n o t as p a r t o f an enterprise b u t as a self-contained un it and th u s generally avoiding reference to results or d a ta outside th e c o u n try concerned, it gives the ta x a t io n o f b ranch estab lishm ents a s tr ic tly territo ria l scope n o t ex tend ing beyond th e boundaries o f th e countries concerned; secondly, th e m ethod helps to enforce th e principle of equa lity of t re a tm e n t o f foreigners by placing, in principle, b ranches of foreign enterprises on th e sam e footing as similar estab lishm ents of dom estic enterprises as regards th e computation of receipts an d expenses, which, once th ey have been allocated o r apportioned by separa te accounting, are to be t re a te d in accordance w ith th e ta x laws of th e country to which th e y have been a t t r ib u te d ; th ird ly , th e use o f separate


accounting as a basis for th e assessm ent of income ta x conforms to the usual p ractice am ong concerns engaged in in te rnationa l business of keeping separa te accounts for each of the ir estab lishments ; finally, separa te accounting serves th e revenue in terests of the coun try concerned, since, when it is p roperly applied and supeivised, i t p reven ts the concealm ent of profits or their diversion from one coun try to another. I n th is connection, Article VI, pa rag rap h 1, section B, of the Protocol specifically foresees the possibility of a rectification b y th e fiscal au thorities concerned of the “ accounts produced, especially in order to correct errors or omissions, or to re-establish th e prices or rem unerations en tered in th e books a t th e value which would prevail betw een independent persons dealing a t a rm ’s length A rectification m ade in th e accounts of an es tab lishm ent situated in one coun try should not, however, result in double taxation of th e en terprise concerned. A rectification m ade in one country m ay therefore call for a corresponding ad ju s tm en t in the accounts o f th e estab lishm ent in th e o ther coun try w ith which th e dealings to which the rectification referred have been effected. This m a tte r is dealt w ith in th e second sentence of the above-m entioned section B of p a rag raph 1 of Article VI of the Protocol.

The assessm ent of th e profits o f a pe rm anen t estab lishm ent according to th e m ethod of separa te accounting implies th a t , when requ ired , th e necessary d a ta are m ade availab le by the enterprise concerned to th e ta x au thorities , and th a t th e records of the estab lishm ent conform to certa in s tandards o f com pleteness and accuracy. W hen such conditions are n o t fulfilled, th e assessment m ust be m ade on a presum ptive basis. I t is to th is question th a t Article VI, p a rag raph 1, section C, of th e Protocol refers. There it is p rovided th a t , if th e estab lishm ent does n o t produce an accounting , or th e accounting produced is deficient and the deficiencies cannot be rem edied, or if the ta x au tho rities and the tax p a y e r agree, th e profits o f the es tab lishm ent involved m ay be determ ined by applying a certain percentage to its gross receipts. T he ob jec t of the procedure rem ains, however, to t re a t th e es tab lishm ent of th e foreign en terprise according to th e sam e s tandards as a sim ilar dom estic concern engaged in th e sam e line o f business. I t is therefore suggested that the percentage should be fixed by com parison w ith th e


conditions and the results of sim ilar enterprises operating in th e coun try . Moreover, it is specified th a t , when the activities of a p e rm an en t estab lishm ent resem ble those of a commission agen t or broker, th e income m ay be determ ined on th e basis of th e cus tom ary comm ission received for such services. It m ay be no ted th a t th is “ commission basis ” m ay, when app rop ria te , be used b y estab lishm ents keeping regular accounts and en titled to be assessed according to the method of sep ara te accounting.

Section D of pa rag rap h 1 o f Article VI of th e Protocol deals w ith th e cases where neither the m ethod of separate accoun ting no r the m ethod of a percentage of gross receipts is applicable. Such a s itu a tio n arises w hen a comparison betw een th e n a tu re of th e ac tiv ities and th e conditions of opera tion of th e estab lishm ent of th e foreign enterprise cannot be m ade w ith those of full-fledged dom estic enterprises. I t Is p rovided th a t , in th is case, th e m ethod of frac tional apportionm en t m ay be applied. U nder th is m ethod, th e earnings of each estab lishm ent are com puted as a proportion of th e entire profits o f th e en terprise to which th e es tab lishm ent belongs, on the basis of th e general balance-sheet an d profit-and-loss account of th e enterprise. Such frac tional apportionm en t m ay be un lim ited or lim ited . In the first case, it takes as its starting- po in t th e to ta l income derived by th e en terprise as a whole from all sources. In th e second case, reference is m ade only to t h a t p a r t o f th e to ta l profits o f th e enterprise which is derived from transac tions in which a p a r t has been taken by th e estab lishm ent whose share in th e to ta l profits is to lie de term ined . I t is to th is second form of fractional apportionm en t t h a t recourse m ay be had according to th e Protocol. T he share o f the to ta l profits from jo in t tran sactions th a t is a t t r ib u ta b le to th e es tab lishm ent concerned is to be determined b y d ividing these profits according to th e ra tio th a t exists betw een certa in fac to rs pe rta in ing to th e establishment concerned an d th e to ta l of th e sam e fac to rs for th e entire en terp rise . E xam ples o f th e factors th a t m ay en te r into the ap p o rtio n m en t formulae are p lan t and equ ipm ent, circulating cap ita l, payrolls, cost o f operation, physical o u tp u t, turnover. I t is understood th a t th e selection an d th e w eighting of the different factors th a t it m ay appear app rop ria te to use will


differ according to th e ty p e of enterprise. I t is, however, provided th a t th e formula- of appo rtionm en t should be “ so selected as to ensure results approaching, as closely as possible, those which would be reflected by a separa te accounting

Though th e m ethod of fractional appo rtionm en t is m entioned by th e Model C onvention only in the th ird place, a fte r the m ethods o f separa te accounting and percentage o f tu rnover, this does no t m ean th a t th e partia l use of fractional ap p o rtionm ent is excluded when, as is generally desirable, b ran ch establishm ents are tax ed according to th e m ethod of separa te accounting. There are, indeed, in m ost enterprises w ith two or more estab lishm ents certa in item s o f expenses th a t m ust necessarily be apportioned in order to achieve th e object of separate accounting, which is to place branches of foreign enterprises on th e sam e footing as dom estic concerns. An application of th is idea is found in pa rag rap h 2 of A rticle VI of the Protocol, which provides th a t , in the de te rm ina tion of the net incom e of a pe rm an en t es tab lishm ent accord ing to separate accounting, a share of th e general expenses o f th e head office o f the enterprise m ay be charged to th e estab lishment.

The objec t of pa rag rap h 3 of A rticle V I of the P ro tocol is to s ta te explicitly certa in corollaries of th e m ethod of separa te accounting as applied to bank ing and financial enterprises. Thus it says t h a t th e in terest on the pe rm anen t cap ita l a llo tted to a branch canno t be deducted from the incom e of th a t b ranch in the coun try where i t is s itua ted even if th e capital takes the form of an advance, loan, overd raft or deposit. On the other hand , w hen such item s do no t represent the p e rm anen t capital of th e es tab lishm ent concerned, th e corresponding interest m ay be deducted from the gross incom e of th e deb to r establishm ent and tre a te d as a receipt o f the cred itor e s ta b lishment.

In view7 of the ir special conditions of operation, insurance companies represent one of th e form s of en terprise which call for particu lar rules in th e allocation of the ir profits betw een their various estab lishm ents. I t has seemed desirable, th e re fore, to specify in A rticle V I, paragraph 4, o f th e Protocol that, where required , the tax ab le income of th e b ranch of an


insurance com pany m ay be determ ined either by th e m ethod of percentage on gross receipts o r by frac tional apportionm ent. In th e first case, coefficients estab lished by reference to corresponding na tiona l enterprises in th e co un try concerned would be applied to the gross prem ium s resu lting from tin* a c tiv ity of th e b ranch concerned. In th e second case, the incom e of th e b ranch in question would be determ ined by applying, e ither to th e to ta l n e t income of th e concern as a whole, or m erely to th a t p a r t of the to ta l opera ting and investm en t income of th e en terprise as a whole which corresponds to th e k ind of activ ities in which th e b ranch in question is engaged, the ra tio existing betw een th e gross premiums received b y th e estab lishm ent and th e to ta l gross premium-: received by th e en terprise in connection w ith th e sam e kind of business.

Ad Article I ' . -— I n c o m e f r o m I n t e r n a t i o n a l

N a v i g a t i o n

The effect of A rticle V is to m ake incom e from international m aritim e and a ir tran sp o rt tax ab le only in th e coun try where the vessel is registered provided th e ow ner or opera to r has his fiscal domicile in th a t coun try . T he difference in wording of th a t article in th e Mexico and London d rafts is due to the fact th a t an a t te m p t has been m ade to s ta te th is rule m ore precisely in th e la t te r d raft. The rule in question is con ta ined in numerous special an d general ta x trea ties . I t is in tended to facilitate th e oj>eration of in te rn a tio n a l t ra n sp o rt enterprises. I t also avoids th e num erous difficulties which experience has shown to be involved in th e ta x a tio n o f profits from international nav iga tion outside th e hom e-coun try of th e opera ting enterprise.

F or its p a r t , in land w a te r tra n sp o rt is not affected by A rticle V an d rem ains, like rail an d road tran sp o rt , subject to th e provisions of A rticle IV , which applies to business incom e in general. T he provisions of th a t article remain applicable also to th e income th a t a m aritim e or a ir transport en terp rise m ight derive from services o th e r th a n ac tua l maritim e or a ir transport-—e.g., w arehousing charges, insurance comm issions an d trav e l agency fees.


Ad Article V I .— R e m u n e r a t i o n f r o m P e r s o n a l S e r v i c e s

a n d P r i v a t e E m p l o y m e n t

Article V I of th e L ondon d ra f t reproduces Article V II of the Mexico d ra f t 1 an d it is in tended to cover th e earnings from all p riva te em ploym ents an d professions. I t does no t apply, however, to p riv a te pensions, which are dealt with separately in Article X I , o r to o ther form s o f earned income which are m entioned in o ther articles such as Articles IV , V, VI and V III .

The first pa rag rap h of Article V I lays dow n th e general principle th a t rem unera tion for labour and personal services, as understood in th is con tex t, is taxab le only in th e coun try where th e services are rendered. According to parag raphs 2 and 3 of th a t article, however, a person hav ing his fiscal domicile in one of th e con trac ting S ta tes will be considered as having rendered services in th e o ther con trac ting S ta te only if the period or periods during which he has s tayed in th e o ther country exceed 183 days. This m odification of th e ru le of taxing th e rem unera tion for personal services in th e coun try where th e corresponding services are rendered is in tended to facilitate th e operations of enterprises engaged in in te rnationa l trade and the m ovem ent of w orkers across na tiona l borders.

Paragraphs 4 and 5 deal specifically w ith independen t professions an d em body rules sim ilar to those of pa rag raphs 2 and 3 of Article IV re la ting to the tax a tio n of business income according to th e criterion of perm anen t estab lishm ent. Accordi n g to parag raph 4, th e c o u n try where the earnings from professional services are to be tax ed is determ ined no t b y th e actual place where th e services a re rendered b u t by th e place where th e tax p a y e r concerned has a perm anen t estab lishm ent i n which or from which he renders his services. P a rag rap h 5 relates to the person who has offices in bo th con trac ting S tates. In this case, th e ta x p a y e r will be taxab le in each S ta te only

* The change in n u m era t io n is due to the elim ination o f the a rtic le o f the Mexico d ra f t re la tive to “ d irec tors ' percentages, a tten d an ce fees and o th e r special remuneration paid to d irectors, m anagers and audito rs of companies ” . In so far as the avoidance of in te rn a tio n a l double tax a t io n was concerned, i t was s ta ted that these i tem s d id no t a p p ea r to call for special rules and could be conveniently covered by the general provisions o f the article relative to the rem unera t ion from personal services an d p r iv a te em ploym ent.


to th e e x te n t t h a t th e incom e he receives results from services rendered in or from th e office s itua ted in t h a t S ta te .

Ad Article V I I . — C i v i l S e r v i c e S a l a r i e s a n d P e n s i o n s

The provisions con ta ined in Article VI of th e Mexico draft concerning civil service salaries and pensions have been reworded in Article V II of th e London d raft so as to be a t once m ore com prehensive and precise. The effect o f the article as it now s tands is to exem p t from incom e ta x in a country rem unera tion from personal services rendered in th a t country when th e following conditions are fulfilled:

(а) T he paying a u th o r i ty m u st be the G overnm ent, a political subdivision or a governm ental agency of one of th e con trac ting S ta tes ;

(б) The payee m u st be a na tiona l of th e above-mentioned S ta te ;

(c) The p aym en t m u st be in respect of th e performance of d ip lom atic, consular or o ther governmental functions ;

(d) Such functions m ust fall w ith in th e norm al field of governm enta l du ties an d m u st n o t be connected w ith th e carrying-on of a trad e or a business on b eha lf o f th e pay ing au th o rity .

C ontrac ting S ta tes m ay find it convenient to specify the officials or functions th a t are to be covered by th is rule, which is no t in tended to res tric t a n y ta x im m u n ity or privilege g ran ted to d iplom atic o r consular agen ts under international usage or treaties.

Ad Article V I I I . — D i v i d e n d s

In th e Mexico d ra f t , dividends and in te rest were covered to g e th e r under th e phrase “ incom e from m ovable capital ” in A rticle I X of th e Convention, which was com pleted by a definition in A rticle IX of th e Protocol.

In th e L ondon d raft , Articles V I I I and IX , which deal separa te ly w ith d ividends and in terest, have tak en the place


of Article I X of the Mexico draft. According to th is article, dividends were to be tax ed in th e coun try where the cap ita l from which th ey were derived was invested— i.e., p u t in to productive use. The result was th a t in m ost cases dividends would have been tax ab le in the same co un try as th e business profits from which th e y were paid out.

According to A rticle V I I I , parag raph 1, of th e L ondon draft, d ividends a re tax ab le in th e coun try where th e d is tr ib u ting en tity has its fiscal domicile or, according to th e provisions of Article I I , p a rag rap h 4, o f the Protocol, its “ real cen tre of m anagem ent ”. Therefore, in the case of a com pany having a branch estab lishm ent in a foreign country , th e profits earned by the com pany will be taxab le , in whole or in p a r t , in th a t country according to th e provisions of Article IV, which applies to business profits as such. B ut th e dividends, or the profits the com pany itself d istribu tes, will be taxab le exclusively in the coun try of its fiscal domicile, subject, o f course, to the provisions of Article X I I I which app ly to th e tax a tio n of the income as a whole of th e person receiving the dividends.

The principle laid dow n in parag raph 1 of th e presen t article is reasserted in p a rag rap h 3 o f t h a t article, which refers also to “ und is tr ibu ted profits This reference is justified b y th e fact th a t , w hen d istr ibu tion o f dividends falls below a certa in limit, the legislation of certa in countries provides for a special tax on “ u n d is tr ib u ted profits ”. I t rem ains perm issible, however, for countries which ta x th e earnings m ade by companies an d similar en tities th rough profits or corporation taxes, to app ly such taxes under the rules of Articles IV and X I I I .

P arag raph 2 of th e p resent article is in tended to avoid th e special cases of double or m ultip le tax a tio n which m ay occur when the incom e d is tr ib u ted by a com pany is derived from dividends received from subsidiaries or related companies, etc. It was th o u g h t t h a t an equitab le and convenient m anner of avoiding such double ta x a t io n was to exem pt in ter-com pany dividend d istribu tions w hen th e recip ien t com pany had a dominant partic ipa tion in th e m anagem ent or cap ita l of the paying com pany, so th a t the dividends ta x is collected once only on th e final d istr ibu tion o f dividends.


Ad Article I X . — I n t e r e s t o n D e b t s

According to th e provisions of th e London draft, in terest on all k inds of indebtedness is to be taxed , in principle, exclusively in th e S ta te where th e cred ito r has his fiscal domicile. This is th e opposite of th e rule contained in A rticle I X of th e Mexico d raft. Indeed , it was considered th a t , especially as regards in terest, th e coun try from which cap ita l originated had a prior righ t to ta x such in terest w herever th e cap ita l was invested. Nevertheless, it was conceded th a t th e S ta te of the debtor could ta x such in terest in th e sam e w ay as if it were paid to nationals or residents b y m eans of deduction or withholding a t source. A t th e sam e tim e, it was th o u g h t th a t th is w ithholding ta x shoidd n o t exceed a certa in percentage to Infixed by agreem ent.

B o th as regards dividends an d in terest, it shoidd be noted th a t th e tre a tm e n t of incom e from m ovable cap ita l is one of th e m ost complex questions th a t arise in connection w ith the p reven tion of in te rna tiona l double tax a tio n . In th is m atter, th ere is an opposition of in terests betw een capital-exporting countries and cap ita l- im porting countries. The revenue in terests of th e form er are best served by ta x a tio n o f income from capital a t th e hom e of th e cred itor o r beneficiary ; those of th e la t te r countries by ta x a t io n a t th e hom e of th e debtor or, ra the r, th e place where th e investm ent is used.

The p rac tica l solution of th e problem depends, in most cases, on th e ex ten t to which each of th e con tracting States is willing to lim it its r igh t of ta x a t io n in order to facilitate in te rn a tio n a l investm ent. In th is connection, i t is advisable th a t regard should be had no t only to th e incidence of a tax on th e incom e from im ported capital, an d th e immediate effects of such m easures on public revenue, b u t also to the consequences, economic and fiscal, en tailed by th e economic developm ent, tra d e and increase of income which in both countries m ay follow th e cap ita l m ovem ents in question.

Ad Article X . — R o y a l t i e s f r o m R e a l E s t a t e , P a t e n t s

a n d C o p y r i g h t s

In th e sam e w ay as o th e r incom e from real p roperty , which is governed by A rticle I I of th e Model Convention, royalties


received by a person, as owner or possessor o f real p roperty in consideration o f the righ t to use or exploit n a tu ra l deposits and resources s itua ted on th e surface or in th e subsoil of his property, such as mines, quarries, w'ells, springs, waterfalls, forests, are taxab le in th e coun try where th e p ro p erty is situated. In so fa r as a d istinction betw een income governed by Article I I and A rticle X respectively is required, for instance, in connection w ith com puta tion of taxab le income or application of ta x rates, reference should be m ade to the provisions of Article I I I of th e Protocol.

The second pa rag rap h of Article X refers to royalties from scientific, industria l and com m ercial p roperty , such as pa ten ts , secret processes an d formulae, trade-m arks and trade-nam es. The Mexico Convention, apply ing th e principle of im m ediate economic origin, placed them under a single rule according to which th e royalties are taxab le in th e coun try where th e p a te n t or o ther similar righ t to which th e y correspond is exploited. As a result, th e re tu rn s of p a ten ts and sim ilar righ ts alw ays remained taxab le in th e coun try where th e righ ts were used, whether th e p roprie to r exploited them him self or th rough a lessee.

Following a sim ilar line of reasoning to th a t which inspired the new w ording of Articles V II I and IX of the L ondon d raft, royalties from p a ten ts and sim ilar rights are m ade taxab le in the new version o f p arag raph 2 of th e article un d e r consideration exclusively in th e coun try to which th e g ran to r belongs. A restriction to th a t principle is, however, m ade by th e new paragraph 3 in case the concession lias tak en place betw een inter-related enterprises. In th a t case, th e royalties become taxable in th e co u n try where th e rights are exploited subject to deduction of “ all expenses and charges including depreciation rela tive to such rights ” .

The fou rth pa rag rap h of Article X in th e L ondon d ra f t is identical w ith th e th ird pa rag rap h of th e Mexico version. Copyright royalties from artistic an d scientific productions, wherever earned, rem ain exclusively taxab le in th e coun try where the recip ien t lias his fiscal domicile or pe rm anen t establishment. The specific purpose of th is rule is to facilita te cultural exchanges.

2 8 C O M M E N T A R Y

Ad Article X I . — P r i v a t e P e n s i o n s a n d L i f e A n n u i t i e s

The Mexico d ra f t m ade p r iv a te pensions and life annuities tax ab le according to th e principle of ta x a tio n by origin in the coun try where th e deb to r lias his fiscal domicile. This was in line w ith the rule adop ted in Article I X of th a t d ra ft as regards incom e from m ovable capital. In th e London draft, p r iva te pensions and life annu ities are m ade taxab le in the co u n try o f fiscal domicile of th e creditor, as in th e case of in terest from debts. In b o th drafts, A rticle X of th e Protocol contains a special provision rela ting to the ta x a tio n of allowances o f s tu d en ts and appren tices from one coun try w ho are s tay ing in the o ther for th e ir studies or tra in ing . These rem ittances are m ade exem pt from ta x a t io n in the country where th e beneficiaries are studying .

