Taxation of Income from Employment A Com
Taxation of Income from Employment: A Comparative Study of the OECD
Model Convention, the UN Model Convention, the Ethio-China Tax Treaty and
the Ethio-UK Tax Treaty
By: Wakgari Kebeta Djigsa
July 2016
Electronic copy available at: http://ssrn.com/abstract=2809489
1. Introduction
With the advent of globalization and technological advancement, an offshore employment
relationships are proliferating more than ever making it possible the application of States’
domestic laws in the situations no more. The problem is more exacerbated when it comes to the
taxation of the remuneration derived from such employment relationships. Most commonly,
double taxation arise because States tax not only domestic assets and transactions but also assets
and transactions in other States which benefit resident taxpayers, resulting in the overlap of the
States’ tax claims.1 In order to tackle this pressing problem, devising a mechanism by which
employment income could be taxed is proved a matter of no alternative.
Not surprisingly, States hesitate to come up with a single multilateral convention on this subject.
Nevertheless, two widely accepted model conventions are there with no binding force. In
addition, States also preferred to address the issue bilaterally Ethiopia being no exception.
Against this background, this piece is aimed at examining how the taxation of [income from
employment] is addressed under the OECD2 and the UN3 Model Conventions as well as the
Ethio-China4 and Ethio-UK5 Treaties on comparative basis. Since the latter three conventions are
principally reproduced from the OECD MC with only slight difference, to avoid unnecessary
redundancy, a mentioning of legal provisions in the work stands for all the conventions except
where a specific reference is made otherwise.
The taxation of Income from a cross-border employment is primarily treated under Art. 15 of all
the four legal regimes under consideration.6 Nevertheless, a resort to other relevant provisions
will also be inevitable. The three sub-provisions of Art. 15 of the OECD, the UN, the EthioChina and Ethio-UK7 Conventions each represent three different scenarios. The first sub-article
1
Klaus Vogel, Double Tax Treaties and Their Interpretation, 4 INT’L TAX & BUS. LAW. 1 (1986). Available at:
http://scholarship.law.berkeley.edu/bjil/vol4/iss1/1.
2
The Organization for Economic Cooperation and Development Model Convention With Respect to Taxes on
Income and on Capital (Condensed Version) –ISBN 978-92-64-08948-8-© OECD 2010 (the OECD MC hereafter).
3
Articles of the United Nations Model Double Taxation Convention Between Developed and Developing Countries,
United Nations, 2001 (the UN MC hereafter).
4
AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLES’ REPUBLIC OF CHINA AND THE
GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR THE AVOIDANCE OF
DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME (the Ethio-China Treaty hereafter).
5
UK/ETHIOPIA DOUBLE TAXATION CONVENTION SIGNED IN LONDON ON 9 JUNE 2011, Entered into
force on 21 February 2013 (the Ethio-UK hereafter).
6
Before it was changed to “Income from Employment” in 2000, the caption of Art. 15 were “Dependent Personal
Services” as opposed to the “Independent Personal Services” of the former Art. 14. The change of wording was
initiated by the removal of Art. 14 OECD MC and has not changed the scope of the article. Currently, the UN MC
and the Ethio-China Treaty employ the term “Dependent Personal Services” whereas the Ethio-UK Treaty uses
“Income from Employment”. See, for instance, Caroline Gratte, The interpretation of the term “employer” in Article
15(2) (b) OECD MC and its implication on short-term secondments -from a Swedish Perspective, 2009, p. 10.
7
The Ethio-UK double taxation convention entered into force on 21 February 2013 and became effective in Ethiopia
from 1 March 2013 for taxes withheld at source and 8 July 2013 for taxes on income. In the UK, it’s effective from
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Electronic copy available at: http://ssrn.com/abstract=2809489
constitutes both a general rule and an exception with respect to the employment income tax. The
second sub-article, on its part, provides for exceptions to the exception per the first sub-article.
Certain special cases are treated under the last sub-article.
