23-07-2010 / Comments on Draft Commentary for Article 17 OECD
On 23 July 2010 we have sent the OECD our comments on the proposed Draft Commentary on Article 17 of the OECD Model Treaty. There are interesting elements in the Draft Commentary, which might lead to improvement, but unfortunately we miss the main problems that result from Article 17. These problems are:
1. Excessive taxation
The difference in the taxable income in the country of performance and the residence country very often leads to excessive taxation. Production expenses very often cannot be deducted in the country of performance, while the residence country limits the foreign tax credit to the national tax on the foreign profit (i.e. after the deduction of expenses). This difference in taxable income can be considerable, because international performing artistes (and sportsmen) very often have high production expenses for their foreign shows and tours. See the example in paragraph 6a.
2. Problems with tax credits lead to double taxation
Opposite the taxation in the country of performance, the residence country needs to allow a foreign tax credit. But this very often leads to problems, see paragraph 6b. The result is that double taxation is likely to occur.
3. Administrative expenses
If it is possible to prevent these described problems, this can only be realized with high administrative expenses. See paragraph 8.
These problems have been the reason for The Netherlands in 2007 to remove unilaterally its source tax for (self-employed) non-resident artistes and sportsmen, under the condition that they are resident in one of the countries with which The Netherlands have concluded a double tax treaty. These artistes and sportsmen are now treated in The Netherlands along the rules of Article 7 and 15 of the OECD Model Treaty, which means that they very often only pay income tax in their residence country, taking away the risk of excessive or double taxation.
Our recommendation is to remove Article 17 from the OECD Model Treaty. This will solve the existing problems and bring down the administrative expenses considerably. But it also still counteracts the tax avoidance behavior of artistes and sportsmen, because there are no tax treaties with tax havens, such as Monte Carlo, and the source tax in the country of performance will still remain effective for these artistes and sportsmen.
All reactions on the proposed change in the Commentary on Article 17 can be found on www.oecd.org/document/48/0,3343,en_2649_33747_45783920_1_1_1_37427,00.html.
Dr. Dick Molenaar