Ad Article X I I . — C a p i t a l G a i n s

The first p a rag rap h of Article X I I in th e L ondon draft reproduces th e provisions a lready con ta ined in the Mexico d raft. I t s tipu la tes th a t gains derived from th e sale or exchange of real p ro p e r ty are tax ab le only in th e S ta te in which the p ro p er ty is s itua ted . As in th e case of ta x a tio n o f income from real p ro p erty covered by A rticle I I of the Model Convention, the clauses of Articles I I and I I I of th e P rotocol would apply as regards m atte rs of definition.

The second p a rag raph o f A rticle X I I in its London wording ex tends th e provisions of Articles IV and V as regards the ta x a tio n of th e gains derived from th e sale or exchange of assets o th e r th a n real p ro p e r ty apperta in ing to a business en terprise. In o ther words, such gains would be taxable in the co u n try where the incom e of th e p ro p er ty which has been disposed o f would itse lf be taxable.

The th ird p a rag rap h s ta tes th a t gains derived from any o th e r cap ita l assets not covered in th e preceding paragraphs should be ta x e d in th e c o u n try of th e fiscal domicile of the recipient. I t is, of course, understood th a t th e clauses referred to above ap p ly only to th e e x te n t t h a t th e in te rnal ta x legislation o f a c o u n try provides for th e tax a tio n o f such cap ita l gains.


Ad Article X I I I . — T a x a t i o n R i g h t s o f t h e C o u n t r y

o f “ F i s c a l D o m i c i l e ”

E xcep t for a slight change in wording which affects only the last section of the English tex t , th e provisions of A rticle X I I I a re th e sam e in th e London and Mexico drafts. This article reserves to th e coun try where the tax p a y e r has his fiscal domicile the r igh t to t a x the ta x p a y e r’s entire income even w hen it is taxab le , in p a r t or as a whole, in th e o ther country. F rom the ta x due in the coun try of “ fiscal domicile ” a deduction has to be m ade, however, on accoun t of th e taxes paid in the o ther coun try in accordance w ith the preceding articles of th e Model Convention. The sim plest m anner of determ ining th is deduction would be to tak e th e ac tu a l am ount of tax paid in th e o ther coun try . R egard is to be had , however, not only to th e in terests of th e tax p a y e r b u t also to those of the S ta te in which he has his fiscal domicile. Article X I I I admits, therefore, th a t , from th e ta x due in th e co u n try of “ fiscal domicile ”, th e taxes due in th e o ther coun try should be deducted only to th e e x ten t th a t th ey do no t exceed th a t proportion of th e ta x effectively due in th e coun try of domicile which corresponds to the p roportion of the incom e taxab le in th e other coun try in rela tion to th e entire income of the tax p ay er.

I t m ay be noted th a t th e above-m entioned lim it of deduction will opera te in th e coun try of “ fiscal domicile ” only when the ta x schedule in th e o ther coun try is so high th a t th e effective percentage of t a x in respect of th e p a r t of income taxable in its te rr ito ry exceeds th e tax percentage which in th e country of “ fiscal domicile ” corresponds to th e to ta l income of the taxpayer.

In b ila te ra l trea ties, it m ay be found advan tageous to combine w ith th e clauses of Article X I I I provisions fixing or limiting th e ra te of ta x applicable to th e incom e derived from a co u n try by a tax p a y e r hav ing his “ fiscal domicile ” in the o ther country . Such fixed or ceiling ta x ra tes m ight, in particular, be con tem pla ted in connection w ith incom e from capital and th is is provided for in parag raph 3 o f Article IX of the London draft.

A special question arises in connection w ith dividends paid to a person b y a com pany in the co un try o th e r th a n th a t


in which he has his “ fiscal domicile D epending on the system followed by th a t co u n try in respect of th e tax a tio n of corpora te income, th e ta x borne b y such dividends m ay take different form s—e.g., th e form of a ta x paid b y the distributing com pany in its own nam e or th a t of a t a x on corpora te earnings. Therefore, to enable th e ta x p a y e r in receipt of dividends so tax ed in th e coun try of th e ir origin to ob tain , in connection w ith such dividends, th e deduction provided by Article X III , i t m ay be desirable to s tipu la te th a t taxes which a company is required to w ithhold from dividends i t d istribu tes or to p a y on such dividends shall be considered as hav ing been paid by th e shareholder for th e purpose of th is article.

T axab le years and ta x collection dates differ from country to coun try . This should be considered w hen determ ining, in t a x trea ties, th e taxes which m ay be deducted or offset against one an o th er according to A rticle X I I I .

Ad Article X I V . — F i s c a l D o m i c i l e i n T w o C o u n t r i e s

Article X IV 1 relates to th e case of tax p ay ers who, as the resu lt of th e construction given to th e articles of th e Convention by th e na tiona l ta x adm in is tra tion or of th e in ternal legislation of th e con tracting parties , m igh t be regarded as having a “ fiscal domicile ” in each of th e tw o countries concerned. I t also applies to tax p ay ers who m ove from one coun try to an o th e r in th e course of a tax ab le year.

In its p resent wording, th e article implies t h a t income tax is collected in th e year following th a t in which th e income was earned. I t provides th a t th e ta x perta in ing to th e country of “ fiscal domicile ” under A rticle X I I I shall be divided betw een th e con trac ting S ta tes in p roportion to th e period of s ta y during th e tax ab le year, o r according to some other p roportion to be agreed upon by th e com peten t authorities. I n connection w ith th is article , th ere arises th e sam e question as was m entioned in th e final parag raph of th e commentary to Article X I I I concerning differences in taxab le years.

1 Due to an editorial error, the order of th e p resen t article and the following a rtic le has been inv erted in the original t e x t o f th e L ondon d ra f t contained in the Fiscal C om m ittee’s Report on the IVork o j the Tenth Session o f the Committee. This e rro r is rectified in the t e x t reproduced in th e Annex.


A d Article X V . —T a x e s o n P r o p e r t y a n d W e a l t h

This article, which was n o t included in th e Mexico version, was drafted a t th e London m eeting in order to tak e care of the cases of double tax a tio n which m ay arise in connection with the taxes on property , cap ita l and increm ent of w ealth which a num ber of E uropean countries app ly as a com plem ent to income taxes or have in troduced as special w ar or post-w ar measures. The principle laid down in th is article is th a t p ro perty, cap ital and increm ent of w ealth m ay be tax ed in a country only if t h a t coun try would have the r igh t to tax , according to th e preceding provisions of the Model Convention, the income orig inating from th e assets in question.

A d Article X V I . — E q u a l i t y o f T r e a t m e n t

The purpose of Article X V I is to p reven t d iscrim inatory trea tm ent in one coun try of taxpayers having the ir “ fiscal domicile ” in th e o ther coun try w hether or no t th e y are nationals of t h a t coun try . I t specifically debars e ither of the contracting S ta tes from subjecting taxpayers hav ing the ir fiscal domicile in th e o ther S ta te to higher or o ther taxes than those applicable in respect of th e same income to t a x payers who have the ir fiscal domicile in the form er S ta te or are nationals of th a t S tate . There is no doub t t h a t these p ro visions are also in tended to apply , mutatis mutandis, to the taxes on property , cap ita l or increm ent of w ealth m entioned in Article XV, though th is is n o t specifically s ta ted in the Model Convention.

A d Article X V I I . — T a x p a y e r s ’ R i g h t s o f A p p e a l

The special procedures of appeal provided for in A rticle X V II are intended n o t to replace b u t to supplem ent th e procedures of tax appeal established by th e ta x legislation of th e contracting S tates. The tax p a y e r who, in spite of th e provisions of the Convention, has suffered double tax a tio n has th e option of filing his appeal w ith th e ta x au thorities of th e coun try of which he is a na tiona l or of th e coun try where he has his fiscal domicile; for it seems leg itim ate th a t he should be able to obtain th e pro tec tion in ta x m atte rs of one or th e o ther


S ta te according to th e circum stances. I t should, moreover, be no ted th a t th e procedure con tem pla ted is n o t a judicial procedure, b u t a d irect consulta tion betw een the ta x adm inistra tio n s involved.

A d Article X V I I I . — G e n e r a l P r e s e r v a t i o n o f T a x p a y e r s ’

R i g h t s

I t m ay happen th a t th e in te rnal legislation of a country p a r ty to a doub le-taxa tion tre a ty g ran ts certain benefits to tax p ay e rs in the form of exem ptions, deductions, credits, allowances, rights of appeal, etc., which are more advantageous or m ore convenient to th e parties concerned th a n the provisions o f th e Model Convention. I t is th e object of th e new Article X V II I of th e London d ra ft to specify t h a t such benefits are no t im paired by th e provisions of th e Convention.

A d Article X I X . — R e l a t i o n s b e t w e e n T a x

A d m i n i s t r a t i o n s

The object of A rticle X I X of th e L ondon d raft, which, except for an add itiona l clause, follows th e w ording of Article X V II of the Mexico d raft , is to en title the ta x adm inistrations o f the con tracting S ta tes to correspond directly with one ano ther and to co-operate in th e app lication o f the Convention , w ithou t necessarily having to resort to diplomatic channels. I t also enables th em to agree on adm inistrative provisions which, while no t expressly provided for in the Convention, are in accordance w ith its sp irit and m ay be requ ired to give i t full effect.

The add ition to w hich reference has ju s t been made is in tended to perm it ta x adm in istra tions to a d a p t th e provisions o f the Convention in th e event of “ subs tan tia l changes in the t a x laws ” w ithou t having resort to th e form al conclusion of a new convention.

A d Article X X . — R a t i f i c a t i o n a n d D u r a t i o n

o f t h e C o n v e n t i o n

The final article of th e Convention deals w ith the procedure of ratification. I t refers also to th e e n try in to force of the


Convention an d to its du ration . I n this connection, an in itia l period of th ree years is suggested, as such a period seems to be generally desirable in order to give sufficient t r ia l to th e system of preven ting double tax a tio n which is embodied in the Model Convention. A question which ta x negotiators m ay have to consider in fixing th e dates of en try in to force of the Convention is th a t of th e possible differences in fiscal years. In many conventions th a t have been concluded in the p as t, their d a te of e n try in to force has been fixed independently of the ac tua l da te of ratification. Quite a few of th em have been m ade retroac tive ly applicable to t a x claims relative to previous ta x years th a t are ou ts tand ing a t the time of the signature of th e convention and which would no t have arisen if th e fac ts m otivating such claims had taken place a fter th e en try in to force of th e convention.


I I . COM M ENTARY ON T H E M O D EL B ILA TER A L C O N V EN TIO N F O R T H E P R E V E N T IO N O F TH E D O U B LE T A X A T IO N O F E ST A T E S A N D SUCCESSIONS

G e n e r a l S t r u c t u r e o f t h e M o d e l C o n v e n t i o n

There is an analogy betw een the form s of double taxation t h a t m ay occur th rough duties on es ta tes and successions and th rough taxes on income and property .

As in th e case of incom e tax , liab ility to es ta te and succession duties m ay indeed have a personal or an impersonal basis. In o ther words, an es ta te m ay be held liable to duty in a coun try on account of th e n a tiona lity or domicile of th e deceased and , a t th e same tim e, be tax ed in another coun try on accoun t of th e s itua tion of p ro p erty belonging to th e esta te.

Double tax a tio n of an e s ta te m ay also occur because it is taxab le in one coun try on account of th e n a tiona lity of the deceased and in ano ther coun try on account of his domicile. I n th is connection, there m ay be, furtherm ore, differences as to th e determ ination of th e na tiona lity or th e domicile of th e deceased.

An es ta te will also be exposed to double tax a tio n when tw o or m ore countries regard a given p ro p erty as subject to d u ty in the ir respective territo ries because th ey employ different criteria regarding im personal ta x liability. One coun try m ay, for instance, ta k e in to accoun t the physical location of th e p roperty , while the o ther refers to the legal situs of such p roperty , and there m ay be divergencies as to the dete rm ina tion of such situs.

Consequently, there is a noticeable parallelism between the Model Convention on es ta tes and succession duties and the Model Convention concerning incom e and p ro p erty taxes, both in th e Mexico and L ondon drafts.

E S T A T E S A N D SU C C ES SIO N S 35

The field of application of th e Model Convention on estates and successions is defined in Article I. Articles I I to IV refer to the tax a tio n of esta tes according to situs. Article I I deals especially w ith real p roperty and its appurtenances, Article I I I with personal p roperty related to a business enterprise and Article IV w ith o ther kinds of personal property . Article V regulates th e allocation of debts between th e tw o countries concerned in order to determ ine th e net value of th e es ta te taxable in each country . T axa tion in th e coun try of domicile of the deceased is governed by Article VI, which, in a m anner analogous to Article X I I I of th e Model Convention on income and p roperty taxes, provides th a t the coun try of domicile of a deceased person, while en titled to ta x th e entire value of the esta te involved no m a tte r where th e p roperty is s itua ted , should g ran t a deduction from its taxes on account of the taxes paid in th e coun try where a p a rt o f th e e s ta te is tax ab le in accordance w ith an y of th e provisions of Articles I I to V. In the London d raft, however, real p roperty is excluded from tax a tio n in th e coun try of domicile. Article V II refers to the continuous co-operation which should be m ain ta ined between ta x adm in istra tions for th e purposes of th e application of the Convention, and Article V I I I refers to the e n try in to force, du ra tion and term ina tion of the Convention.

The Convention is followed by a Protocol contain ing rules intended to facilita te th e se ttlem ent of questions arising in connection w ith th e de term ination of domicile of a deceased person and th e taxab le situs of th e various k inds of property . In this respect th e London d ra f t is more com plete th a n the Mexico d ra f t and contains specific indications as to th e de te rmination of the situs of personal p roperty for th e purposes of estate duties. According to th e m ethod followed in the comm entary on th e Model B ilateral Convention for the P re vention of Double T axa tion of Incom e and P roperty , the provisions of th e Pro tocol to the present Model Convention will be dealt w ith in conjunction w ith th e articles of the m ain Convention to which th ey refer.

36 CO M M E N T A R Y

Ad Article I . — O b j e c t a n d S c o p e o f t h e M o d e l

C o n v e n t i o n

The w ording of Article I in th e London d ra f t is simpler and briefer th a n in th e Mexico d raft. B u t i t is clear in bo th drafts th a t the provisions of th e Model Conventions are to apply to th e esta tes o f persons domiciled a t the tim e of the ir death in e ither one o f the con tracting S tates, w hether or no t they were nationals of th a t S ta te or of the o ther S tate . The estate of a foreigner is indeed generally subject in th a t coun try to the sam e ta x liab ility as th e es ta te of a na tional. I t seems therefore appropria te t h a t relief from in te rnationa l double tax a tio n of an es ta te should be gran ted , irrespective of the n a tio n a lity of th e deceased, w hen he was domiciled a t the tim e of his d ea th in e ither one o f the con tracting States.

I n th e present Model Convention, “ domicile ” is defined som ew hat differently from w h a t it is in th e Model Convention for th e P reven tion of th e Double T axa tion of Incom e and P roperty . In th a t tex t , it m ay be recalled, th e “ fiscal domicile ” of th e ind iv idual is “ th e place where th e individual has his norm al residence, th e te rm ‘ residence ’ being understood to m ean p e rm anen t hom e ”.x According to Article I of the Pro tocol of th e Model Convention on es ta te and succession duties, “ th e domicile of a person a t th e tim e of his death is th e place where he th en h ad his perm anen t residence with th e m anifest in ten tion of re ta in ing i t ”. A lthough th e wording of th is definition of “ domicile ” differs slightly from th a t of th e definition given by th e General M eeting of Government E x p e r ts on D ouble T axa tion in the ir m odel b ila teral convention on succession duties, the ir com m ents on th e matter still ap p ly to th e new definition. They s ta ted th a t :

“ I t is clear th a t the con cep tion o f domicile appropriate to a duty w hich is lev ied once and for all on the occasion o f death m ust imply a greater degree o f perm anence th an the conception on which an annual ta x such as the incom e ta x is based. I t is un likely that any State w ould claim th e right to le v y a death d u ty on the whole prop er ty o f a deceased person on the ground th a t at the tim e of his death he w as tem porarily resident w ith in its borders i f his p e r m a n e n t

1 Model B ila tera l C onvention for th e P rev en tio n of the Double T a x a t i o n of Incom e an d P ro p e rty . P rotocol, Article I I . p a rag ra p h 1.

E S T A T E S A N D SU C C ESSIO N S 37

home and true econom ic allegiance lay elsewhere. B u t w hen i t is sought to define the precise character and degree o f perm anence o f the residence w hich should ex is t in order to ju st ify a claim to ta x on the ground o f dom icile, w'ide divergencies o f v iew are found to ex ist in the different legal sy stem s o f th e various countries o f the world. In these circum stances, it has not been found possible to do more than frame a definition w hich seems to com m and the greatest com m on measure o f agreem ent in the various codes o f law ”.1

The second p a rag raph of Article I of th e Protocol covers the case of deceased persons who a t th e tim e of the ir d ea th had no domicile as defined above and were nationals of bo th contracting S tates. In such cases, i t shall be presum ed th a t the deceased “ had his domicile in the coun try in which his family, social and economic in terests were centred T hough there is no provision in the p resen t te x t concerning deceased persons who had no “ domicile ” as defined above b u t wrere nationals o f only one of th e con tracting S tates, i t m ay be presumed th a t it was in tended th a t in such cases th e deceased would be considered as having his domicile in th e coun try of which he is a na tional, in accordance w ith th e rule contained in the model convention of 1928.2

The taxes to which th e Model Convention shoidd app ly include duties based on th e to ta l value of th e es ta te of a deceased person irrespective of th e m anner in which such estate is divided and d istr ibu ted am ong heirs or legatees, and duties assessed on the value of th e share accruing to each heir o r legatee and com puted w ith reference no t only to the value of th a t share b u t also to the degree of relationship between the deceased an d th e successor concerned.

Article I o f th e Model Convention is d raw n up in such a way as to enable th e negotia tors using th e Model Convention to enum erate the duties to which th ey desire t h a t the Convention should apply. In th is connection, i t would have to be determ ined in th e case o f each bila teral t re a ty w hether it should or should n o t app ly also to gifts inter vivos, as such gifts are tak en in to account in certain countries in th e com pu tation of d ea th duties, subject to certain conditions re la ting to

1 Report o f the General M eeting o f Government Experts on Double Taxation and Fiscal Evasion, Geneva, 1928. League o f N ations docum ent C.562.M. 178.1928.11, pages 23-24.


th e ir am oun t and to their p rox im ity in tim e to the decease of th e donor. A sim ilar question m ay arise w ith respect to the judicia l and adm in is tra tive fees collected in connection with th e d istribu tion of an esta te.

The Protocol contains a clause—Article V I I I in the Mexico d raft and V II in th e London d ra f t—which in vary ing forms is found in a num ber of conventions concerning d ea th duties. I t safeguards th e ta x im m unities th a t are g ran ted or m ay be g ran ted to d iplom ats and sim ilar public officials, and protects th e righ t of th e coun try of which th e above-m entioned officials a re na tiona ls to ta x upon the ir decease th e p ro p erty which they leave in th e o ther con trac ting S ta te , subject to th e general rides of in te rnationa l law and of in te rnal law of th e two countries concerned.

Ad Article I I . — R e a l P r o p e r t y

Article I I of th e Model Convention m erely conforms to the rule contained in all n a tiona l legislation and b ila teral agreem en ts according to which real p roperty , personal property accessory there to , and rights rela ting to, or secured by, real p ro p erty are subject to the es ta te and succession duties and sim ilar taxes in the coun try where th e p ro p er ty is situated, irrespective of th e domicile or na tio n a lity of the deceased.

A rticle 11 of the Protocol, which s ta tes th a t it is the law of th e S ta te in which th e p ro p er ty is s itua ted th a t should determ ine w hether it is real or personal, also follows a generally accepted practice.

Ad Article I I I . — B u s i n e s s E s t a b l i s h m e n t s

The provisions o f Article I I I have been draw n u p in the light of th e b ila teral conventions concluded during th e inter- w ar period. Most, if no t all, o f these conventions stipulate th a t comm ercial, m ining and agricu ltu ra l establishm ents are sub jec t to e s ta te and succession duties in th e coun try where th ey are s itua ted . This rule applies n o t only to th e tangible p ro p erty which m ateria lly represents the business establishm en t b u t also to all assets which p e rta in to th e business carried on in such es tab lishm ent, since such business property


constitutes an accounting u n it which should be tax ed as a whole.