2. General Rule and Its Exception
As mentioned earlier, paragraph 1 of Art. 15 recognizes the general rule for the taxation of
income from employment. Not surprisingly, the general rule is that an employment income
derived by a resident of a contracting state is taxable only in the residence state. The relevant part
of the provision reads:
“…salaries, wages and other similar remuneration8 derived by a resident of a Contracting State
in respect of an employment shall be taxable only in that state…”9
Accordingly, in principle, it is the state where the employee resides that the salaries, wages and
other similar remuneration of the latter are to be taxed. This, however, is not always the case. As
one can observe from the further reading of sub-article 1, there is one permissive exception to
this general rule whereby the taxation power to levy and collect taxes on employment income
goes to a State other than that of the residence. It goes on saying:
“…unless the employment is exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in that other State.”10
In case where the employment activity is exercised in another Contracting State, the latter is
entitled to impose tax on the income. The condition provided by the Article for taxation by the
State of source is the salaries, wages and other similar remuneration be derived from the exercise
of employment in that State. This applies regardless of when that income may be paid to,
credited to or otherwise or otherwise definitely acquired by the employee.11 A point to be made
here is the vivid terminological difference while allocating the power of taxation between the
State of residence and to the other Contracting State, i.e. the source State. The term ‘shall’ is
employed in the former case whereas it is ‘may’ for the latter. In my opinion, such a divergence
is intentional with the aim to tighten the taxation power of the source State.
At this juncture, it has to be pointed out that Art. 15 (1) is applicable to employment income
without prejudice to Arts. 16 (Non-employment remuneration of members of Board of Directors
1 March 2013 for taxes withheld at source, 1 April 2013 for Corporation Tax and 6 April 2013 for Income Tax and
Capital Gains Tax.
8
Member countries to the OECD have generally understood the term “salaries, wages and other similar
remuneration” to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a
residence or automobile, health or life insurance coverage and club memberships).
9
See Art. 15 (1) OECD MC. See para. 2.1 of Art. 15 Commentary on the OECD MC.
10
Id. The last alinea of the first sentence of sub-article 1 and its last sentence.
11
See para. 2.2 of Art. 15 Commentary on the OECD MC.
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of companies), 18(Pensions) and 19(Government Services) of the OECD, UN, Ethio-China,
Ethio-UK as well as Arts. 20 (Teachers and Researchers) and 21 (Students and Trainees) of the
Ethio-China Conventions. In this regard, the Ethio-China is at odd as it regulates the taxation of
visiting professors and students and trainees.12
3. Exceptions to Exception
The fact that a recipient exercises an employment in a State other than the Residence State, of
itself, does not suffice to enable a non-residence State to impose tax. The second paragraph of
Art. 15 stipulates an exception to exception, which reverts the allocation of the taxing rights back
to the State of residence, regardless of the fact that the employment has been carried out in
another State. Gratte believes that the purpose of this provision is to facilitate international shortterm secondments of employees.13 A secondment can preferably be described as a situation
where an employee is sent abroad by his employer to work for a company within the same
group.14 This exception covers all individuals rendering services in the course of an employment
like sales representatives, construction workers, engineers, etc to the extent that their
remuneration does not fall under the provisions of other Articles, such as those applying to
government services and artists and sportsmen.15 It is the scenario whereby the employer has
neither residence nor a permanent establishment in the State of source.16
The applicability of the supplementary exception under Art. 15(2) of the four legal regimes is
dependent on three cumulative conditions. If these conditions are fulfilled, the Contracting State
of source is restrained from levying income tax on remuneration derived from an employment
exercised within its jurisdiction. In the foregoing paragraphs, a detailed discussion of the
conditions will be in order.
A) The 183-day Rule
In the history of the tax conventions, the 183-day Rule traces back to the League of Nations’
Mexico Model (1943) and the London Model (1946) with the aim to facilitate the operations of
enterprises engaged in international trade and the movement of workers across national
borders.17 Accordingly, the rule avoids an excessive administrative burden for employees and
employers. An administrative burden is regarded as excessive if neither the employee, as the
employee is temporarily present in the source State under Art. 15 (2) (a), nor the employer, under
Art. 15 (b) and (c), has a sufficient level of presence in the source State.
12
See Art. 20 and 21 (2), the Ethio-China Treaty. This issue will be discussed at length later.
Supra 7, Caroline Gratte, 2009, p.11.
14
Id. P.11.
15
See para. 3 of Art. 15 Commentary on the OECD MC.
16
Supra 7, Caroline Gratte, 2009, p.12.
17
See K. Dziurdz, Article 15 of the OECD Model:The 183-Day Rule and the Meaning of “Borne by a Permanent
Establishment”. BULLETIN FOR INTERNATIONAL TAXATION, MARCH 2013, P. 123.
13
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Under the Art. 15 (2) (a), the source State is duty bound to vacate the employment income where
the recipient is present therein for a period of less than 183 days. For the purpose of ease
understanding, the relevant part is reproduced below.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 [in any twelve month period commencing or ending in the fiscal year
concerned].18
Though literatures have no concrete answer why the period of 183-days is selected, it,
nevertheless, serves as a demarcation line between the points where the taxation power of the
residence State ceases to exist and where that of the source State starts to count. Accordingly, all
income derived from an employment in a source State through the presence of the recipient in
the latter State for a period not exceeding 183 days is subject to tax in the State of residence. On
the other hand, employment income derived as a result of the recipient’s presence in the source
State for a period beyond 183 days is taxable in the source State. The presence can be
consecutively or intermittently. The rule, however, is subject to the conditions per Art. 15 (2) (b)
and (c).
Though there is no consensus on the method of calculation of the 183 days, there is only one way
which is consistent with the wording of the paragraph-the “days of physical presence” method.19
The application of this method is straightforward as the individual is either present in a country
or he is not. The presence could also relatively easily be documented by the taxpayer when
evidence is required by the tax authorities.20
B) Remuneration “Paid by, or on Behalf of, an Employer”
For the residence State to levy tax on employment income, it is not sufficient to indicate the
compliance with the 183-Day Rule. It is equally important that the remuneration was paid in
accordance with Art. 15 (2) (b) which has the following to say:
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other
State.
18
This contrasts with the 1963 Draft Convention and the 1977 Model Convention which provided that the 183 day
period should not be exceeded “in the fiscal year concerned”, a formulation that created difficulties where the fiscal
years of the States did not coincide and which opened up opportunities for tax avoidance. See also para. 4 of the Art.
15 Commentary on the OECD MC.
19
Paragraph 5 of the Commentary on Art. 15 of the OECD MC.
20
Id. Para 5.
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This provision lays down two important requirements. First, the remuneration must be paid by,
or on behalf of, an employer. In the literature, it is argued that “paid by, or on behalf of” is a
condition independent from the question of who the employer is and that there is a requirement
that the employer economically bear the remuneration.21 However, if an employee has only one
employer, the question of “paid by or on behalf of” is of secondary importance, i.e. either the
employer pays the remuneration or somebody else pays the remuneration on behalf of the
employer.
If “paid by, or on behalf of” is understood to be a condition that is independent from the question
of who the employer is, in certain cases, there may be no relevant employer, i.e. where the
employer does not pay the remuneration and the person paying the remuneration is not an
employer and does not pay the remuneration on behalf of the employer.22 In such a case, the
condition under Art. 15 (2) (b) is never fulfilled as there is no paying employer. If “paid by, or on
behalf of” is understood to be an independent condition that is not connected to the status of the
employer, the object and purpose of the 183-Day Rule, i.e. avoidance of excessive administrative
burden, will not be achieved.
Accordingly, it can be said that the phrases “paid by, or on behalf of” and “an employer” in Art.
15 (2) (b) are interrelated and must be considered together. The Commentary on Art. 15 of the
OECD MC also confirms that the condition “paid by, or on behalf of” is not independent of the
question of who the employer is. Rather, a charge to a person is regarded as an indication of
whether or not that person is an employer.23 Ultimately, the remuneration is always “paid by, or
on behalf of” the person who mainly exercises the relevant employer functions, i.e. the employer.