In conform ity w ith these principles, Article I I I contains two rules which rela te respectively to th e case where an enterprise which is p a r t of a taxab le es ta te has a perm anen t establishm ent in one coun try only an d the case where i t has one or m ore estab lishm ents in each of th e con tracting S tates. In the first case, th e entire p roperty perta in ing to th e perm anent establishm ent is taxab le in th e coun try where th e establishm ent is s itua ted . In th e second case, each coun try is entitled to ta x the p roperty of the enterprise to th e -extent to which such p roperty belongs or relates to th e establishm ent or establishm ents s itua ted in th a t country . The problem of allocation which th is procedure entails is to be solved according to Article IV of th e Protocol, by means of th e criteria and accounting rules contained in Articles IV, V and VI of the Protocol of the Model Convention for th e P reven tion of the Double T axa tion of Incom e and P ro p e rty which define, among o ther things, th e phrase “ perm anent e s tab lishm en t”, and indicate the accounting rules to be followed in th e allocation of the assets and liabilities of such establishm ents.

A d Article I V . —P e r s o n a l P r o p e r t y

Article IX' of th e Convention, rela tive to personal p roperty not covered b y Articles I I and I I I , lias to be read in conjunction with Article V of th e Protocol. This article of the Convention entitles the coun try where p roperty is s itua ted a t th e tim e of death of the deceased to app ly its es ta te and succession duties to such property . In the Mexico d raft, th e article in question included certain clauses which were, in fact, a duplication of the more detailed provisions of Article V I rela tive to the taxing right of th e coun try of domicile. Moreover, th e Mexico draft gave 11 0 specific indications as to th e criteria according to which s ituation of p ro p erty was to be determ ined for es ta te and succession d u ty purposes. This gap is now filled by the detailed provisions of Article V of th e P rotocol of th e London draft. I t should be no ted th a t th e rules suggested in Mexico and in London concerning personal p ro p erty constitu te a departure from th e general tren d of th e trea ties concerning


dea th duties which were concluded u p to th e w ar recently ended. In th is connection, i t was proposed a t the Mexico Conference th a t the p resen t article of the Model Convention should be worded as follows:

“ All o ther p roperty to which Articles I I and I I I do n o t app ly shall be exclusively taxed in th e coun try o f the fiscal domicile of th e deceased .”

I t was argued in suppo rt of th a t suggestion t h a t it was by no m eans generally ad m itted in p riva te in te rnationa l law th a t , for purposes of successions, the law of s itua tion of the p roperty should app ly in so far as personal p roperty is concerned; in th is respect, m an y jurisdictions refer to the law of domicile. I t was observed th a t none of th e b ila teral conventions th a t had been concluded for the preven tion of double taxa tion concerning d ea th duties provided for th e ta x a tio n of property o th e r th a n real e s ta te an d business enterprises and their appurtenances in th e coun try o f situation . A tten tion was also d raw n to th e fac t t h a t exclusive tax a tio n of property o ther th a n th a t covered b y Articles I I and I I I in the co u n try o f domicile of th e deceased m ight prove more convenient b o th for th e heirs and for th e ta x adm inistrations concerned.

Ad Article V.— D e d u c t i o n o f D e b t s

Since d ea th duties are generally assessed on th e n e t value of th e tax ab le es ta te , it is desirable therefore to indicate in w h a t m an n er and p roportion debts should be deducted from the p ro p er ty tax ab le in each o f the con trac ting States. Such is th e purpose of Article V of the Model Convention.

Two m ain kinds of d eb t m ay be distinguished for this purpose :

(а) Special deb ts which are secured by or rela te to specific p roperty , such as deb ts guaran teed by a m ortgage or a lien;

(б) General deb ts which are no t especially guaranteed by, and are n o t otherwise m anifestly connected w ith , an y p a rticu la r asse t of th e deceased.


As regards the first kind of debt, the conventions concluded during the ’tw enties an d ’th irties have s tipu lated th a t th ey were deductible from th e real es ta te or the industria l and commercial estab lishm ents to which th ey were related. The fairness of such provisions is obvious. Section A of th e article under consideration is worded to th a t effect.

I t m ay happen th a t such special deb ts exceed th e value of the p roperty from which th ey should be prim arily deducted. Section B prescribes t h a t th e am ount o f such excess should be deducted from the value of th e o ther p roperty which the deceased m ay have held in the same co u n try a t the tim e of his death . In th e norm al course of events it m ay, indeed, be presum ed th a t th e d e b t has a greater degree of connection with th e p roperty s itua ted in th e same coun try as th e original guarantee th a n w ith p roperty s itua ted elsewhere.

Only w hen the a m o u n t of th e special deb t involved exceeds the value of all th e p ro p er ty left by th e deceased in the country where the original guaran tee is s itua ted , m ay the deb t be deducted from p ro p erty s itua ted in th e o ther country , according to Section C.

As regards general debts, it seems logical, as suggested in Section D, th a t th ey should be deducted p roportionately to the value— n e t or gross according to th e term s of the agreement which would have to be reached in th a t connection —of the p roperty left by th e deceased in each coun try , in view of the p resent w ording o f Articles I I , I I I and IV.

I f Article IV h ad been d rafted in such a w ay as to give to the S ta te of domicile th e exclusive righ t of tax in g p roperty not covered by Articles I I an d I I I , th en the rule as regards the deduction of general deb ts m ight have been the following:

“ A general deb t w ithou t specific guaran tee shall be deducted from the p ro p e r ty taxab le in th e co u n try of domicile of th e deceased in accordance w ith Article IV. I f such a deb t exceeds th e value of th e p ro p erty taxab le in the coun try of the domicile of the deceased, th e excess shall be deducted from th e value of th e p ro p e r ty in th e other c o u n try .”

Article V of th e Model Convention is com pleted by A rticles VI and V II o f th e P ro tocol in the London d raft. The


effect of these provisions is th a t , once th e deb ts of an estate have been allocated betw een th e tw o con tracting States according to th e provisions of A rticle V of th e Convention, th e question of w hether a deb t so allocated is to be deducted from th e p ro p erty in th e co u n try concerned will depend on th e general provisions which th e legislation of th a t country contains as to th e conditions under which a deb t m ay be deducted from th e value of an es ta te for ta x purposes.

In the Mexico d raft, there was a special rule embodied in A rticle V II of th e Pro tocol concerning the deduction of debts from inalienable property . This rule, which h ad been taken from certa in re la tive ly old trea ties betw een C entral European countries, was left o u t in th e L ondon d ra f t because i t had little p ractical significance.

Ad Article V I .— D o m i c i l e T a x a t i o n

A rticle X' I in th e Mexico d ra f t s tipu lates th a t , while the co u n try of domicile is en titled to impose its duties on the en tire e s ta te of th e deceased, i t should deduct from the tax so assessed th e am oun t of ta x due in the o ther coun try , under Articles I I , I I I an d IV, provided th a t the am o u n t of th is tax does no t exceed a certa in p roportion of its own tax . This p roportion is determ ined by com puting th e ra tio which the ta x of th e coun try of domicile th a t corresponds to th e property tax ab le in th e co u n try of s itua tion according to Articles II to IV bears to th e to ta l ta x which would have been due if the en tire e s ta te had been taxab le in the coun try of domicile of the deceased. This m ethod of p reven ting double tax a tio n through d ea th duties corresponds to t h a t p rovided in Article X I I I of th e Model Convention for th e P reven tion o f the Double T axa tion of Incom e and P roperty .

The general principle and th e w ording of th is article are tlie sam e in th e L ondon d ra f t as in th e Mexico d ra f t except that th e co u n try of domicile is no longer en titled to tak e into accoun t rea l p ro p erty tax ab le in th e co u n try of situation according to Article I I in de term ining its ta x on th e total esta te . I t seems to follow th a t th e co u n try of domicile is not expected to g ran t a deduction from , or credit against, its tax on th e to ta l e s ta te on account of th e taxes paid in th e country

E S T A T E S A N D SU C C E S SIO N S 43

of s ituation under Article I I . In o ther words, according to the London d raft , th e application of e s ta te an d succession duties on real p roperty is m ade quite independent of th e taxation of the en tire e s ta te in the coun try of fiscal domicile of the deceased.

A d Article V I I . — I n t e r - A d m i n i s t r a t i v e C o - o p e r a t i o n

As in th e m a tte r of incom e taxes, the prevention of double taxation th rough d ea th duties cannot be assured m erely through provisions which each adm in is tra tion would app ly separately and in te rp re t independently . Article V II of the present Model Convention reproduces, therefore, the provisions of Article X V II o f th e Model Convention on income and property taxes w hich rela te to in ter-adm in istra tive consulta tion and co-operation.

A d Article V I I I . — R a t i f i c a t i o n a n d D u r a t i o n


The wording of Article V III of this Model Convention is the same as th a t o f Article X V I I l of th e Model Convention on income and p ro p erty taxes and the sam e considerations apply in bo th cases.


I I I . COM M ENTARY O N T H E M O D EL B IL A T E R A L C O N V EN TIO N FO R T H E E ST A B L ISH M E N T O F R E CIPR O CA L A D M IN IS T R A T IV E ASSISTAN CE FOR T H E ASSESSM EN T A N D C O LLEC TIO N O F TAXES ON IN CO M E. P R O P E R T Y . E ST A T E S A N D SUCCESSIONS

I n t r o d u c t i o n

Following th e precedents of th e General Meeting of Governm en t E xperts on Double T axa tion and Fiscal Evasion of 1928, it appeared desirable a t th e Mexico and London meetings to com plem ent th e model conventions on th e prevention of double ta x a t io n w ith a Model Convention on Reciprocal A dm in is tra tive Assistance in ta x m atters.

Nevertheless, while th e G overnm ent E x p e r ts d rafted two separa te m odel conventions dealing respectively w ith assessm en t of taxes and w ith collection o f taxes, b o th subjects are now tre a te d in a single in s trum en t. Indeed , th e k ind of cooperation which is required for reciprocal assistance between adm in is tra tions for the assessm ent and for the collection of tax es is su b s tan tia lly th e sam e in b o th fields. Consequently, m an y form al provisions a re valid in bo th cases. A t th e same tim e, if ta x negotia tors desire to res tr ic t adm in is tra tive coopera tion to m atte rs of assessm ent, as is no t infrequently done in b ila te ra l agreem ents, it is simple to elim inate from th e Model Convention th e provisions which find an application only as regards th e collection of taxes.

The ob jec t of the Model Convention is ind ica ted in its Article I , which provides t h a t co-operation betw een tax adm in is tra tions for the assessm ent and collection of taxes should be lim ited to taxes in connection w ith which double tax a tio n has been or is being avoided an d th is article makes th e provisions of th e C onvention sub jec t to reciprocity. Article I I lays dow n the bases upon which ta x administrations would be en titled to correspond in connection w ith exchange o f inform ation. Article I I I rela tes to certa in kinds of easily availab le d a ta for which th e procedure of exchange of informa-

R E C IP R O C A L A D M IN IS T R A T IV E A S S IS T A N C E 45

tion is simplified in th e Mexico d ra f t and m ade au tom atic in the L ondon d raft. Collection o f taxes is dealt w ith in A rticle IV . Article V indicates certain cases where a request for information or for assistance in ta x collection m ay be rejected a t the discretion of th e au thorities receiving th e request. The rules as to th e secrecy to be m ain ta ined by the officials of one adm in is tra tion in connection w ith inform ation received from th e adm in is tra tion of th e o ther co u n try are contained in Article VI. Article V II deals w ith th e m easures which the tax adm in istra tions of the contracting S ta tes m ay tak e in consultation to carry o u t an d in te rp re t th e Convention, and Article V I I I refers to th e e n try in to force, du ra tion an d te r m ination of th e agreem ent.

A detailed Pro tocol contains provisions concerning the following m atte rs : designation of th e au thorities en titled to correspond w ith one an o th e r for th e application of the Convention; m anner in which th e existence of reciprocity will l)e ascertained in th e case o f th e various types of requests; form in which requests m ay be m ade and th e docum ents th a t should accom pany th em ; ac tion to be tak e n by an ad m in is tra tion receiving a request for assistance; form which should govern legal and jud icia l ac ts perform ed in com pliance w ith the Convention; rules app ly ing to collection, handling, transfer of funds, and se ttlem ent of accounts betw een th e tw o adm inistrations.

Ad Article I . —O b j e c t a n d S c o p e o f t h e M o d e l

C o n v e n t i o n

According to th e initial clauses of Article I, th e object of the Model Convention on Reciprocal A dm in istra tive Assistance is th a t “ of assuring, in th e in terest o f G overnm ents and taxpayers, an effective an d fair application of th e taxes to which app ly th e Conventions for th e P reven tion of th e Double T axa tion of Incom e, P roperty , E s ta te s and Successions I t is indeed th e d u ty of revenue au thorities to see th a t each taxpayer should pay the taxes for which lie lias been assessed according to th e laws o f th e coun try under th e jurisdiction of which lie comes. Failure to collect such taxes is indeed susceptible of im pairing th e services which th e G overnm ent


should render to th e public or bringing abou t an increase of th e taxes borne by non-delinquen t taxpayers .

B ilateral a rrangem en ts betw een ta x adm in istra tions for th e preven tion of fiscal evasion have, on various occasions, m et w ith suspicion. Various reasons m ay explain th is distrust. There m ay have been a certa in background of opposition to d irect tax a tio n , or a t least to certa in of its forms, and to an increase of th e investiga ting powers of revenue authorities. A nother fac to r was an unwillingness to place th e facilities of th e na tiona l t a x adm in is tra tion a t the disposal of foreign au tho rities and still m ore to in troduce new ta x practices in o rder to suit th e requ irem ents of foreign G overnm ents. In certa in instances, there was a fear th a t th e existence o f too close a system of ta x supervision and control would induce cap ita l to prefer countries where its ta x t re a tm e n t was less s tr ic t or less burdensom e. Moreover, th e feeling was sometimes m anifested th a t th e proposals which ostensibly re la ted to the p reven tion o f fiscal evasion constitu ted in rea lity an a ttem pt to in terfere w ith the freedom of cap ita l m ovem ents.

These objections have no t, however, p reven ted some th ir ty -o d d b ila tera l conventions on reciprocal assistance betw een ta x adm in is tra tions from being concluded by some fifteen countries, m ostly E uropean , during the inter-war period, and it is clear th a t , in so fa r as th e y exist, th e dangers m entioned above m ay be avoided th rough app rop ria te provisions.

I t is b u t leg itim ate th a t reciprocal assistance between t a x adm in is tra tions should exist only as regards taxes concerning which double tax a tio n is avoided, or a t least mitigated, betw een th e tw o countries. This is clearly s tipulated in Article I , which m akes th e Convention on reciprocal administra t iv e assistance a com plem ent to th e Conventions on the preven tion of double ta x a t io n th ro u g h income taxes and d e a th duties.

I t is also s ta ted in Article I th a t assistance m ust be reciprocal. To exist, such rec ip rocity requires t h a t the tax legislation and organisation o f each of th e con tracting States a re such th a t th e powers of th e respective national administrations to ob ta in inform ation an d to enforce revenue claims are su bs tan tia lly th e same, except fo r m ere form al differences

R E C IP R O C A L A D M IN IS T R A T IV E A S SIST A N C E 47

in procedure. Article I I of th e Protocol indicates th e m anner in which th e existence of reciprocity should be ascertained in each case.

Reciprocity m eans also th a t the S ta te th a t receives a request for assistance from th e o ther S ta te should in principle exert th e same diligence in carrying ou t such request as if it were ac ting on its own behalf. The provisions of Article I of the Model Convention are com pleted in th is respect by those of Article V I I of the Pro tocol in the Mexico d raft, V in the London d raft, concerning th e duties of the ta x au thorities of a country w ith regard to requests for assistance from the corresponding au tho rities of the o ther country .

The fac t th a t there is an arrangem en t for ta x assistance with ano ther coun try should no t give to a n y nationa l ta x adm inistration g rea ter powers of investigation and ta x enforcement against its own taxpayers th a n those which are conferred upon it by its own dom estic legislation. Such extension might, indeed, ind irectly v io late th e guarantees g ran ted to the taxpayers by th a t legislation. A t th e sam e tim e, an agreement for reciprocal ta x assistance should n o t im ply for any adm in is tra tion the obligation to tak e an y m easure th a t is repugnant to its na tiona l legislation or its established practices. I t is therefore s tipu lated in A rticle I , in add ition to the general requ irem ent of reciprocity, th a t th e inform ation that m ay be furnished under th e Convention will be “ such information in m atte rs of tax a tio n as the com petent au thorities of each S ta te have a t th e ir disposal or are in a position to obtain under th e ir own la w s . . . . ”

Mention m ay also be m ade, in th is connection, of Article V of the Model Convention, which stipulates, am ong o ther things, th a t requests for in form ation m ay be denied if th ey involve the obligation to ob ta in or supply inform ation which is not procurable under th e legislation of th e S ta te applied to or under th a t of th e apply ing S ta te , or if th ey im ply adm in istrative or judicia l ac tion incom patib le w ith th e legislation and practices of e ither con tracting S tate .

Reference should also be m ade, however, to A rticle X of the Protocol, which adm its as an exception to or m odification of the principles which have ju s t been outlined th a t “ any special forms of assistance no t being incom patib le w ith the


laws of th e S ta te applied to m ay be adop ted a t the request of th e app ly ing S ta te

I n order to complete th e enum eration of the general conditions under which reciprocal assistance m ay be granted in ta x m atte rs , it m ay be well to m ention a t th is junc tu re certain o ther provisions contained in Article V of th e Convention, which is in effect a com plem ent of Article I.

In add ition to th e requirem ents which Article I imposes, as m entioned above, regarding reciprocity and com patibility of th e requests for assistance, and th e action taken thereon, w ith the legislation and practice of bo th contracting States, in Article V it is provided th a t adm in is tra tive assistance should never en ta il for e ither adm in is tra tion the necessity for tak in g m easures th a t m igh t im ply th e violation o f a professional. industria l or tra d e secret. This m a t te r of adm inistrative secrecy is also dealt w ith in Article V I of th e Model Convention.

I t m ay n o t be th o u g h t desirable th a t an agreem ent for reciprocal ad m in is tra tive ta x assistance should result in a S ta te ’s abandoning its citizens who are taxab le in another coun try en tirely to the d iscretion of a foreign ta x adm inistration and , m oreover, p u ttin g itself under the obligation to carry o u t a t th e request of such an adm in is tra tion measures t h a t m ay no t be in harm ony with dom estic customs. Such a danger is a lready reduced by the article of th e Model Conven tion for th e P reven tion of the Double T axa tion of Income and P ro p e rty which relates to equa lity o f tre a tm e n t (Mexico d ra f t , Article X V ; London d raft, Article X V I). Moreover, Article V gives the au tho rities of th e S ta te applied to the right in various cases to refuse a t the ir discretion to give effect to a request for t a x assistance w hen i t relates to one of its nationals.

The safeguarding of th e rights of domestic creditors in the S ta te which receives a request for assistance as regards collection o f taxes m ay also have to be tak e n in to account. I t is fo r th is reason th a t th e Protocol (Article X I , Mexico d raft , A rticle IX , London draft) provides th a t “ revenue claims for collection shall n o t receive preference over either public or p riva te claims in th e S ta te applied to ” w hatever may be th e p rio rity given to such revenue claims in th e country by which th e request for assistance in collection is made.


A d Article I I . — I n f o r m a t i o n t o b e s u p p l i e d o n R e q u e s t

The object of Article I I is to enable th e com peten t authorities of th e con tracting S ta tes to correspond directly as regards the inform ation th ey m ay need from one ano ther in connection w ith th e taxes to which the Convention applies, as such taxes are defined in Article I of the p resent Model Convention an d by the in itia l articles of th e Model Conventions on th e p reven tion o f double tax a tio n th rough income taxes and d ea th duties.

The compliance w ith such requests is of course subject to the general conditions which have been reviewed above in the comm ent on Article I .

As to th e rides th a t app ly specifically to the sub jec t-m atte r of Article I I , i t m ay be no ted th a t , according to Article I of th e Protocol, the com petent au thorities th a t are en titled to correspond in th is connection are “ th e highest t a x au thorities of each o f the con tracting S tates or the duly au thorised representatives of such au thorities

Such requests should be form ulated in th e official language of the app lican t S ta te . T hey should specify th e a u th o r ity making th e request, th e nam e and address an d na tiona lity of the person to whom th e request relates, th e tax a tio n in respect of which i t is m ade, according to th e Protocol (paragraph 1 o f Article IV, Mexico d raft ; Article I I I , London draft). They should be accom panied by a declaration by th e competent au thorities who m ake th e application, officially confirming th a t a n y sim ilar request would be complied w ith in accordance w ith th e laws of th e app lican t S ta te , according to Article I I of the Protocol, unless the inform ation falls within the scope of A rticle I I I o f the Convention, in which case reciprocity will be presum ed to exist w ithou t an y specific declaration to t h a t effect.

The inform ation t h a t m ay be applied for under th is article may be in th e hands of th e adm in is tra tion to which the request is directed or it m ay have to be secured from an outside source. This source m ay be th e p a r ty concerned him self or persons who, as a resu lt of th e ir relations w ith th e taxpayer, can give information ab o u t his affairs, or resort m ay have to be m ade to experts or witnesses. I n all such cases, th e au thorities


receiving a request, provided t h a t th e request is allowable under Articles I and V of th e Model Convention, m ust exert diligence in com plying w ith th e request (Article X I I I of the P rotocol in th e Mexico d raft, X I in th e L ondon draft), must advise th e app lican t a u th o r ity as to th e action tak en on the request (Article X I I I of th e Pro tocol in th e Mexico draft, X I in the L ondon d raft) and , if th e request cannot be complied w ith , m ust s ta te the reasons why, tra n sm itt in g all th e relevant in form ation th a t is in th e ir possession an d th a t th ey m ay com m unicate (Article X IV of th e Pro tocol in the Mexico draft). This la t te r provision was elim inated as red u n d an t in th e L ondon d raft.

I f compliance w ith a request reqidres a form al procedure such as legal service of docum ents, th e provisions of Article IV, p a rag raph 2, of th e P rotocol apply . Accordingly, th e au thority m aking a request has to ind ica te “ th e address of th e recipient and th e n a tu re and purpose of th e docum ent for service ”, The form of service is itself governed b y Articles V I and VII of th e Pro tocol in th e Mexico d raft, IV an d V in the London d raft , which provide th a t th e au thorities receiving a request for th e service of a docum ent “ m ay lim it th e ir action in connection w ith th e service of th e docum ent to m erely handing i t to th e recipient, if th e la t te r is willing to receive i t ” and th a t , “ if th e com peten t au tho rities of the app lican t S ta te so desire, th e docum ent m ay be served in th e form prescribed in sim ilar cases by th e in te rna l law of th e S ta te applied to I t m ay also be no ted t h a t A rticle X of th e Pro tocol in the Mexico d raft, V I I I in the L ondon d raft, stipu lates tha t “ assistance procedure shall be in th e form for which the laws of th e S ta te applied to provide . . . . A ny special forms of assistance no t being incom patib le w ith th e laws of th e State applied to m ay be adop ted a t th e request of th e applying S ta te ”.

As regards the expenses which m ay be involved by requests for assistance, reference should be m ade to A rticle XX III of th e P rotocol in th e Mexico d raft , X V in th e L ondon draft, which provides th a t , in principle, assistance is to be gratuitous, except w ith regard “ to em olum ents paid to witnesses, experts, agents of execution and to legal and jud icia l fees incurred in connection w ith th e service of a docum ent or th e enforcement


of a revenue c-laim. The revenue au thorities shall notify one ano ther as required of th e probable am o u n t of such costs, fees or charges ”.

Ad Article I I I . — E x c h a n g e o f r e a d i l y a v a i l a b l e

I n f o r m a t i o n

An increasing num ber of ta x agreem ents provides for the autom atic exchange betw een nationa l revenue au thorities a t the end of each year o f in form ation on paym en ts of rents, dividends, in terest, royalties, annuities, salaries, pensions, on bank accounts and deposits, and on inventories of estates. These data are indeed frequen tly collected by ta x adm inistra tions in the o rd inary course of th e ir business and th ey can conveniently tran sm it th em to the au thorities of ano ther coun try when th ey concern a foreign taxpayer. I t is th e object of Article I I I of th e L ondon d raft to provide for such exchange of inform ation.

Though th e form ula now embodied in th e L ondon draft was subm itted to th e Mexico m eeting, it appeared a t th a t tim e th a t an au tom atic exchange of in form ation betw een ta x authorities would work satisfactorily only in th e case of countries hav ing a very-well-established ta x system and adm inistration. I t was therefore no t deem ed desirable to provide for such a procedure in th e Model Convention as prepared in Mexico. Nevertheless, even in th e Mexico d ra f t there rem ains a d istinction betw een th e inform ation generally included under Article I I and th e four kinds of d a ta specifically mentioned in A rticle I I I . Indeed , a request for inform ation under Article I I m ay be rejected by the adm in is tra tion receiving such a request on a n y of th e grounds m entioned in Article V. On the o ther hand , these lim itations do no t app ly to the inform ation specifically m entioned in Article I I I , since the reservations and safeguards contained in Article V do no t seem to be called fo r in the case of such inform ation. Moreover, reciprocity is p resum ed to exist as regards inform ation covered by Article I I I , w ithou t an y special declaration to th a t effect in the case of each indiv idual request.


Ad Article I V . — A s s i s t a n c e i n T a x C o l l e c t i o n

The m ain rules governing th e assistance which th e tax adm in is tra tion of one S ta te m ay render to th a t o f th e other S ta te as regards ta x collection are contained in Article IV. The provisions of th is article are of course subject to the reciprocity requirem ents of Article I of th e Convention and Article I I of th e P ro toco l and to th e general safeguards of Article V (in particu lar, Sections B an d D) o f th e Model Convention.

Assistance as regards collection m ay, in principle, be asked only as regards revenue claims which are definitely due, though p a rag rap h 4 of Article IV contem plates th e possibility of m easures o f conservancy in connection w ith revenue claims n o t definitely due.

U nder the general rule requests for collection assistance “ shall be accom panied b y such docum ents as are required by th e laws o f the app ly ing S ta te to establish th a t th e taxes are definitely due ” (parag raph 3 o f Article IV of th e Model Convention) a n d th a t requirem ent will be satisfied “ by a copy or official e x tra c t o f th e final decision or order by the com peten t au tho rities concerning th e revenue claim in question and by a s ta tem en t from th e com petent au thorities to the effect th a t th e revenue claim is final ” (Article V I I I of the P ro toco l in th e Mexico d raft , V I in th e L ondon draft). The claims for which collection assistance m ay be requested include in add ition to th e principal o f the tax , th e “ in terest, costs, add itions to taxes, and fines no t being o f a penal character, according to th e laws of th e S ta te applied to ” (Article IV of th e Convention, p a rag rap h 1). N evertheless, requests for assistance should only be m ade w hen th e am o u n t involved justifies such procedure an d w hen th e S ta te concerned cannot collect it by its own m eans (Article IX of th e P ro tocol in the Mexico d raft, V II in th e L ondon draft).

The provisions m entioned in the las t tw o paragraphs of the com m ent to A rticle I I , as regards th e form of service of docum ents, rules of procedure (including form s of representation) and th e refund of expenses, app ly when requests for collection assistance involve legal ac tion or judicial proceedings. In such cases, however, requests for th e service o f docum ents should


indicate, in add ition to th e inform ation required fo r collection purposes : “ th e am oun t of principal due and in terest due an d th e date from which such in te res t begins to ru n ; in th e case o f fiscal penalties, th e n a tu re and am oun t of such penalties ; an d any other in form ation of a n a tu re to facilitate or accelerate collection ” (Article IV o f th e Protocol, parag raph 3).

To safeguard th e in te rests of dom estic creditors in th e S ta te applied to, Article X I of th e Protocol in th e Mexico d raft, IX in the L ondon d raft , provides th a t “ revenue claims for collection shall n o t receive preference over e ither public or private claims in th e S ta te applied to

According to A rticle X V I of the P rotocol in th e Mexico draft, X I I I in th e L ondon d raft, “ collection shall alw ays take place in th e currency o f the S ta te applied to To th a t effect, the a m o u n t for collection will be converted by the authorities o f the S ta te applied to into the ir own currency a t the las t exchange ra te quo ted on th e app rop ria te m arket. These provisions presuppose, of course, a certain s tab ili ty of exchange rates, and special arrangem ents m ight have to be considered in the case w here eit her or bo th of th e countries concerned have a highly fluc tuating currency. Article X V of th e Protocol in the Mexico d raft, X I I in th e London d raft, provides th a t “ the S ta te applied to shall be responsible to th e applying State for th e sums collected on th e la t te r ’s b e h a lf . . . ” and Article X V II of th e P ro tocol in th e Mexico d raft , X IV in the London d raft, s tipu lates th a t the am oun t so collected shall be paid over to th e account of the cen tral ban k of th e applying State w ith th e cen tral b a n k of the S ta te applied to a fte r deduction of th e costs t h a t m ay be due as ind ica ted in th e last paragraph o f th e com m ent to Article I I .

According to Article X IX of th e Pro tocol in th e Mexico draft, X V I in th e L ondon d raft, the Convention does no t apply to m easures of conservancy in respect to taxes th a t have not yet been assessed. However, as regards taxes th a t have been assessed, b u t are n o t definitely due, th e ta x au thorities concerned m ay request th e corresponding au thorities o f the other S ta te “ to ta k e such m easures of conservancy as are authorised b y th e revenue laws of th e S ta te in te rested ”, subject, of course, to th e general requirem ents of reciprocity contained in A rticle I o f th e Convention, Articles I I and X I I

54

(last sentence) of th e P ro tocol in the Mexico d raft, I I and X in th e L ondon draft, and th e safeguards contained in Article V of th e Convention.

A d Article V .— G e n e r a l S a f e g u a r d s

Reference has been m ade in connection w ith all the preceding articles of th e Model Convention to Article V, since its clauses a re key provisions which delim it th e p rac tica l scope of th e system of reciprocal adm in is tra tive assistance contem p la ted in th e Model Convention. According to th is article, a n y request for in form ation or for assistance w ith regard to collection is allowable only if i t en tails action th a t is compatible w ith th e legislation of b o th con trac ting S tates. I t safeguards also professional, industria l and tra d e secrecy, and i t gives the au tho rities receiving a request for in fo rm ation or for assistance th e righ t to decline to com ply w ith such a request when it rela tes to a tax p a y e r who is one of the ir na tionals or when com pliance m ay endanger th e security or sovereign rights of th e S ta te applied to. I t should, however, be no ted th a t the reservations of Article V do no t app ly to th e information m entioned under A rticle I I I o f th e Convention, as in ordinary practice such in form ation is readily available and does not involve probing in to th e in tim a te affairs of a person or into governm enta l secrets.

A d Article V I .— S a f e g u a r d s o f A d m i n i s t r a t i v e

S e c r e c y

Reciprocal assistance betw een ta x adm in istra tions is possible only if each ad m in is tra tion is assured th a t th e other adm in is tra tion will t re a t w ith proper confidence th e information w hich m ay have to be com m unicated to it in th e course ot th e ir co-operation. A t th e sam e tim e, th e respect of such secrecy b y th e officials of a c o u n try is a m a t te r of national jurisdiction. I t is therefore provided in A rticle V I th a t information com m unicated under th e provisions of th e Convention shall be k e p t secret by th e au tho rities receiving i t “ in the sam e w ay and to th e sam e e x te n t as is done in th e S ta te that

55

supplies i t Sanctions for th e violation of such secrecy by an official of the S ta te th a t has received inform ation shall, however, be governed by th e adm in istra tive and penal laws of th a t S tate .

Ad Article V I I . — A p p l i c a t i o n o f t h e C o n v e n t i o n

The object of A rticle V II is in tended to furn ish th e basis for continuous co-operation betw een th e ta x au thorities concerned as regards th e in te rp re ta tio n and application of the Convention an d th e adop tion of special m easures in order to enforce th e Convention, or to complete it w ith respect to doubtful cases o r m a tte rs not expressly provided for. I t m ay be of in terest to note t h a t th e second sentence of th is article enables the con tracting S tates, w hen signing a convention for reciprocal adm in is tra tive assistance in ta x m atte rs , to agree formally only on the essential provisions of the agreem ent and to dispense as th e y see fit w ith th e detailed provisions contained in th e P rotocol an d those of the Model Convention which appear secondary or superfluous in view of th e kind of relations th a t are likely to develop betw een th e ta x a u th o r ities in the con tracting S tates. Indeed , th e second sentence of th a t article stipu lates th a t , “ w ith respect to the provisions of this Convention rela ting to exchange of inform ation, service of docum ents an d m u tu a l assistance in the collection of taxes, . . . such au thorities m ay, by com m on agreem ent, prescribe rules concerning m atte rs o f procedure, forms of application and reply, conversion of currency, disposition of am oun ts collected, minimum am oun ts subject to collection and rela ted m atte rs ”. Article X X of th e P rotocol in th e Mexico d ra f t was left ou t in the London d ra f t because it appeared to go beyond the general scope of th e Convention.

Ad Article V I I I . —R a t i f i c a t i o n a n d D u r a t i o n


The provisions of Article V I I I of th e Model Convention are identical w ith those o f the final articles of th e Model Conventions on double ta x a t io n th rough income taxes and d ea th

56

duties. I t is, o f course, clear th a t th e e n try in to force and d u ra tion o f th e Convention on reciprocal assistance between ta x adm in is tra tions should coincide w ith t h a t of th e Convention or Conventions for th e preven tion of double tax a tio n in respect of th e taxes to which the Convention on ad m in is tra tive assistance applies.

ANNEX

T E X T OF TH E

MODEL BILA TERA L TAX CONVENTIONS

58

1. M O D EL B IL A T E R A L C O N V E N T IO N F O R T H E P R E V E N T IO N O F T H E D O U B LE T A X A T IO N

O F INCOM E

Mexico Draft.

Article I .

1. The p resen t Convention is designed to p reven t double ta x a t io n in th e case of th e tax p ay e rs of th e con tracting States, w hether na tionals or not, as regards the following taxes :

A. W ith reference to S ta te A:1 ....................................................................................2 ....................................................................................

3....................................................................................

B. W ith reference to S ta te B:1 ....................................................................................2 .........................................................................................3....................................................................................

2. I t is m u tu a lly agreed th a t th e p resen t Convention shall app ly also to a n y o ther ta x , or increase of tax , imposed by e ith e r con trac ting S ta te subsequent to th e da te of signature of th is Convention upon su b stan tia lly th e sam e bases as the tax es enum erated in th e preceding pa rag rap h o f th is Article.

Article I I .

Incom e from rea l p ro p erty shall be tax ab le only in the S ta te in which th e p ro p er ty is s itua ted .

Article I I I .

1. Incom e from m ortgages on real p ro p erty shall be tax ab le only in th e S ta te where th e p ro p erty is s ituated .

2. Incom e from m ortgages on sea and /o r a ir vessels shall be taxab le only in th e S ta te w here such vessels are registered.

5 9

1. M ODEL B IL A T E R A L C O N V EN TIO N F O R T H E P R E V E N T IO N O F T H E D O U B LE T A X A T IO N

O F INCOM E AND P R O P E R T Y

London Draft.

Article I.

1. The p resen t Convention is designed to p reven t doubletaxation in th e case of th e tax p ay ers of th e con tracting S tates,whether na tiona ls or no t, as regards the following taxes :

A. W ith reference to S ta te A:

1......................................................................................................;2..................................................................................... ;3.....................................................................................

B. W ith reference to S ta te B:

1.................................................................................. ;2 ............................................................................................... ;3......................................................................................

2. I t is m u tu a lly agreed th a t the p resent Convention shall apply also to an y o ther tax , or increase of tax , imposed by either con trac ting S ta te subsequent to th e d a te of signature of this Convention upon substan tia lly th e sam e bases as the taxes enum erated in th e preceding parag raph of th is Article.

Article I I .

Income from rea l p roperty shall be taxab le in th e S ta te in which the p ro p er ty is s itua ted .

Article I I I .

1. Incom e from m ortgages on real p roperty shall be taxable in the S ta te where th e p ro p erty is s itua ted .

2. Incom e from m ortgages on sea and /o r a ir vessels shall be taxable in th e S ta te where such vessels are registered.

60 M E X IC O D R A F T ---- IN C O M E

Article I V .

1. Incom e from an y industria l, comm ercial or agricultural business a n d from a n y o th e r gainful a c tiv ity shall be taxable only in th e S ta te where th e business or ac tiv ity is carried out.

2. I f an en terprise or an individual in one of the con trac ting S ta te s ex tends its or his activ ities to the o ther State, th rough isolated or occasional transactions, w ithou t possessing in t h a t S ta te a pe rm anen t estab lishm ent, th e income derived from such activ ities shall be tax ab le only in th e first State.

3. I f an en terprise has a p e rm an en t estab lishm ent in each of th e con trac ting S ta tes , each S ta te shall t a x t h a t part of th e incom e which is produced in its te rrito ry .

4. As regards agricu ltu ra l and m ining raw m ateria ls anti o ther n a tu ra l m ateria ls an d products, th e incom e which results from prices prevailing betw een independen t p e r s o n s

or conform ing to world m ark e t quo ta tions shall be regarded as realised in th e S ta te in which such m ateria ls or products have been produced.

Article V.

Incom e which a n en terprise of one of th e contracting S ta tes derives from th e opera tion of ships o r a irc ra f t registered in such S ta te is tax ab le on ly in t h a t S ta te .

Article VI.

1. D irec to rs’ percentages, a tten d an ce fees an d other special rem unera tion paid to d irectors, m anagers and auditors of com panies are tax ab le only in th e S ta te where th e fiscal domicile of th e en terprise is s itua ted .

2. If, however, such rem unera tion is pa id for services rendered in a p e rm an en t es tab lishm en t s itu a ted in th e other con trac ting S ta te , i t shall be tax ab le only in t h a t S tate.

Article V I I .

1. C om pensation for labour or personal services shall be tax ab le only in th e con trac ting S ta te in which such services are rendered.

L O N D O N D R A F T IN C O M E 61

Article I V .

1. Incom e derived from any industria l, com m ercial or agricultural enterprise a n d from a n y o ther gainful occupation shall be taxab le in th e S ta te where th e tax p ay e r has a perm anent e s tab lishm en t.

2. I f an enterprise in one S ta te ex tends its ac tiv ities to the o ther S ta te w ithou t possessing a pe rm anen t estab lishm ent therein, the incom e derived from such activ ities shall be taxable only in th e first S ta te .

3. I f a n enterprise lias a p e rm anen t estab lishm ent in each of the con trac ting S ta tes, each S ta te shall ta x only th a t p a rt of th e incom e which is produced in its territo ry .

Article V.

Incom e which an en terprise in one of th e con tracting States derives from th e opera tion of ships or a irc ra f t engaged in in te rnationa l tra n sp o rt is taxab le only in th e S ta te in which th e en terprise has its fiscal domicile.

Article VI.

1. R em unera tion for labour or personal services shall be taxable in th e con trac ting S ta te in which such services are rendered.


2. A person having his fiscal domicile in one contracting S ta te shall, however, be exem pt from ta x a tio n in the other con trac ting S ta te in respect of such com pensation if he is tem porarily p resen t w ith in th e la t te r S ta te for a period or periods no t exceeding a to ta l of one hund red and eighty-three days during the calendar year, and shall rem ain taxable in th e first S tate .

3. I f th e person rem ains in th e second S ta te more than one hundred an d e ighty-three days, he shall be taxab le therein in respect of com pensation he earned during Ms s ta y there, b u t shall no t be taxab le in respect of such com pensation in the first S ta te .

4. Incom e derived b y an accoun tan t, an architect, a doctor, an engineer, a law yer or o ther person engaged in the p rac tice of a liberal profession shall be tax ab le only in the con trac ting S ta te in which th e person has a pe rm anen t establishm ent a t, or from , which he renders services.

5. I f a n y such person has a pe rm an en t estab lishm ent in b o th con tracting S ta tes, he shall be tax ab le in each S ta te only on th e income received for services rendered therein.

Article V I I I .

1. Salaries, wages and o ther rem unera tion paid by one o f th e con trac ting S ta tes, or by public bodies, institu tions or services depending on it, to its nationals carry ing out public functions in the o ther S ta te shall be tax ab le only in the first S ta te , p rovided th a t these functions are included w ithin the no rm al field of ac tiv ity of th e S ta te , as th is field is defined by in te rn a tio n a l usage.

2. Public pensions shall be taxab le only in the S tate of th e deb to r en tity .

Article I X .

Incom e from m ovable cap ita l shall be tax ab le only in the con trac ting S ta te where such cap ita l is invested.

L O N D O N D R A F T ---- IN C O M E 63

2. A person hav ing his fiscal domicile in one con tracting State shall, however, be exem pt from tax a tio n in th e o ther contracting S ta te in respect o f such rem unera tion if he is temporarily p resen t w ith in th e la t te r S ta te for a period or periods no t exceeding a to ta l of one hundred and e igh ty-th ree clays during th e tax ab le year, a n d shall rem ain taxab le in the first S ta te .