Not surprisingly, the term “employer” is understood in OECD member States in different ways.
The two widely practiced concepts are legal approach (formal employer) and material
approach (economic employer).24 The first method has its point of departure in the legal
circumstances surrounding the employment. Consequently, States that advocate the legal
approach attach a great significance to the formal contract of employment. The second approach
differs from the former to the extent that the company with a formal contract of employment is
not consistently equivalent to the employer. On the contrary, the material approach concentrates
on the reality of the employment. Hence, great emphasis25 is attached to factors such as the
beneficiary of the assignment and the actual bearer of the cost and the risk of the employment. It
21
Supra 18, K. Dziurdz, 2013, p. 124.
Id. p. 124.
23
Para. 8 OECD MC Commentary (2010) on Art. 15. However, the extent of the applicability of the paragraph is
controversial since it explicitly concerns cases of international hiring-out of labor.
24
Supra 7, Caroline Gratte, 2009, P. 12.
25
Rather than looking at the “legal” or “economic” employer, the OECD Commentary focuses on factors that
indicate whether the individual is integrated into the business and under the control of a host State entity in order to
test whether there is an employment relationship. There is, therefore, a distinction between individuals who provide
services to an entity in an employment relationship (contract of service) and those who provide services as part of a
contract between two separate entities (contract for services).
22
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goes without saying that the divided understanding of the term “employer” might even lead to
cases of double taxation, despite the existence of a tax treaty.
In 2007, OECD Working Party No. 1 released the 2007 Discussion Draft entitled Revised Draft
Changes to the Commentary on Paragraph 2 of Art. 15, which was designed to improve on the
2004 Discussion Draft on the scope of Art. 15 (2) of the OECD Model Tax Convention.26 These
Discussion Drafts seek to clarify the explanation and interpretation of “employer” for purposes
of Art. 15 (2) (b) of the OECD MC. The explanation and interpretation of “employer” include, as
one of the conditions, that the failure to satisfy Art. 15 (2) (b) means that the work State has the
right to tax a proportionate part of the employee’s salary. This condition plays an important part
in the cross-border secondment of employees. The 2007 Discussion Draft also seeks to respond,
at least in part, to the criticism made in the legal literature of para. 8 of the Commentary on Art.
15 of the OECD MC.
The second condition under Art. 15 (2) (b) is that the employer in question should not be a
resident of the source State. For the taxation power of the residence State to override that of the
source State, it must be established that the paying employer is not a resident of the latter. If this
is not the case, the power of taxation resides with the State of source. Nevertheless, it is not a
requirement that the employer be a resident of the State of residence of the employee. According
to the OECD Commentary, some member countries may, however, consider that it is
inappropriate to extend the exception of paragraph 2 to cases where the employer is not a
resident of the State of residence of the employee, as there might then be administrative
difficulties in determining the employment income of the employee or in enforcing withholding
obligations on the employer.27
C) Meaning of “Borne by” based on the Arm’s Length Principle
In addition to the two conditions addressed so far, the Art. 15 (2) exception begs the fulfillment
of the third condition which reads:
(c) the remuneration is not borne by a permanent establishment which the employer has in the
other State.
As one can understand from this provision, it is mandatory that the remuneration be not borne by
a permanent establishment in the source State. Art. 15 (2) (c) and Art. 7 have several things in
common. Both refer to the permanent establishment under Art. 5, both require that a distinction
be made between different parts of an enterprise and both require assigning expenses to a
permanent establishment.
26
See Proposed changes to the Commentary on Art. 15 (2) of the OECD Model and their effect on the interpretation
of “employer” for treaty purposes, Bulletin for International Taxation, 2007 (Volume 61), No. 11.
27
Para. 6 of Art. 15 Commentary on the OECD MC.