3. I f a person rem ains in th e second S ta te more th a n one hundred and e igh ty-th ree days, he shall be taxab le therein in respect of th e rem unera tion he earned during his s ta y there, b u t shall no t be taxab le in respect of such rem unera tion in the first S tate .

4. Incom e derived by an accountan t, an arch itect, an engineer, a law yer, a physician or o ther person engaged on his own account, in th e practice of a profession shall be taxab le in the contracting S ta te in which th e person has a pe rm anen t establishment a t, or from , which he renders services.

5. I f an y person described in the preceding p a rag raph has a pe rm anen t es tab lishm ent in bo th con tracting S tates, he shall be tax ab le in each S ta te only on th e incom e for services rendered therein .

Article V I I .

Salaries, wages, pensions an d o ther rem unera tion paid by the Government, political subdivisions an d governm ental agencies of one of th e con tracting S ta tes to nationals of such State in respect of th e perform ance of diplom atic, consularor other governm enta l functions in th e o ther S ta te , shall betaxable only in the first S ta te , provided th a t these functions are included w ith in th e norm al field o f governm ental functions and are no t connected w ith th e carrying on of a trad e orbusiness on beha lf of th e S ta te , its subdivisions a n d itsagencies.

Article V I I I .

1. Dividends an d o ther income from shares in a com pany and shares of profits accruing to lim ited liab ility partners in


Article X .

1. R oyalties from im m ovable p ro p erty or in respect of th e operation of a m ine, a quarry , or o ther n a tu ra l resource shall be tax ab le only in th e con tracting S ta te in which such p roperty , m ine, quarry , or o ther n a tu ra l resource is situated.

2. R oyalties a n d am oun ts received as a consideration for th e r ig h t to use a p a te n t, a secret process or form ula, a tradem ark o r o ther analogous r ig h t shall be taxab le only in the S ta te where such righ t is exploited.


a limited liab ility pa rtne rsh ip shall be tax ab le only in the contracting S ta te where th e com pany or lim ited liab ility partnership has its fiscal domicile.

2. N otw ithstand ing the provisions of p a rag raph 1, d iv idends paid b y a com pany which has its fiscal domicile in one contracting S ta te to a com pany which has its fiscal domicile in the o ther con trac ting S ta te and has a dom inan t pa rtic ipa tion in the m anagem en t or cap ita l of the com pany paying the dividends shall be exem pt from ta x in th e form er S ta te .

3. Dividends paid by, or und istr ibu ted profits of, a company which has its fiscal domicile in one contracting State shall n o t be subjected to an y ta x b y the o ther con trac ting S tate by reason of th e fac t t h a t th e dividends or und istributed profits represent, in whole or in part, incom e derived from the te rr ito ry of t h a t o ther S tate .

Article I X .

1. In te res t on bonds, securities, notes, debentures or on any other form of indebtedness shall be taxab le only in the State where th e cred ito r has his fiscal domicile.

2. The S ta te of th e deb to r is, however, en titled to ta x such in terest by m eans of deduction or w ithholding a t source.

3. The ta x w ithheld a t source under parag raph 2 of th is Article shall in no case exceed. . . % of the tax ed in terest.

Article X .

1. R oyalties from im m ovable p roperty or in respect of the operation of a m ine, a q u a rry or o ther n a tu ra l resource shall be taxab le only in th e con tracting S ta te in which such property, m ine, q u a rry or o ther n a tu ra l resource is s itua ted .

2. R oyalties derived from one of th e con tracting S ta tes by an individual, corporation or o ther e n ti ty of th e o ther contracting S ta te in consideration for the righ t to use a p a ten t, a secret process or form ula, a trade-m ark or o ther analogous right, shall n o t be tax ab le in the form er S ta te .

3. If, however, royalties a re pa id by an enterprise of one contracting S ta te to an o th e r enterprise o f th e o ther con tract-


3. R oyalties derived from one o f th e con tracting States by an indiv idual, corporation or o ther e n ti ty of th e other con tracting S ta te , in consideration for th e r igh t to use a musical, a rtis tic , lite ra ry , scientific or o ther cu ltu ra l work or publica tion shall n o t be tax ab le in th e form er S ta te .

Article X I .

P riv a te pensions and life annu ities shall be taxab le only in th e S ta te where th e deb to r has his fiscal domicile.

Article X I I .

Gains derived from th e sale or exchange o f real property shall be taxab le only in th e S ta te in which th e p roperty is s itua ted .

Article X I I I .

The S ta te where th e ta x p a y e r has his fiscal domicile shall re ta in th e r igh t to t a x th e en tire incom e o f th e taxpayer w he ther derived from its te r r ito ry or from th a t o f the other con trac ting S ta te , b u t shall deduc t from its ta x on such entire


ing S tate which has a dom inan t partic ipa tion in its m anagement or capital, or vice versa, or when b o th enterprises are owned or controlled by th e same in terests, th e royalties shall be sub jec t to ta x a t io n in the S ta te where th e r igh t in consideration of which th ey are paid is exploited, subject to deduction from th e gross am o u n t of such royalties of all expenses and charges, including depreciation, rela tive to such rights and royalties.

4. R oyalties derived from one of th e con tracting S ta tes by an individual, corporation or o ther e n ti ty of the o ther contracting S ta te , in consideration for th e righ t to use an artistic, scientific or o ther cu ltu ra l work or publication shall not be taxab le in th e form er S ta te .

Article X I .

Private pensions an d life annuities shall be taxab le only 111 the S ta te where the recipient has his fiscal domicile.

Article X I I .

1. Gains derived from th e sale or exchange of rea l p roperty shall be tax ab le only in th e coun try in which the p ro p er ty is situated.

2. Gains derived from th e sale or exchange of assets o ther than real p roperty , apperta in ing to an industria l, comm ercial or agricultural en terprise or to an y o ther independent occupation. shall be tax ab le according to th e provisions of Articles IV and V.

3. Gains derived from th e sale or exchange of a n y cap ita l assets o ther th a n those m entioned in the preceding pa rag raphs of the p resent A rticle shall be taxab le only in th e S ta te where the recipient has his fiscal domicile.

Article X I I I .

The S ta te where th e tax p a y e r has his fiscal domicile shall retain the r igh t to t a x the en tire income of th e tax p a y e r whether derived from its te rr ito ry or from th a t of the o ther contracting S ta te , b u t shall deduct from its t a x on such en tire

6 8 M E X IC O D R A F T ---- IN C O M E

incom e the lesser of th e tw o following am oun ts :A. The ta x collected by th e la t te r con tracting S ta te on

th e incom e which is taxab le in its te r r ito ry according to th e preceding A rtic les;

B. The am o u n t which represents th e sam e proportion in com parison w ith th e to ta l t a x on th e income th a t is taxab le in b o th S ta te s as the incom e tax ab le in the o ther S ta te in com parison w ith th e to ta l income.

Article X I V .

I n th e case o f a ta x p a y e r w ith a fiscal domicile in both con trac ting S ta tes, th e tax , th e collection of which under this C onvention depends on fiscal domicile, shall be imposed in each of th e con trac ting S ta tes in p roportion to th e period of s ta y during the preceding y ear o r according to a p roportion to be agreed by th e com peten t adm in is tra tions .

Article A T ,

A tax p a y e r hav ing his fiscal domicile in one of th e con trac ting S ta tes shall no t be sub jec t in the o ther con tracting State, in respect of income he derives from th a t S ta te , to higher or o th e r tax es th a n the tax es applicable in respect of th e same incom e to a ta x p a y e r hav ing his fiscal domicile in th e latter S ta te , or hav ing th e n a tio n a li ty of t h a t S ta te .

Article X V I .

1. W hen a tax p a y e r shows proof t h a t th e ac tion of the ta x ad m in is tra tio n of one of th e con tracting S ta te s has resulted in double tax a tio n , he shall be en titled to lodge a claim with the t a x ad m in is tra tion of th e S ta te in which he has his fiscal domicile or of which he is a national.


income the lesser of th e following am ounts :A. The ta x collected by th e o ther con tracting S ta te on

the incom e which is tax ab le in its te rr ito ry according to th e preceding Articles ;

B. The am o u n t which represents th e sam e proportion of th e ta x of th e S ta te of fiscal domicile on th e en tire n e t income of th e ta x p a y e r as the n e t income tax ab le in th e o ther S ta te bears to th e entire n e t income.

Article X I V .

In th e case of a tax p a y e r w ith a fiscal dom icile in b o th contracting S ta tes , the ta x , th e collection of which under th is Convention depends on fiscal domicile, shall be im posed in each of th e con trac ting S ta tes in p roportion to th e period of stay during th e tax ab le year or according to a p roportion to be agreed by the com peten t adm in istra tions.

Article X V .

The provisions of th e preceding Articles shall be applicable, mutatis mutandis, to taxes on p roperty , cap ita l or increm ent of wealth w hether such tax es are p e rm anen t or are levied once only.

Article X V I .

A ta x p a y e r hav ing his fiscal domicile in one of the c o n tra c ting S ta tes shall n o t be sub jec t in th e o ther con trac ting S ta te , in respect of incom e he derives from th a t S ta te , to h igher or other taxes th a n th e tax es applicable in respect of the same income to a tax p a y e r hav ing his fiscal domicile in th e la t te r State, or hav ing th e n a tio n a li ty of th a t S ta te .

Article X V I I .

1. W hen a ta x p a y e r shows proof t h a t th e ac tion o f the tax adm in is tra tion of one of th e con trac ting S ta tes has resulted in double tax a tio n , he shall be en titled to lodge a claim w ith th e ta x adm in is tra tion of the S ta te in which he has his fiscal domicile or of which he is a na tiona l.

70 M E X IC O D R A F T IN C O M E

2. Should th e claim be a d m itted , th e com peten t tax adm in is tra tion o f th a t S ta te shall consult d irec tly w ith the com peten t a u th o r i ty of th e o th e r S ta te , w ith a view to reaching a n agreem ent for an equ itab le avoidance o f double taxation .

Article X V I I .

As regards a n y special provisions which m ay be necessary for th e app lication o f th e p resen t Convention, m ore p a rticu larly in cases n o t expressly p rovided for, th e com peten t au th o rities o f the tw o con trac ting S ta te s m ay confer toge the r and ta k e th e m easures required in accordance w ith th e spirit of th is Convention.

Article X V I I I .

1. This Convention a n d th e accom panying Protocol, which shall be considered to be an in tegral p a r t of the Convention, shall be ratified an d th e in stru m en ts o f ratification shallbe exchanged a t ..................................................................... as soonas possible.

2. This C onvention a n d P ro tocol shall become effective on th e first d ay of J a n u a ry 19. .. T hey shall continue effective for a period o f th ree years from th a t d a te an d indefinitely a fte r th a t period. T hey m ay , however, be te rm in a ted by e ither of th e con trac ting S ta te s a t th e end of th e three-year period or a t a n y tim e thereafter , p rovided th a t a t least six m on ths p rio r notice of te rm in a tio n has been given, th e term ination to become effective on th e first d ay of J a n u a ry following th e exp ira tion of th e six -m on th period.

Done in duplicate , a t .............................. t h i s ...............................d ay o f ................................... , 1 9 ............

L O N D O N D R A F T — IN C O M E 71

2. Should th e claim be adm itted , th e com petent ta x adm in is tra tion of t h a t S ta te shall consult d irectly w ith the com petent a u th o r i ty of th e o ther S ta te , w ith a view to reaching an agreem ent for an equ itab le avoidance of double taxa tion .

Article X V I I I .

The provisions of th e p resent Convention shall no t be construed to res tr ic t in a n y m anner an y exem ption, deduction, credit, allowance, advan tage an d righ t of adm in is tra tive or judicial appeal accorded to a tax p a y e r by th e laws of e ither of the con tracting S tates.

Article X I X .

As regards a n y special provisions which m ay be necessary for the application of the p resent Convention, m ore p a rt icu larly in cases not expressly provided for, an d in th e even t of substan tia l changes in the ta x laws of e ither of th e con tracting States, th e com petent au tho rities of th e tw o con tracting S ta tes shall confer together a n d tak e th e m easures required in accordance w ith th e sp irit of the present Convention.

Article X X .

1. This Convention an d the accom panying Protocol, which shall be considered to be an in tegral p a r t of th e Convention, shall be ratified and th e in strum en ts of ratification shallbe exchanged a t .................................................................... as soonas possible.

2. This Convention and Protocol shall become effective on the first d a y of J a n u a ry 19. .. They shall continue effective for a period of th ree years from th a t da te and indefinitely after th a t period. They m ay, however, be te rm ina ted by either of the con tracting S ta tes a t the end of the three-year period or a t a n y tim e thereafter, provided th a t a t least six months prior notice of te rm ina tion has been given, th e te rm in a tion to become effective on the first day of J a n u a ry following the expiration of the six-m onth period.

Done in duplicate, a t ............................th is ...............................day o f ............................... 19 .........


PR O TO CO L

On proceeding to sign th e Convention for th e Prevention of Double T axa tion o f Incom e concluded th is day between...................................................an d theundersigned P len ipo ten tiaries have agreed th e following provisions, which shall form an in tegral p a r t of th e said Convention.

Article I.

The te rm s “ ta x p a y e r of a con tracting S ta te ” an d “ en terprise o f a con trac ting S ta te ” m ean a tax p a y e r or an enterprise whose fiscal domicile is in th e said S ta te .

Article I I .

1. F or th e purpose of th e foregoing Convention, the term “ fiscal domicile ” m eans, in th e case of an ind iv idual or of an en terprise belonging to an indiv idual, th e place where the ind iv idual has his norm al residence, th e te rm “ residence ” being understood to m ean pe rm an en t home.

2. Should a tax p a y e r possess a residence in bo th the con trac ting S ta tes, th e com peten t adm in is tra tion shall determine, by com m on agreem ent, th e place of his m ain residence, w hich shall be considered as his fiscal domicile. In order to determ ine, as betw een several residences, th e m ain residence, th e com peten t ad m in is tra tion will tak e in to accoun t elements such as th e dura tion , regu larity , frequency o f stays, the place where th e fam ily of th e tax p a y e r is usually p resen t, the proxim ity to th e place where th e p a r ty concerned carries ou t his occupation.

3. In th e case of a ta x p a y e r having a residence in both of th e con trac ting S ta tes of w hich e ither can be considered as his m ain residence, Article X V II of the Convention shall apply.

4. The fiscal domicile of partnersh ips, com panies and other legal en tities or cle facto bodies shall be th e S ta te under the laws o f which th e y were constitu ted .


PR O TO CO L

On proceeding to sign th e Convention for th e P reven tion of Double T axa tion of Incom e concluded th is day betw een.................................................... a n d ................................................ th eundersigned P len ipo ten tiaries have agreed the following provisions, which shall form an in tegral p a r t o f the said Convention.

Article I .

The term s “ tax p a y e r of a con tracting S ta te ” a n d “ e n te r prise of a con trac ting S ta te ” m ean a ta x p a y e r or an e n te r prise whose fiscal domicile is in th e said S ta te .

Article I I .

1. F o r th e purpose of th e foregoing Convention, the te rm “ fiscal domicile ” m eans, in th e case of an ind iv idual or of an enterprise belonging to an individual, th e place where the individual has his norm al residence, th e te rm “ residence ” being understood to m ean pe rm anen t home.

2. Should a ta x p a y e r possess a residence in b o th the contracting S ta tes, th e com peten t adm in is tra tion shall d e te rmine, by com m on agreem ent, th e place of his m ain residence, which shall be considered as his fiscal domicile. I n order to determ ine, as betw een several residences, the m ain residence, the com peten t adm in is tra tion will tak e in to account elem ents such as th e dura tion , regu larity , frequency of stays, th e place where th e fam ily o f th e tax p a y e r is u sually present, the proxim ity to th e place where th e p a r ty concerned carries ou t his occupation.

3. In the case o f a ta x p a y e r having a residence in b o th of the con tracting S ta tes o f which e ither can be considered as his m ain residence, A rticle X I X of th e Convention shall apply .

4. The fiscal domicile of a partnersh ip , com pany and an y other legal e n ti ty or de facto body shall be th e S ta te in which its real centre of m anagem en t is s ituated .


Article I I I .

Differences which arise concerning th e n a tu re of real prop e r ty shall be se ttled in accordance w ith th e legislation of the te r r i to ry w here th e p ro p er ty is s itua ted .

Article I V .

The te rm “ en terprise ” includes a n y k ind of enterprise w hether i t belongs to a n ind iv idual, a partnersh ip , a company or a n y o th e r legal e n ti ty or de facto body.

Article V.

1. The te rm “ p e rm anen t estab lishm en t ” includes head offices, branches, mines an d oil-wells, p lan ta tions , factories, w orkshops, w arehouses, offices, agencies, insta lla tions, professional prem ises a n d o th e r fixed places of business having a p roductive character.

2. A building site (chantier de construction) constitu tes a “ p e rm anen t estab lishm ent ” w hen it is destined to be used for a year a t least or has been in existence for a year.

3. The fac t th a t an en terprise estab lished in one of the con trac ting S ta tes has business dealings in an o th e r contracting S ta te tlirough a n agen t of genuinely independen t status (broker, comm ission agen t, etc.) shall no t be held to mean th a t th e en terprise has a p e rm anen t es tab lishm ent in the la t te r S ta te .

4. "When an en terprise of one o f th e con trac ting States regularly has business rela tions in th e o th e r S ta te th rough an agen t estab lished there who is au tho rised to a c t on its behalf, i t shall be deem ed to have a pe rm an en t es tab lishm ent in that S ta te .

A p erm anen t estab lishm ent shall, for instance, be deemed to exist when the agen t:

A. Is a du ly accred ited a g en t (fondé de pouvoir) and hab itu a lly en ters in to con tracts for th e enterprise for wliich he w orks; or


Article I I I .

Differences which arise concerning th e n a tu re of real p roperty shall be se ttled in accordance w ith th e legislation of the te rr ito ry where th e p ro p er ty is s itua ted .

Article I V .

The te rm “ en terprise ” includes a n y k ind of enterprise w hether i t belongs to an individual, a partnersh ip , a com pany or an y o ther legal e n ti ty or de facto body.

Article V.

1. The te rm “ pe rm anen t es tab lishm ent ” includes head offices, branches, m ines an d oil-wells, p lan ta tions , factories, workshops, warehouses, offices, agencies, insta lla tions, professional prem ises an d o ther fixed places of business hav ing a productive character.

2. A building site (chantier de construction) cons titu tes a “ perm anen t es tab lishm ent ” w hen it is destined to be used for a yea r a t least or has been in existence for a year.

3. The fac t t h a t an en terprise established in one of the contracting S ta tes has business dealings in ano ther con trac ting S tate th ro u g h an agen t of genuinely independen t s ta tu s (broker, commission agent, etc.) shall no t be held to m ean th a t the enterprise has a p e rm anen t estab lishm ent in th e la t te r State.

4. W hen an en terprise of one of th e con trac ting S ta tes regularly has business rela tions in th e o ther S ta te th rough an agent established there who is au thorised to ac t on its behalf, it shall be deem ed to have a p e rm anen t es tab lishm ent in th a t State.

A perm anen t es tab lishm ent shall, for instance, be deem ed to exist w hen the a g en t:

A. Is a du ly accredited agen t (fondé de pouvoir) and h ab itu a lly en te rs in to con trac ts for th e en terprise for which he w orks; or

76 M E X IC O D R A E T IN C O M E

B. Is bound by an em ploym ent con trac t an d habitually tran sac ts business on behalf of th e en terprise in return for rem unera tion from th e enterprise ; or

C. Is hab itua lly in possession, for the purpose of sale, of a depo t o r s tock of goods belonging to th e enterprise.

5. As evidence o f an em ploym ent con trac t under the term s of B above m ay be tak en , moreover, th e fac t th a t the adm in is tra tive expenses of th e agent, in pa rticu la r the ren t of prem ises, a re pa id by the enterprise.

6. The fact t h a t a b roker places his services a t th e disposal of an en terprise in order to bring i t in to touch w ith customers does no t in itself im ply th e existence of a p e rm anen t establishm en t for th e enterprise, even if his w ork for th e enterprise is, to a certa in ex ten t, continuous or is carried on a t regular periods, an d even if th e goods sold have been tem porarily p laced in a warehouse. Sim ilarly, the fac t t h a t a commission agen t (commissionnaire) ac ts in his own nam e for one or more enterprises and receives a no rm al ra te of commission does not constitu te a pe rm anen t estab lishm ent for a n y such enterprise, even if th e goods sold have been tem porarily placed in a warehouse.

7. A perm anen t es tab lishm ent shall n o t be deemed to exist in the case o f com m ercial travellers no t com ing under any o f th e preceding categories.

8. The fac t th a t a p a re n t com pany, th e fiscal domicile of w hich is one of th e con trac ting S ta tes, has a subsidiary in the o ther S ta te does no t m ean th a t th e p a re n t com pany has a pe rm anen t estab lishm en t in th a t S ta te , regardless of th e fiscal obligations o f th e subsid iary tow ard th e S ta te in which it is s itua ted .

Article VI.

The allocation of th e incom e of th e enterprises mentioned in Article IV of th e Convention shall be effected in th e following m an n e r :

1. In respect of industria l, com m ercial and agricultural en terprises in general and for o ther independent activities :


B. Is bound by an em ploym ent con trac t and hab itua lly tran sac ts business on behalf o f the enterprise in re tu rn for rem unera tion from the enterprise ; or

C. Is hab itua lly in possession, for th e purpose of sale, of a depot or stock of goods belonging to th e enterprise.

5. As evidence of an em ploym ent con trac t under th e terms of B above m ay be taken , moreover, th e fac t th a t th e adm inistrative expenses of th e agent, in pa rticu la r th e re n t of premises, are pa id by th e enterprise.

6. The fac t th a t a broker places his services a t the disposal of an enterprise in order to bring i t in to touch w ith custom ers does no t in itse lf im ply th e existence of a p e rm anen t es tab lish ment for the enterprise, even if his work for th e enterprise is, to a certain ex ten t, continuous or is carried on a t regular periods, and even if th e goods sold have been tem porarily placed in a warehouse. Similarly, th e fac t t h a t a commission agen t (commissionnaire) ac ts in his own nam e for one or m ore e n te r prises an d receives a norm al ra te of commission does no t constitute a pe rm anen t estab lishm ent for an y such enterprise, even if th e goods sold have been tem porarily placed in a warehouse.

7. A perm anen t estab lishm ent shall no t be deem ed to exist in th e case o f com m ercial travellers no t coming under any of th e preceding categories.

8. The fac t th a t a p a ren t com pany, the fiscal domicile of which is one of the con tracting S tates, has a subsid iary in the o ther S ta te does n o t m ean th a t th e p a ren t com pany has a pe rm anen t es tab lishm ent in th a t S ta te , regardless of the fiscal obligations of th e subsidiary tow ard the S ta te in which it is s itua ted .

Article VI.

The allocation of the incom e of th e enterprises m entioned in Article IV of th e Convention shall be effected in the following m anner :

1. In respect of industria l, comm ercial an d agricu ltu ra l enterprises in general an d for o ther independent ac tiv ities :


A. I f an en terprise w ith its fiscal domicile in one con trac ting S ta te has a p e rm an en t estab lishm ent in th e o ther con trac ting S ta te , th ere shall be a t t r ib u te d to each pe rm anen t estab lishm ent th e n e t business income which it m ight be expected to derive, if i t were an independent enterprise engaged in th e sam e or similar activ ities, un d e r th e sam e or sim ilar conditions. Such net incom e will, in principle, be determ ined on the basis of th e separa te accounts pe rta in ing to such estab lishm ent. According to the provisions of the Convention, such incom e shall be tax e d in accordance w ith th e legislation and agreem ents of th e S ta te in which such estab lishm ent is s itua ted .

B. The fiscal au thorities of th e con trac ting S ta tes shall, when necessary, in execution of the preceding section, rectify th e accounts produced, especially to correct errors or omissions, or to re-estab lish th e prices or rem unera tions en tered in th e books a t the value which woidd prevail betw een independen t persons dealing a t a rm ’s length . I f th e accounts of th e perm anent estab lishm ent in one con trac ting S ta te are rectified as a resu lt o f such verification, a corresponding rectification shall be m ade in th e accounts of the estab lishm en t in th e o th e r con tracting S ta te with which th e dealings in question have been effected.

C. I f an estab lishm ent does n o t produce an accounting showing its own operations, or if th e accounting produced does n o t correspond to the norm al usages of th e tra d e in th e coun try where the establishm ent is s itua ted , or i f th e rectifications provided for in the preceding section cannot be effected, or if the tax payer agrees, th e fiscal au tho rities m ay determine, in a p resum ptive m anner, th e business income by apply ing a percentage to th e gross receipts of that es tab lishm ent. This percen tage is fixed in accordance w ith th e n a tu re o f th e transactions in which the es tab lishm ent is engaged an d by com parison w ith the resu lts ob ta ined by sim ilar en terprises operating in th e coun try . W here th e activ ities of th e permanent


A. I f an en terprise w ith its fiscal domicile in one c o n tra c ting S ta te has a p e rm anen t es tab lishm ent in th e o ther con tracting S ta te , there shall be a t t r ib u te d to each pe rm anen t estab lishm ent th e n e t business incom e which it m igh t be expected to derive, if i t were an independen t enterprise engaged in th e sam e or sim ilar activ ities, under th e same or sim ilar conditions. Such n e t income will, in principle, be determ ined on the basis of th e separa te accounts pe rta in ing to such es tab lishm ent. According to th e provisions of the Convention, such incom e shall be tax ed in accordance w ith th e legislation an d agreem ents of the S ta te in which such estab lishm ent is s ituated .

B. The fiscal au tho rities of th e con tracting S ta tes shall, w hen necessary, in execution of th e preceding section, rectify th e accounts produced, especially to correct errors or omissions, or to re-establish th e prices or rem unera tions en tered in th e books a t th e value which would p revail betw een independen t persons dealing a t a rm ’s length . I f th e accounts of th e p e rm anen t estab lishm en t in one con trac ting S ta te are rectified as a resu lt o f such verification, a corresponding rec tification shall be m ade in th e accounts of th e es tab lish m en t in th e o th e r con tracting S ta te w ith which the dealings in question have been effected.

C. I f an estab lishm en t does n o t produce an accounting showing its own operations, or if th e accounting p roduced does n o t correspond to th e norm al usages of th e tra d e in th e coun try where th e estab lishm en t is s itua ted , or if th e rectifications provided for in th e preceding section canno t be effected, or if th e tax p a y e r agrees, th e fiscal au tho rities m ay determ ine, in a p resum ptive m anner, th e business incom e b y applying a percentage to th e gross receipts of th a t es tab lishm ent. This percentage is fixed in accordance w ith th e n a tu re of th e transactions in which th e es tab lishm ent is engaged an d by com parison w ith th e results ob tained by sim ilar en terprises opera ting in th e country . W h e r e

the activ ities of th e p e rm anen t estab lishm en t are in


estab lishm ent are in th e n a tu re of those o f a genuinely independen t commission agen t or broker, the income m ay be determ ined on the basis of th e custom ary commission received for such services.

D. I f th e m ethods o f de te rm ina tion described in the preceding sections are found to be inapplicable, the ne t business income of the p e rm anen t establishm ent m ay be determ ined b y a com puta tion based on the to ta l incom e derived by the enterprise from th e ac tiv ities in which such estab lishm ent has participated. This de te rm ina tion is m ade by app ly ing to th e to ta l incom e coefficients based on a com parison of gross receipts, assets, num ber of hours worked or other app rop ria te factors, provided such factors are so selected as to ensure results approaching as closely as possible those which would be reflected by a separa te accounting.

2. I n determ ining th e n e t income on th e basis of the separa te accounting of a perm anen t es tab lishm ent, a properly apportioned p a r t o f the general expenses of th e head office of th e en terprise m ay be deducted .

3. In respect of bank ing and financial enterprises, the allocation of th e income shall be effected in conform ity with th e principles laid down in pa rag rap h 1 of th e p resen t Article, p rovided th a t , when a p e rm anen t es tab lishm ent of th e enterprise is in th e position of a cred ito r or deb to r in relation to an o th er p e rm anen t estab lishm ent of the enterprise, th e following provisions shall app ly :

A. I f a pe rm anen t estab lishm ent in one S ta te (creditor estab lishm ent) supplies funds, w hether in the form of an advance, loan, overdraft, deposit, or otherwise, to a pe rm anen t es tab lishm ent in th e second State (debtor es tab lishm ent), in te rest shall be deemed to accrue as incom e to the cred itor establishm ent and as a deduction from gross incom e to th e deb to r establishm ent for ta x purposes, and i t shall be computed a t th e in te r-bank ra te for sim ilar transactions in the currency used;


th e n a tu re o f those o f a genuinely independen t com mission agen t or broker, th e incom e m ay be d e te rm ined on th e basis of th e custom ary commission received for such services.

D. I f th e m ethods of de te rm ina tion described in the preceding sections are found to be inapplicable, the ne t business income of the pe rm anen t estab lishm ent m ay be determ ined by a com puta tion based on the to ta l income derived by th e enterprise from th e activ ities in which such estab lishm ent has partic ipa ted . This de te rm ina tion is m ade by app ly ing to th e to ta l income coefficients based on a com parison of gross receipts, assets, num ber o f horn's worked or o ther app rop ria te factors, p rovided such factors are so selected as to ensure results approaching as closely as possible those which would be reflected by a separa te accounting.

2. I n determ ining th e n e t income on th e basis of the separate accounting of a perm anen t estab lishm ent, a properly apportioned p a r t o f the general expenses of th e head office of the en terprise m ay be deducted.

3. In respect o f bank ing and financial enterprises, th e allocation of th e income shall be effected in conform ity w ith the principles laid down in parag raph 1 of the p resen t Article, provided th a t , when a perm anen t es tab lishm ent of th e e n te rprise is in th e position of a creditor or deb to r in rela tion to another pe rm anen t estab lishm ent of th e enterprise, th e following provisions shall app ly :

A. I f a pe rm an en t establislim ent in one S ta te (creditor estab lishm ent) supplies funds, w hether in th e form of an advance, loan, overdraft, deposit, or otherwise, to a p e rm anen t estab lishm ent in th e second S ta te (debtor estab lishm ent), in terest shall be deemed to accrue as incom e to th e creditor estab lishm en t a n d as a deduction from gross incom e to th e deb tor estab lishm ent for ta x purposes, a n d it shall be com pu ted a t th e in te r-b an k ra te for sim ilar transactions in the currency used;

6

8 2 M E X IC O D R A F T IN C O M E

B. The in terest corresponding to th e pe rm anen t capital a llo tted to th e deb to r estab lishm ent, w hether in the form of an advance, loan, overdraft, deposit or o therwise, shall be, however, excluded from the interest accruing as income to th e creditor estab lishm ent and deductib le from gross income by the deb tor establishm ent.

4. The n e t income of insurance enterprises shall be determ ined in conform ity w ith th e principles laid down in parag raph 1 of th e p resent Article. If, however, these principles are n o t applicable in a given case, th e ne t taxab le income of a perm anen t estab lishm ent belonging to an insurance enterprise m ay be assessed, e ither by applying, to th e gross prem ium s received as a result of th e ac tiv ity of the perm anent estab lishm ent, coefficients com puted on th e basis of th e total income of a rep resen ta tive na tiona l enterprise of th e particular category of insurance concerned, or by apportion ing the incom e according to th e ra tio existing betw een th e gross prem ium s rela ting to the perm anen t estab lishm ent and the to ta l gross prem ium s received b y th e enterprise.

5. In cases where the foregoing rules do no t result in a fair allocation of income, th e com petent au thorities may consult to agree upon a m ethod th a t will p reven t double taxa tion .

Article V I I .

W hen an enterprise of one con tracting S ta te has a domin a n t partic ipa tion in th e m anagem ent or cap ita l of an enterprise of an o th er con tracting S ta te , or when bo th enterprises are owned or controlled by the sam e in terests, and , as the result of such situation , there exist in th e ir comm ercial or financial relations conditions different from those which would have existed betw een independen t enterprises, a n y item of profit or loss which should norm ally have appeared in th e accounts of one enterprise, bu t which has been, in th is m anner, diverted to th e o ther enterprise, shall be en tered in th e accounts ot such form er enterprise, sub jec t to th e rights of appeal allowed under the laws of th e S ta te of such enterprise.


B. The in te rest corresponding to th e pe rm anen t capital a llo tted to the deb tor establishm ent, w hether in the form of an advance, loan, overdraft, deposit or o therwise, shall be, however, excluded from th e in terest accruing as income to th e creditor estab lishm ent and deductible from gross income by th e deb to r estab lishm ent .

4. The n e t income of insurance enterprises shall be d e te rmined in conform ity w ith th e principles laid down in p a rag raph 1 of the p resent Article. If, however, these principles are no t applicable in a given case, th e n e t taxab le incom e of a permanent estab lishm ent belonging to an insurance enterprise m ay be assessed, e ither b y applying, to th e gross prem ium s received as a result of the ac tiv ity of th e perm anen t establishm ent, coefficients com puted on the basis of th e to ta l income of a representative nationa l enterprise of the particu la r category of insurance concerned, or by apportion ing th e income according to the ra tio existing betw een th e gross prem ium s rela ting to the perm anen t estab lishm ent an d th e to ta l gross prem ium s received by th e enterprise.

5. In cases where th e foregoing rules do n o t resu lt in a fair allocation of income, th e com petent au thorities m ay consult to agree upon a m ethod th a t will p reven t double taxation.

Article V I I .

W hen an enterprise of one contracting S ta te has a dom inan t participation in the m anagem ent or cap ita l of an enterprise of another contracting S ta te , or when bo th enterprises are owned or controlled by the same in terests, and , as the resu lt of such situation, there exist in the ir commercial or financial relations conditions different from those which would have existed between independen t enterprises, a n y item of profit or loss which should norm ally have appeared in th e accounts of one enterprise, b u t which has been, in th is m anner, d iverted to the other enterprise, shall be entered in th e accounts of such former enterprise.

8 4 M E X IC O D R A F T ---- IN C O M E

Article V I I I .

The provisions o f A rticle IV of th e Convention shall not ap p ly to pedlars, in land shipping, tou ring shows an d other sim ilar occupations, which shall be tax ab le in accordance w ith th e legislation of th e coun try where these occupations are carried on and concerning which the com peten t adm in istra tions m ay , if necessary, agree special provisions.

Article I X .

F o r th e purposes of A rticle IX of th e Convention, the te rm “ incom e from m ovable c a p ita l” includes income from public funds, obligations, loans, deposits, w hether fixed or on cu rren t account, income from shares an d sim ilar partic ipations in com panies, as well as incom e from sleeping pa rtne r shares or shares of p a rtn e rs hav ing no powers o f m anagem ent or personal liab ility in partnersh ips.

Article X .

S tu d en ts a n d appren tices from one con tracting State residing in th e o th e r con trac ting S ta te exclusively for the purpose of s tu d y or for acquiring business experience shall no t be tax ab le by th e la t te r S ta te in respect of rem ittances received by th e m from w ith in the form er S ta te for th e pu rpose of th e ir m ain tenance or studies.

L O N D O N D R A F T ---- IN C O M E 8 5

Article V I I I .

The provisions of Article IV of th e Convention shall n o t apply to pedlars, in land shipping, touring shows an d o th e r similar occupations, w hich shall be tax ab le in accordance w ith the legislation of th e coun try where these occupations are carried on and concerning which th e com peten t a d m in is tra tions m ay, if necessary, agree special provisions.

Article I X .

S tuden ts a n d apprentices from one con trac ting S ta te residing in th e o ther con trac ting S ta te exclusively for th e purpose of s tu d y or for acquiring business experience shall not be tax ab le by th e la t te r S ta te in respect o f rem ittances received by th em from w ith in th e form er S ta te for th e purpose of their m ain tenance or studies.

8 6

2. M O D EL B IL A T E R A L C O N V EN TIO N F O R T H E P R E V E N T IO N O F T H E D O U B LE TA X A T IO N

O F SUCCESSIONS

Mexico Draft.

Article I.

1. The p resent Convention, th e purpose of which is to p reven t th e double tax a tio n of successions, applies to a ll duties an d taxes levied, by reason of death , on th e es ta te , or on the tran sfe r of, or th e succession to , th e es ta te , of a person who. a t th e tim e of his death , had his domicile in one of th e two con tracting S ta tes, w hether or no t he was a na tiona l of th a t S ta te or th e o th e r S ta te , an d on th e p a rt of such es ta te th a t accrues to each heir or legatee.

2. The duties a n d tax es to which th is Article refers are:

A. In th e case of S ta te A:1..............................................................................

3........................................

B. In th e case o f S ta te B: 1........................................

3......................................................................................

Article I I .

R eal p roperty , personal p ro p er ty accessory there to and rights re la ting to , or secured by, rea l p ro p er ty which are included in th e e s ta te of a person who, a t th e tim e of his dea th , had his domicile in one of th e tw o con tracting States shall be subject to th e duties a n d taxes described in Article I only in the S ta te in which such p ro p erty is s itua ted .

2. M O D EL B IL A T E R A L C O N V EN TIO N FO R T H E P R E V E N T IO N O F T H E D O U B LE TA X A T IO N

O F EST A TES AN D SUCCESSIONS

London Draft.

Article I .

The present Convention, th e purpose of which is to p revent the double tax a tio n of es ta tes an d successions, applies to the following duties an d taxes :

A. In the case of S ta te A :1 ;2 ..................

3.....................................................................................

B. In th e case of S ta te B :1 :9 .............................................................................................................................................................. ;

3.....................................................................................

Article I I .Real property , personal p ro p erty accessory there to and

rights rela ting to, o r secured by, real p roperty which are included in th e e s ta te of a person who, a t th e tim e of his death , had Ms domicile in one of the tw o con tracting S ta tes shall be subject to th e duties an d taxes described in A rticle I only in the S ta te in which such p ro p erty is s itua ted .

8 8 M E X IC O D R A F T E S T A T E S A N D SU C C E S SIO N S

Article I I I .

P ro p e rty apperta in ing to a commercial, industria l, mining, agricu ltu ra l or o ther enterprise, including a m aritim e or an air nav iga tion enterprise, left by a person who, a t th e tim e of his dea th , h ad his domicile in one of th e con tracting S ta tes shall be sub jec t to th e duties an d taxes described in Article I in accordance w ith th e following rides :

A. I f the enterprise has a pe rm anen t estab lishm ent in oneof th e tw o S tates, th e p roperty shall be taxab le only in th a t S ta te ;

B. I f th e enterprise has a pe rm anen t estab lishm ent inb o th S ta tes, th e p roperty shall be taxab le in each S ta te to th e e x te n t to which such p roperty belongs or rela tes to the estab lishm ent s itu a ted in t h a t S tate.

Article I V .

I f a person who, a t th e tim e of his dea th , h a d his domicile in one o f the con tracting S ta tes leaves in th e o ther contracting S ta te p ro p e r ty to which Articles I I and I I I do no t apply , the form er S ta te m ay ap p ly the duties a n d taxes described in Article I o f th e present C onvention to the en tire es ta te , subject to th e provisions of Article V I, an d th e la t te r S ta te m ay apply such duties a n d taxes to th e p ro p er ty s itu a ted in its territo ry , b u t only according to th e ra te which corresponds to th e value of th e la t te r p roperty , w ithou t tak ing in to account th e property s itu a ted in th e te rr ito ry of th e o th e r S ta te .

Article V.

F or th e purposes o f determ ining th e n e t value of the p ro p er ty sub jec t to the duties and taxes to which th is Conventio n refers, th e deb ts of th e deceased shall be deducted according to th e following rules :

A. A d eb t secured by, or relating to , p ro p erty to which A rticles I I an d I I I app ly shall be deducted from the value of th e specific p ro p erty b y which i t is secured, or to which i t re la tes ;

L O N D O N D R A F T ----- E S T A T E S AN D SU C C E S SIO N S 89

Article I I I .

P roperty apperta in ing to a commercial, industria l, mining, agricultural or o ther enterprise, including a m aritim e or an air navigation enterprise, left by a person who, a t th e tim e of his death , had his domicile in one of th e con tracting S ta tes shall be subject to th e duties an d taxes described in Article I in accordance w ith the following rules :

A. I f the enterprise has a perm anen t estab lishm ent in oneof th e tw o S ta tes, th e p roperty shall be taxab le only in t h a t S ta te ;

B. I f the enterprise has a perm anen t estab lishm ent inbo th S ta tes, th e p roperty shall be taxab le in each S ta te to th e e x te n t to which such p roperty belongs or rela tes to th e estab lishm ent s itu a ted in t h a t S ta te .

Article I V .

Personal p ro p erty n o t coming w ith in th e purview of the provisions of Articles I I an d I I I left by a person who, a t the time of his dea th , had his fiscal domicile in one of the co n trac ting States, shall be sub jec t to th e duties an d taxes described in Article I only in the S ta te in which such p ro p erty was s itu a ted a t the tim e of death .

Article V.

For th e purposes of de term ining the n e t value of the p ro perty subject to the duties and taxes to which th is Convention refers, th e debts of the deceased shall be deducted according to the following rules:

A. A d eb t secured by , or re la ting to , p roperty to which Articles I I a n d I I I app ly shall be deducted from the value of th e specific p ro p erty by which it is secured, or to which it rela tes;

9 0 M E X IC O D R A F T ----- E S T A T E S A N D SU C C E S S IO N S

B. I f a deb t to which rule A applies exceeds th e value of th e p ro p erty by which it is secured or to which it relates, it shall be deducted from th e value of th e o ther p ro p er ty left by th e deceased in th e same coun try ;

C. I f a deb t to which rule A applies exceeds also the value of th e p ro p erty s itu a ted in th e same country, th e excess shall be deducted from th e value of the p ro p erty left by th e deceased in th e o ther coun try ;

I). A general deb t w ithou t specific guaran tee will bededucted p ropo rtiona te ly to the va lue of th e property left b y the deceased in each country .

Article V I.

The S ta te in which th e deceased, a t th e tim e of his death, h ad his domicile shall re ta in th e r igh t to t a x th e en tire estate, w hether s itu a ted in its te r r i to ry or th a t of the o ther contracting S ta te , b u t shall deduct from th e duties a n d taxes it applies to th e en tire e s ta te th e lesser o f th e tw o following am oun ts :

A. The siim of th e duties an d taxes levied by th e other con trac ting S ta te on th e p ro p er ty which is taxab le in

its te rr ito ry according to th e preceding A rticles;

B. T he sum which rep resen ts th e sam e proportion in comparison w ith th e du ties a n d taxes due in th e S ta te of domicile as the p ro p e r ty taxab le in th e o ther S ta te in

com parison w ith th e en tire taxab le es ta te of the deceased.

Article V I I .

As regards a n y special provisions which m ay be necessary for th e application of th e p resen t C onvention, m ore particularly in cases no t expressly p rov ided for, th e com peten t authorities of th e tw o con trac ting S ta tes m ay confer togethe r an d take th e m easures required in accordance w ith th e spirit of this Convention.

L O N D O N D R A F T ---- E S T A T E S A N D S U C C E S SIO N S 91

B. I f a deb t to wliich ru le A applies exceeds the value ofthe p ro p er ty by which it is secured or to which itrelates, it shall be deducted from th e value of the o ther p roperty left by th e deceased in th e same coun try ;

C. I f a deb t to which rule A applies exceeds also th e value of th e p ro p erty s itua ted in th e same country , th e excess shall be deducted from the value of th e p ro p erty left by th e deceased in th e o ther coun try ;

D. A general deb t w ithou t specific guaran tee will bededucted p ropo rtiona te ly to th e value of th e p roperty left by th e deceased in each country .

Article V I.

The S ta te in which th e deceased, a t th e tim e of his death , had his domicile shall re ta in th e righ t to ta x th e entire e s ta te , whether s itua ted in its te r r i to ry or th a t o f th e o th e r co n tra c ting S ta te , excluding p roperty described in Article I I , b u t shall deduct from th e duties an d taxes it applies to th e entire es ta te the lesser of the tw o following am ounts :

A. The sum of th e duties an d taxes collected by the o ther con tracting S ta te on th e p ro p erty w hich is tax ab le in its te r r ito ry according to th e preceding Articles ;

B. The am o u n t which represents th e same p roportion of th e duties and tax es o f th e S ta te of domicile on th e en tire taxab le e s ta te of th e deceased as th e ne t p ro p e rty taxab le in th e o ther S ta te bears to the en tire ne t esta te .

Article V I I .

As regards a n y special provisions which m ay be necessary for the application of th e present Convention, m ore particu la rly in cases no t expressly provided for, th e com peten t au thorities of the tw o con tracting S ta tes m ay confer togethe r an d tak e the measures required in accordance w ith th e spirit of th is C onvention.

92 M E X IC O D R A F T E S T A T E S A N D SU C C E S S IO N S

Article V I I I .

1. This Convention an d th e accom panying Protocol, w hich shall be considered to be an in tegral p a r t o f the Convention, shall be ratified and the in strum en ts of ratification shall be exchanged a t ..............................................as soon as possible.

2. This C onvention an d P ro tocol shall become effective on th e first d ay of J a n u a r y 19... They shall continue effective for a period of th ree years from th a t da te a n d indefinitely after th a t period. They m ay, however, be te rm in a ted by e ither of th e con trac ting S ta tes a t th e end of the th ree-year period or a t a n y tim e th ereafte r , p rovided th a t a t least six m onths prior notice o f te rm ina tion has been given, th e term ina tion to become effective on the first day of J a n u a ry following the exp ira tion of th e six -m on th period.

Done in duplicate , a t .............................. th is .............................d ay o f .......................................................................... 19. ..

PR O TO CO L

On proceeding to sign th e Convention concluded this day betw een the con trac ting S ta tes regard ing th e Prevention of th e Double T axa tion o f Successions, th e undersigned Plenipo ten tia ries have m ade th e following jo in t declaration, which shall form an in tegral p a r t o f the said Convention.

Article I .

1. F or th e purposes of th e foregoing Convention, the dom icile of a person, a t the tim e of his dea th , is the place where he th e n h a d his p e rm an en t residence w ith th e manifest in te n tio n o f re ta in ing it.

2. I f th e deceased, a t th e tim e of his dea th , had no such dom icile a n d was a na tiona l of b o th con trac ting States, he shall be regarded as having h ad his domicile in th e country in which his fam ily, social and economic in te rests were centred.

L O N D O N D R A F T E S T A T E S A N D S U C C E S SIO N S 93

Article V I I I .

1. This Convention an d th e accom panying Protocol, w hich shall be considered to be an in tegral p a r t of th e Convention, shall be ratified a n d th e in strum en ts of ratification shall be exchanged a t ..............................as soon as possible.

2. This Convention and Protocol shall become effective on the first d ay of J a n u a ry 19 . .. They shall continue effective for a period of th ree years from th a t da te and indefinitely a fte r th a t period. They m ay, however, be te rm ina ted b y e ither of the con tracting S ta tes a t the end of the th ree-year period or a t any tim e thereafter, p rovided th a t a t least six m on ths prior notice of te rm ina tion has been given, the te rm ina tion to become effective on th e first day of J a n u a ry following the expiration of the s ix-m onth period.

Done in duplicate, a t ........................... t h i s ..............................clay o f ................................................ 19. ..

PRO TO CO L

On proceeding to sign th e Convention concluded th is day between the con tracting S ta tes regarding the P reven tion of the Double T axa tion o f Successions, th e undersigned P len ipotentiaries have m ade th e following jo in t declaration, which shall form an in tegral p a r t of the said Convention.

Article I .

1. For th e purposes of th e foregoing Convention, the domicile of a person, a t the tim e of his death , is th e place where lie th en had his perm anen t residence w ith the m anifest intention of re ta in ing it.

2. I f th e deceased, a t th e tim e of Ids dea th , h ad no such domicile and was a na tiona l of bo th con tracting S ta tes, he shall be regarded as having h ad his domicile in the coun try in which his family, social an d economic in terests were centred .

94 M E X IC O D R A F T E S T A T E S A N D S U C C E S SIO N S

Article I I .

The question w hether p ro p er ty is to be regarded as real or personal shall be se ttled in accordance w ith th e laws of the S ta te in which th e p ro p erty is s ituated .

Article I I I .

The s itua tion of personal p ro p erty accessory to real prop e rty an d of rights re la ting to , or secured by, real property shall be determ ined in accordance w ith th e laws of the State in which the real p ro p er ty concerned is s itua ted .

Article I V .

1. The expression “ commercial, industria l, mining, agricu ltu ra l or o ther enterprise, including a m aritim e or an air nav igation enterprise ” a n d th e expression “ perm anen t establishm ent ” have th e same m eaning for th e purposes of the foregoing C onvention as in Articles IV a n d V of the Protocol of th e Model B ila tera l C onvention for th e P reven tion of the Double T axa tion of Incom e.

2. In th e case of an enterprise w ith a pe rm anen t establishm en t in each of th e tw o con tracting S tates, th e apportionm ent of th e assets an d liabilities will be achieved th rough the application, b y analogy, of th e rules concerning th e allocation o f income th a t are expressed in A rticle V I of th e Protocol of th e Model B ila tera l Convention for th e P revention of D ouble T axa tion o f Incom e.

Article V.

F o r th e purpose of A rticle IV of th e foregoing Convention, personal p ro p er ty hereinbelow m entioned shall be deemed to be s itua ted :

A. A t th e place where th e p roperty is s itua ted , in the case of:

(a)( b )

(c)

L O N D O N D R A F T E S T A T E S A N D SU C C ESSIO N S 95

Article I I .

The question w hether p roperty is to be regarded as real or personal shall be se ttled in accordance w ith th e laws of th e State in which the p roperty is s ituated .

Article I I I .

The s ituation of personal p roperty accessory to real p roperty and of rights rela ting to, or secured by, real p roperty shall be determined in accordance w ith th e laws of the S ta te in which the real p roperty concerned is situated .

Article I V .

1. The expression “ commercial, industria l, mining, agricultural or o ther enterprise, including a m aritim e or an air navigation enterprise ” an d the expression “ pe rm anen t establishment ” have th e same m eaning for th e purposes of the foregoing Convention as in Articles IV and V of th e P ro tocol of the Model B ilateral Convention for the P reven tion of the Double T axa tion of Incom e.

2. In the case of an enterprise w ith a pe rm anen t estab lishment in each of th e tw o con tracting S tates, the appo rtionm en t of the assets and liabilities will be achieved th rough the application, by analogy, of th e rules concerning th e allocation of income th a t a re expressed in Article V I of the Pro tocol of the Model B ilateral Convention for the P reven tion of Double Taxation of Incom e.

Article V.

The s itua tion of personal p roperty to which th e provisions of Article IV of th e Convention app ly shall be determ ined in accordance w ith th e following rules:

A. R ights or in terests (otherwise th a n by w ay of security) in or over tangib le m ovable p roperty o ther th a n such p roperty for which specific provision is hereinafter m ade shall be deemed to be s itua ted a t th e place where such p ro p erty was physically located a t the tim e of dea th ;

96 M E X IC O D R A F T E S T A T E S A N D SU C C E S SIO N S

B. A t th e place where the p roperty is registered for tran sfe r purposes, as in th e case of:

(а) ................................(б) ................................

<c) .............................................................................

C. A t th e domicile o f the debtor, in th e case of property transferab le only by notification to the deb to r or endorsem ent, as in th e case of:

(а ) ................................(б) ................................(c)

L O N D O N D R A F T — E S T A T E S A N D S U C C E S SIO N S 97

B. R ights or in te rests (other th a n by w ay of security) in or over ban k or currency notes, o ther form s of currency, negotiable bills o f exchange and negotiable prom issory notes shall be deem ed to be s itua ted a t th e place where such notes, currency or docum ents are located a t th e tim e of dea th ;

C. R igh ts or in terests (otherwise th a n by w ay of security) in or over p roperty described under A and B above w hich are in t ra n s it a t th e tim e of d ea th shall be deem ed to be located a t the place of destina tion ;

D. D ebts secured or unsecured, o ther th a n th e form s of indebtedness for which specific provision is m ade herein, shall be deem ed to be s itu a ted a t th e place where the deceased h a d his domicile a t th e tim e of d ea th ;

E. Shares and sim ilar in terests and partic ipa tions in a com pany or lim ited liab ility pa rtne rsh ip shall be deem ed to be s itua ted in th e te rr ito ry of th e S ta te in which or under th e law's of which th e corporation or partnersh ip was organised;

F. Sums payab le un d e r an insurance policy on the life of the deceased shall be deemed to be s itu a ted a t th e place where the deceased had his domicile a t th e tim e of d ea th ;

Gr. Ships an d a irc ra f t an d shares in th e p ro p erty thereo f shall be deemed to be s itua ted a t th e place where th e ship or a irc ra f t was registered a t th e tim e of th e d ea th of th e deceased :

H. Goodwill as a business or professional asset shall be deem ed to be s itua ted a t the place where th e business or profession to which it, apperta ins was carried on a t th e tim e of d e a th ;

I. P a ten ts , trade-m arks, designs shall be deemed to be s itu a ted a t th e place where th ey were registered a t th e tim e of d e a th ;

9 8 M E X IC O D R A F T E S T A T E S A N D S U C C E S SIO N S

Article V I.

The question w hether a deb t w hich is deductib le according to Article V of th e foregoing Convention is to be regarded as a bona fide deb t shall be se ttled in accordance w ith th e laws o f th e S ta te in which such d e b t w ould be deducted.

Article V I I .

A d eb t shall n o t be deducted from th e value of inahenable p ro p erty unless such p roperty has been m ade inalienable by th e will of th e deceased.

Article V I I I .

The foregoing Convention shall no t affect such immunities as are a t present, or m ay hereafte r be, accorded to diplomatic, consular or foreign G overnm ent officials in v irtue of the general rules of in te rn a tio n a l law or th e in te rna l legislation of e ither of th e con tracting S ta tes. W here, by reason of such im m unities, th e es ta tes left b y such officials a re n o t subject to th e duties an d tax es to which th e p resen t Convention applies in th e S ta te in w hich th e y exercise th e ir functions, th e S ta te which th ey serve shall be en titled to levy such duties an d taxes.

L O N D O N D R A F T ---- E S T A T E S A N D S U C C E S SIO N S 99

J . Copyrights, franchises an d rights or licences to use a n y copyrighted m ateria l, p a ten t, trade-m ark or design shall be deemed to be s itua ted a t the place where such righ ts were exercisable a t th e tim e of d ea th ;

K. R ights or causes of ac tion ex clelicto shall be deemed to be s itua ted a t th e place where such righ ts or causes of action arose;

L. Ju d g m e n t deb ts shall be deemed to be s itua ted a t th e place where th e judgm en t is recorded.

Article V I.

The question w hether a deb t which is deductible according to Article V of the foregoing Convention is to be regarded as a bona fide debt shall be se ttled in accordance w ith the laws of th e S ta te in which such deb t would be deducted.

Article V I I .

The foregoing Convention shall no t affect such im m unities as are a t present, or m ay hereafter be, accorded to diplom atic, consular or foreign G overnm ent officials in v irtue of th e general rules of in te rna tiona l law or the in te rna l legislation of either of the con tracting S tates. W here, by reason of such immunities, the es ta tes left by such officials are no t subject to the duties an d taxes to which th e p resent Convention applies in the S ta te in which th ey exercise the ir functions, th e S ta te which they serve shall be en titled to levy such duties and taxes.

100

3. M O D EL B IL A T E R A L C O N V EN TIO N F O R TH E E S T A B L ISH M E N T O F R E C IPR O C A L A D M IN ISTR A TIV E

ASSISTAN CE F O R T H E ASSESSM ENT AND CO LLEC TIO N O F D IR E C T TA X ES

Mexico Draft.

Article I.

W ith a view of assuring, in the in te rest of Governments a n d taxpayers , an effective an d fair application of th e taxes to which app ly th e Conventions for th e P reven tion of Double T ax a tio n of Incom e an d Successions, concluded th is day by th e con trac ting S tates, each o f the con tracting S ta tes undertakes, sub jec t to reciprocity , to furn ish on special request such inform ation in m atte rs of tax a tio n as th e competent au tho rities o f each S ta te have a t th e ir disposal or are in a position to ob ta in under th e ir own laws and as m ay be of use to th e com peten t au tho rities o f th e o ther S ta te in the assessm ent of th e above-m entioned taxes and to lend assistance to th e com peten t au tho rities of th e o ther S ta te in the collection of such taxes.

Article I I .

The com peten t au tho rities o f each of th e con tracting States shall be en titled to ob ta in th ro u g h direct correspondence, from th e com peten t au tho rities of th e o ther con tracting State, in form ation concerning p a rticu la r cases t h a t is necessary for th e assessm ent of th e taxes to which th e p resent Convention relates.

101

3. M ODEL B IL A T E R A L CO N V EN TIO N F O R T H E ESTA BLISH M EN T O F R E C IPR O C A L A D M IN IS T R A T IV E ASSISTANCE F O R T H E ASSESSM ENT A N D CO LLECTION O F TA X E S ON INCOM E, P R O P E R T Y , EST A TES

A N D SUCCESSIONS

London D raft.

Article I .

W ith a view of assuring, in the in te rest of G overnm ents and taxpayers, an effective an d fair application of th e taxes to which app ly the Conventions for th e P reven tion of Double Taxation of Incom e an d E s ta te s and Successions, concluded th is day by th e contracting S tates, each of the con tracting S ta tes undertakes, subject to reciprocity , to furnish 0 11 special request such inform ation in m atte rs o f tax a tio n as th e com peten t authorities of each S ta te have a t th e ir disposal or are in a position to ob ta in under th e ir own revenue laws and as m ay be of use to th e com peten t au thorities of the o ther S ta te in the assessm ent of th e above-m entioned taxes and to lend assistance to th e com petent au thorities of the o ther S ta te in the collection of such taxes.

Article I I .

The c o m p e te n t a u th o r i t ie s o f e a ch o f th e c o n tra c t in g S tates sha ll be e n ti t le d to o b ta in th ro u g h d ire c t co rre sp o n d ence, from th e c o m p e te n t a u th o r i t ie s o f th e o th e r c o n tra c t in g S tate, in fo rm a tio n co n cern in g p a r t ic u la r cases t h a t is n eces sary for th e a sse ssm e n t o f th e ta x e s to w h ich th e p re se n t Convention re la te s .

102 M E X IC O D R A F T ----- A D M IN IS T R A T IV E A S SIST A N C E

Article I I I .

I n accordance w ith th e preceding A rticle, th e com petent au thorities of each con tracting S ta te shall tran sm it, in concrete cases on special request, to th e com petent authorities of th e o ther S ta te :

A. The nam e and address o f a n y indiv idual, partnership , corporation o r o th e r e n ti ty hav ing an address in the te rr ito ry of th e o ther S ta te an d deriving from sources w ith in th e te rr ito ry of th e form er S ta te ren ts , dividends, in terests, royalties, income from tru s ts , wages, salaries, pensions, annu ities or o ther fixed or determ inable periodical income, ind ica ting th e am ount of such receipts in th e case of each addressee ;

B. An ex tra c t of the inventories received b y the compete n t au tho rities in the case of p roperty passing on the decease of persons th a t h ad an address in th e territo ry of th e o ther S ta te or th e n a tio n a li ty of th a t S ta te ;

C. A ny particu la rs which th e com peten t au tho rities m ay ob tain from banks, insurance com panies, or other financial in stitu tions concerning assets an d claims belonging to persons hav ing an address in th e territory of th e o ther S ta te ;

D. A ny particu la rs w hich th e com peten t au thorities may o b ta in from inventories in th e case of p ro p erty passing on d e a th concerning debts con trac ted to , or property passing to , persons hav ing an address in th e territory of th e o th e r S ta te .

Article I V .

1. T he com peten t au tho rities of each of th e contracting S ta tes shall be en titled to ob tain , th rough direct correspondence, th e assistance an d suppo rt of th e com peten t authorities of th e o ther con tracting S ta te for th e collection of the taxes to which th e p resen t Convention re la tes together w ith interest, costs, add itions to taxes , a n d fines no t being o f a penal

L O N D O N D R A F T ---- A D M IN IS T R A T IV E A S S IS T A N C E 103

Article I I I .

In accordance w ith the preceding Article, th e com petent authorities of each con tracting S ta te shall tran sm it, in th e ordinary course as soon as possible a fte r th e exp ira tion of each calendar (or fiscal) year, to th e com peten t au thorities of th e o ther S ta te :

A. The nam e an d address of an y individual, partnersh ip , corporation or o ther e n ti ty having an address in th e te rr ito ry of th e o ther S ta te and deriving from sources w ith in th e te r r ito ry of th e form er S ta te ren ts , d iv idends, in terest, royalties, income from tru s ts , wages, salaries, pensions, annuities or o ther fixed or d e te rm inable periodical income, ind icating th e am oun t of such receipts in th e case of each addressee ;

B. An ex trac t of the inventories received b y th e com pe ten t au thorities in th e case of p ro p er ty passing on th e decease of persons th a t had an address in the te rr ito ry of th e o ther S ta te or th e n a tio n a li ty of th a t S ta te ;

C. A ny particu lars which th e com peten t au thorities m ay ob tain from banks, insurance companies, or o ther financial institu tions concerning assets and claims belonging to persons hav ing an address in th e te r r ito ry of th e o ther S ta te ;

D. A ny particu lars which th e com petent au thorities m ay ob tain from inventories in the case of p ro p erty passing on d ea th concerning debts con tracted to , or p roperty passing to , persons having an address in th e te rr ito ry of the o ther S ta te .

Article I V.

1. The com peten t au thorities of each of th e con tracting States shall be en titled to obtain , th rough direct correspondence, the assistance and support of th e com petent authorities of th e o ther con tracting S ta te for th e collection of the taxes to which th e p resent Convention relates together with in terest, costs, additions to taxes, an d fines no t being

104 M E X IC O D R A F T ---- A D M IN IS T R A T IV E A S SIST A N C E

character, according to th e laws of th e S ta te applied to , in the case of tax es th a t a re definitely due according to th e laws of th e app ly ing S ta te .

2. I n the case o f a req u es t for th e enforcem ent of a tax , revenue claims of each of th e con tracting S ta tes which have been finally determ ined shall be accepted for enforcem ent by th e o ther con tracting S ta te a n d collected in th a t S ta te in accordance w ith th e laws applicable to th e enforcem ent and collection of i ts own taxes.

3. The request shall be accom panied by such docum ents as are required by th e laws of th e app ly ing S ta te to establish th a t th e tax es are definitely due.

4. I f a revenue claim is n o t definitely due, th e S ta te applied to m ay, on th e request of th e o ther con tracting S ta te , tak e such m easures of conservancy as are au thorised by th e revenue laws of th e form er S ta te .

Article V.

Special requests for in form ation an d /o r assistance for the enforcem ent o f taxes under Articles I I an d IV of th e present C onvention m ay be refused in the following cases:

A. I f th ey involve th e obligation to ob ta in or supply in form ation which is n o t procurable under th e legislation of th e S ta te applied to or t h a t o f th e applying S ta te ;

B. I f th e y im ply ad m in is tra tive or judicia l ac tion incom p a tib le w ith th e legislation an d practice of either con trac ting S ta te ;

C. I f compliance involves violation of a professional, industria l or tra d e secret;

D. I f th e request rela tes to a ta x p a y e r who is a national o f th e S ta te app lied to ;

E . If, in th e opinion of th e S ta te applied to, compliance w ith th e request m ay comprom ise its security or sovereign rights.


of a penal character, according to th e laws of the S ta te applied to, in the case of tax es t h a t are definitely due according to the laws o f th e apply ing S ta te .

2. In the case of a reques t for th e enforcem ent o f a tax , revenue claims of each of th e con tracting S ta tes which have been finally determ ined shall be accepted for enforcem ent by th e o th e r con trac ting S ta te and collected in t h a t S ta te in accordance w ith th e laws applicable to th e enforcem ent and collection o f its own taxes.

3. The request shall be accom panied by such docum ents as are required by th e laws of th e applying S ta te to estab lish th a t the taxes are definitely due.

4. I f a revenue claim is n o t definitely due, th e S ta te applied to m ay, on th e request o f the o ther con trac ting S ta te , take such m easures o f conservancy as are au thorised by th e revenue laws of th e form er S ta te for the enforcem ent of its own taxes.

Article V.

Special requests for in fo rm ation an d /o r assistance for th e enforcement of taxes under Articles I I and IV of th e p resen t Convention m ay be refused in th e following cases :

A. I f th ey involve th e obligation to ob ta in or supp ly inform ation which is n o t procurable under th e legislation of th e S ta te applied to or t h a t of th e app ly ing S ta te ;

B. I f th e y im ply ad m in is tra tive or judicia l ac tion incom patib le w ith th e legislation an d p rac tice of e ither con trac ting S ta te ;

C. I f compliance involves violation o f a professional, industria l or tra d e secret ;

D. I f the request re la tes to a tax p a y e r who is a na tiona l of th e S ta te app lied to ;

E. If, in th e opinion of the S ta te applied to , compliance w ith th e request m ay comprom ise its security or sovereign rights.


Article V I.

W hen th e com petent au tho rities o f one of the contracting S ta tes have requested from the au thorities of the o ther S tate in fo rm ation to which th is Convention applies, th ey shall observe secrecy as regards such inform ation, in th e same w ay and to th e same e x ten t as is done in th e S ta te th a t supplies it, a n d the com peten t au thorities of th e form er S ta te shall app ly to its officials th e adm in is tra tive and p enal sanctions t h a t correspond, under its own laws, to th e v io lation of such secrecy.

Article V I I .

The com peten t au thorities o f th e tw o con tracting States m ay prescribe regulations necessary to in te rp re t an d carry out th e provisions of th is Convention. W ith respect to the provisions of th is Convention re la ting to exchange o f inform ation, service of docum ents an d m u tu a l assistance in the collection of taxes, such au thorities m ay , by com m on agreem ent, p rescribe rides concerning m atte rs of procedure, form s of applicat ion an d reply, conversion of currency, disposition of am ounts collected, m in im um am oun ts subject to collection an d related m atte rs .

Article V I I I .

1. This Convention an d th e accom panying P rotocol, which shall be considered to be an in teg ra l p a r t of th e Convention, shall be ratified an d the in stru m en ts of ratification shall be exchanged a t ................................................ as soon as possible.

2. This Convention an d P rotocol shall become effective on the first d ay of J a n u a ry 19 . .. They shall continue effective for a period of th ree years from th a t da te a n d indefinitely after th a t period. T hey m ay, however, be te rm in a te d by either of th e con tracting S ta tes a t th e end of th e th ree-year period or a t an y tim e thereafter , p rovided th a t a t least six m on ths prior notice of te rm ina tion has been given, th e term ina tion to become effective on th e first d ay of J a n u a ry following the exp ira tion of th e s ix-m onth period.

Done in duplicate , a t ........................................................... this........................... day o f .......................... 19. ..

L O N D O N D R A F T ---- A D M IN IS T R A T IV E A S SIST A N C E 107

Article V I.

W hen the com petent au thorities o f one of th e con tracting States have requested from the au thorities of th e o ther S ta te inform ation to which th is Convention applies, th ey shall observe secrecy as regards such inform ation, in th e sam e w ay and to the same e x ten t as is done in the S ta te th a t supplies it, and the com petent au thorities of the form er S ta te shall app ly to its officials the adm in is tra tive and penal sanctions th a t correspond, under its own laws, to the violation of such secrecy.

Article VI I .

The com petent au thorities of the tw o con tracting S ta tes may prescribe regulations necessary to in te rp re t a n d carry ou t the provisions of th is Convention. W ith respect to th e prov isions of th is Convention rela ting to exchange of inform ation, service of docum ents and m u tu a l assistance in th e collection of taxes an d evidence of reciprocity , such au thorities m ay, by common agreem ent, prescribe rides concerning m atte rs of procedure, forms of application an d reply, conversion of currency, disposition of am oun ts collected, m in im um am oun ts subject to collection and re la ted m atte rs .

Article V I I I .

1. This Convention and th e accom panying Protocol, which shall be considered to be an in tegral p a r t of the Convention, shall be ratified and the in strum en ts of ratification shall be exchanged a t ................................................as soon as possible.

2. This Convention an d Protocol shall become effective on the first day of J a n u a ry 19 . .. They shall continue effective for a period of th ree years from th a t d a te an d indefinitely a fte r tha t period. They m ay, however, be te rm in a ted b y e ither of the contracting S ta tes a t th e end of th e th ree-year period or at any tim e thereafter, provided th a t a t least six m on ths prior notice of te rm ina tion has been given, th e te rm ina tion to become effective on the first day of J a n u a ry following th e exp ira tion of the six -m onth period.

D one in d u p lica te , a t .............................t h i s ..................................day o f ........................................... 19 . ..


PR O TO CO L

Oil proceeding to sign th e Convention concluded th is day for th e E stab lishm en t of R eciprocal A dm in istra tive Assistance for th e Assessm ent a n d Collection of D irect Taxes, th e undersigned P len ipoten tiaries, du ly au thorised by th e ir respective G overnm ents for th e purpose, have m ade th e following joint declaration, which shall form a n in teg ra l p a r t of th e said Convention.

Article I.

As used in th e foregoing Convention, th e te rm “ com petent au thorities ” m eans th e h ighest ta x au tho rities of each of the con trac ting S ta tes o r th e du ly au tho rised representatives of such au thorities .

Article I I .

R eciprocity is deem ed to exist as regards requests under Article I I I of th e foregoing Convention. In th e m a tte r of o ther requests, reciprocity shall be deem ed to ex ist when the request is accom panied b y a declaration by th e com petent au tho rities who m ake th e application , officially confirming th a t a n y sim ilar request woidd be complied w ith in accordance with the laws of th e app lican t S ta te .

Article I I I .

In fo rm ation com m unicated under A rticle I I shall be in the official language of th e S ta te by which th ey are com m unicated.

Article IV .

1. Special requests for in fo rm ation shall specify: the a u th o r i ty m aking th e request ; th e nam e, address an d nationa li ty of th e person to w hom th e request rela tes ; th e tax a tio n in respect of which th e request is m ade an d period or da te in respect of which it is imposed.


PRO TO CO L

On proceeding to sign th e Convention concluded th is d a y for th e E stab lishm en t of R eciprocal A dm in is tra tive A ssistance for th e Assessm ent an d Collection of Taxes on Incom e, P roperty , Estates a n d Successions, th e undersigned Plenipoten tiaries, duly au thorised by th e ir respective G overnm ents for th e purpose, have m ade the following jo in t declaration, which shall form an in teg ra l p a rt o f th e said Convention.

Article I .

As used in th e foregoing Convention, the te rm “ com peten t au thorities ” m eans th e h ighest t a x au thorities of each of th e contracting S ta tes or the du ly au thorised represen ta tives of such au thorities.

Article I I .

R eciprocity is deem ed to exist as regards requests under Article I I I of th e foregoing Convention. In th e m a tte r of other requests, reciprocity shall be deemed to exist w hen th e request is accom panied b y a declaration b y th e com peten t authorities who m ake th e application , officially confirming th a t any sim ilar request woidd be complied w ith in accordance w ith the laws of th e app lican t S ta te .

Article I I I .

1. Special requests for in form ation shall specify: the au thority m ak ing the request ; th e nam e, address a n d na tiona lity of the person to whom th e request re la tes ; the ta x a t io n in respect of which the request is m ade an d period or d a te in respect of w hich it is imposed.


2. R equests for th e service of docum ents shall specify, in add ition to th e particu lars m entioned in the first parag raph of th is Article : th e address of th e recipient ; a n d th e n a tu re and purpose of th e docum ent for service.

3. R equests concerning th e collection of taxes shall ind icate, in add ition to th e inform ation m entioned in th e first pa rag raph of th is Article : th e am o u n t of principal due and in te res t due an d the d a te from which such in te res t begins to ru n ; in th e case of fiscal penalties, th e n a tu re and am ount of such penalties; an d a n y o ther in form ation of a n a tu re to fac ilita te or accelerate collection.

Article V.

R equests to which Article IV refers shall be form ula ted in th e official language of th e app lican t S ta te an d accom panied by a tran s la tion in th e official language of th e S tate applied to.

Article V I.

The com peten t au thorities of th e S ta te to which a request for th e service of docum ents is m ade m ay lim it th e ir ac tion in connection w ith th e service of th e docum ent to m erely handing it to th e recipient, if th e la t te r is willing to receive it.

Article V I I .

I f th e com peten t au thorities of the app lican t S ta te so desire, th e docum ent m ay be served in th e form prescribed in sim ilar cases by th e in te rna l law of th e S ta te applied to.

Article V I I I .

R equests for collection m ust be accom panied by a copy or official ex tra c t of th e final decision or order by th e competent au tho rities concerning th e revenue claim in question and by a s ta tem en t from th e com peten t au tho rities to th e effect that th e revenue claim is final.

L O N D O N D R A F T — A D M IN IS T R A T IV E A S S IS T A N C E 111

2. R equests for th e service of docum ents shall specify, in addition to the particu lars m entioned in the first p a rag raph of tins Article : th e address o f the recipient ; an d th e n a tu re and purpose of th e docum ent for service.

3. R equests concerning the collection of taxes shall ind icate, in add ition to th e inform ation m entioned in th e first paragraph of th is A rticle : th e am o u n t of principal due and interest due and th e da te from which such in te res t begins to run ; in the case o f fiscal penalties, the n a tu re and am oun t of such penalties ; and an y o ther in form ation of a n a tu re to facilitate or accelerate collection.

Article I V .

The com petent au thorities of th e S ta te to which a request for the service of docum ents is m ade m ay lim it th e ir action in connection w ith th e service of the docum ent to m erely handing it to the recipient, if th e la t te r is willing to receive it.

Article V.

I f the com petent au thorities of th e app lican t S ta te so desire, the docum ent m ay be served in th e form prescribed in sim ilar cases by th e in te rnal law of th e S ta te applied to .

Article V I.

Requests for collection m ust be accom panied by a copy or official ex tra c t of th e final decision or order by th e com peten t authorities concerning th e revenue claim in question and by a statem ent from th e com peten t au thorities to th e effect t h a t th e revenue claim is final.

112 M E X IC O D R A FT ---- A D M IN IS T R A T IV E A S SIST A N C E

Article I X .

No request for assistance for the collection of taxes shall be fo rm ula ted w hen :

A. There is a p resum ption th a t th e am oun t due is in fact recoverable in th e in terested S ta te ;

B. The am o u n t due is less th a n ..............................................

Article X .

A ssistance procedure shall be in th e form for which th e laws of th e S ta te applied to provide, as s tipu la ted in th e Convention. Nevertheless, any special form s of assistance n o t being incom patib le w ith th e laws of the S ta te applied to m ay be adop ted a t th e request of the apply ing S ta te .

Article X I .

R evenue claims for collection shall n o t receive preference over e ither public or p riva te claims in th e S ta te applied to.

Article X I I .

The au tho rities o f the S ta te applied to shall tak e all such steps an d em ploy all such m eans of ac tion as th ey would be bound to ta k e an d em ploy in sim ilar cases, w hen th e ir own in terests are involved, p rovided th a t no m eans of action shall be em ployed to which there is no corresponding m eans of action under th e law of th e app lican t S tate . In doub tfu l cases, the com peten t au thorities of th e app lican t S ta te m u st certify that th e ir na tiona l legislation empowers th em to com ply w ith a sim ilar request from th e S ta te applied to.

Article X I I I .

The com peten t au tho rities of th e S ta te applied to shall inform, w ithou t delay, th e com peten t au tho rities of th e applica n t S ta te as to the ac tion ta k e n on th e request, w hether such ac tion is com plete or incom plete.


Article VI I .

No request for assistance for th e collection of taxes shall be form ulated when :

A. There is a presum ption th a t th e am oun t due is in fac t recoverable in the in terested S ta te ;

B. The am oun t due is less th a n ....................................

Article V I I I .

Assistance procedure shall be in th e form for which th e laws of th e S ta te applied to provide, as s tipu la ted in th e Convention. Nevertheless, an y special forms o f assistance not being incom patib le w ith the laws of the S ta te applied to m ay be adop ted a t th e request o f the applying S tate.

Article I X .

R evenue claims for collection shall no t receive preference over e ither public or p riva te claims in the S ta te applied to.

Article X .

The au thorities of the S ta te applied to shall ta k e all such steps and em ploy all such m eans of action as th ey would be bound to tak e a n d em ploy in sim ilar cases, w hen th e ir own interests are involved, provided th a t no m eans of action shall be employed to which there is no corresponding m eans of action under th e law of th e app lican t S ta te . In doubtfu l cases, th e com peten t au thorities of th e app lican t S ta te m ust certify th a t th e ir na tiona l legislation empowers th em to comply w ith a sim ilar request from the S ta te applied to .

Article X I .

The com peten t au thorities of the S ta te applied to shall inform, w ithou t delay, th e com petent au thorities of th e applicant S ta te as to th e action taken on th e request, w hether such action is com plete or incomplete.

114 M E X IC O D R A FT - A D M IN IS T R A T IV E A S SIST A N C E

Article X I V .

I f a request canno t be complied w ith, the com peten t au th o rities of th e S ta te applied to shall advise th e com petent au thorities of th e app lican t S ta te of the reasons which prevent complying w ith th e request, an d shall tran sm it to such au th o rities all inform ation which m ay have a bearing on th e case.

Article X V .

The S ta te applied to shall be responsible to th e applying S ta te for the sums collected on th e la t te r ’s behalf by its officials or agents.

Article X V I .

Collection shall alw ays tak e place in th e currency of the S ta te applied to . To th a t effect, th e com petent authorities of th e S ta te applied to shall convert th e am oun t for collection in to th e ir own currency a t th e las t ra te quo ted betw een the tw o con tracting S tates.

Article X V I I .

A m ounts collected by th e com petent au thorities of one S ta te on behalf of the com peten t au thorities of th e o ther S tate shall be pa id over im m ediately , a fte r deduction of th e costs u n d e r A rticle X V II I below, to th e account o f th e C entral Bank of th e apply ing S ta te w ith th e Central B ank of th e S tate applied to.

Article X V I I I .

No fees or costs shall be charged for ac tion tak e n on requests for assistance. This provision shall, however, no t apply, in th e absence of an y agreem ent to th e con trary , to emoluments pa id to witnesses, experts, agents of execution and to legal an d judicial fees incurred in connection w ith th e service of a docum ent or th e enforcem ent of a revenue claim. The revenue au thorities shall no tify each o ther as required of the probable am o u n t of such costs, fees or charges. W hen rela ting to the collection of a revenue claim, th e am oun t of such costs, fees and

L O N D O N D R A F T — - A D M IN IS T R A T IV E A S SIST A N C E 115

Article X I I .

The S ta te applied to shall be responsible to th e applying S tate for th e sums collected on th e la t te r ’s behalf by its officials or agents.

Article X I I I .

Collection shall alw ays tak e place in the currency of th e S tate applied to . To th a t effect, th e com petent au thorities of th e S ta te applied to shall convert th e am oun t for collection into the ir own currency a t th e ra te of exchange prevailing a t the da te th a t th e request is received.

Article X I V .

A m ounts collected by th e com peten t au thorities of one S tate on behalf of the com petent au thorities of th e o ther State shall be paid over im m ediately , a fte r deduction of the costs under Article X V below, to th e account of the Central Bank of th e app lican t S ta te w ith the Central B ank of the State applied to.

Article X V .

No fees or costs shall be charged for action ta k e n on requests for assistance. This provision shall, however, no t apply, in th e absence of an y agreem ent to th e con trary , to emoluments pa id to witnesses, experts, agents of execution and to legal an d judicial fees incurred in connection w ith the service of a docum ent or th e enforcem ent o f a revenue claim. The revenue au tho rities shall no tify each o ther as required of the probable am oun t of such costs, fees or charges. W hen relating to the collection of a revenue claim, th e am oun t of


charges shall be reta ined from the am o u n t collected by the com petent au thorities of th e S ta te applied to.

Article X I X .

The Convention shall no t app ly to m easures of conservancy in respect to taxes t h a t have no t ye t been assessed.

Article X X .

Over an d above th e m easures of assistance for which the Convention provides, th e com petent revenue au thorities of the tw o con trac ting S ta tes m ay concert together for the exchange o f in form ation o ther th a n th a t for which provision is m ade a n d also for th e purpose of th e assessm ent of the taxes to which the Convention relates.


such costs, fees an d charges shall be re ta ined from th e am o u n t collected b y th e com peten t au thorities of th e S ta te applied to .

Article X V I .

The Convention shall no t app ly to m easures of conservancy in respect to taxes t h a t have no t yet been assessed.

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Prevention of International Doable Taxation and Fiscal Evasion, by Mitchell B. Carroll. (1939.II.A.S). 53 pp. 1/6; $0.40

General survey of the work done under the auspices of the League of Nations since 1920, with particular emphasis on the work of the Fiscal Committee since 1929.

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In October 1928 a Conference of representatives of twenty-seven Governments gave its approval to six draft bilateral conventions designed to enable States to prevent or, at least, greatly to diminish double taxation and tax evasion. These draft conventions have since served as models (or the large majority of the actual conventions which have been concluded between Governments.

-Section of International Agreements and Internal LegalProvisions for the Prevention of Double Taxation and Fiseal Evasion (prepared by the Economic and Financ ia l Section of the Secretariat of the League of Nations in accordance with the Council Resolution of September 15th, 1927). (1928.11.45). 278 pp.............................10/-; $2.50

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in the form of a series of sixty-two monographs.Complete . . . , ................. 15/-; $3.7Single monographs ........................................ 1/-; $0.2Facts and figures concerning the public finances in

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