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If the employer has a permanent establishment in the State in which the employment is
exercised, the exemption is given on condition that the remuneration is not borne by that
permanent establishment. The phrase “borne by” must be interpreted in the light of the
underlying purpose of sub-paragraph c of the Article, which is to ensure that the exception
provided for in paragraph 2 does not apply to remuneration that could give rise to a deduction,
having regard to the principle of Art. 7 and the nature of the remuneration in computing the
profits of a permanent establishment situated in the State in which the employment is
exercised.28
Art. 7 (2), on its part, determines whether or not profits, i.e. earnings and expenses, such as
remuneration in respect of an employment, are attributable to a permanent establishment in the
source State. It provides that profits attributable to the permanent establishment are:
…the profits it might be expected to make, in particular in its dealings with other parts of the
enterprise, if it were a separate and independent enterprise engaged in the same or similar
activities under the same or similar conditions, taking in to account the functions performed,
assets used and risks assumed by the enterprise through the permanent establishment and
through other parts of the enterprise.
Accordingly, the arm’s length principle under Art. 7 (2) can be applied in answering the question
of whether or not, under Art. 15 (2) (c), the remuneration is born by a permanent establishment
that the employer has in the source State. At this juncture, it must be asked how and why the
remuneration is attributable to the permanent establishment. If it is attributable as part of a fee
for goods delivered or services rendered, it is not borne by the permanent establishment.
However, between independent enterprises, the question of whether the remuneration is charged
as part of a fee for goods delivered or services provided depends on who the employer is. In
order to establish whether or not the remuneration is borne by the permanent establishment,
whether the permanent establishment, as a separate and independent enterprise, would mainly
exercise the relevant employer functions must be examined. The remuneration is borne by the
permanent establishment if the permanent establishment, as a separate and independent
enterprise engaged in the same or similar activities under the same or similar conditions would
be the employer within the meaning of Art. 15 (2) (b).
To sum up this section, the employee income remains taxable remains taxable in the country of
residence of the employee, if the recipient is present in the other state for a period or periods not
exceeding the aggregated 183 days in any twelve month-period commencing or ending in the
fiscal year concerned and if the remuneration is paid by, or on behalf of, an employer who is not
a resident of the other state and if the remuneration is not born by a permanent establishment that
the employer has in the source State. In order to escape from the application of the 183-days rule,
it is sufficient that one of the three aforementioned conditions is not fulfilled. In view of a split
28
See Para. 7 of Art. 15 Commentary on the OECD MC.
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taxation scheme, it is important to take into account that the presence of more than 183 days in
the work state (first condition) is a fact to be established by the employee-taxpayer.29
Furthermore, it is necessary to prove the existence of two employment contracts (second
condition), if need be (e.g. less than 183 days in the work state), which might be difficult in the
case of a single payroll.30
4. A Regime for Frontier-workers
None of the four legal regimes provides a rule for frontier-workers.31 According to three double
taxation treaties,32 a frontier-worker can be defined as a person who works in the frontier zone of
the work-state, who is resident in the frontier-zone of his State of residence and where he usually
returns. According to this system, the frontier-worker will be taxed in his State of residence, even
if he should be taxed in the State in which his employment is exercised under the 183-days rule.
For the establishment of split taxation schemes with the neighboring countries, it is important to
avoid not only the application of the 183-days rule but also to avoid the application of the regime
of the frontier-workers.33 By the same token, no special rules regarding the taxation of income of
employees working on trucks and trains travelling between States are included as it would be
more suitable for the problems created by local conditions to be solved directly between the
Sates concerned.34
5. Employment exercised aboard a ship, aircraft or a [boat]
Art. 15 (3) OECD MC applies to the remuneration of crews of ships or aircrafts operated in
international traffic, or of [boats] engaged in inland waterways transport, a rule which follows up
to a certain extent the rule applied to the income from shipping, inland waterways transport and
air transport, i.e. to tax them in the State in which the place of the effective management of the
enterprise concerned is situated.35 The provision reads:
(3) Notwithstanding the preceding provisions of this Article, remuneration derived in respect of
an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a
[boat] engaged in inland waterways transport, may be taxed in the Contracting State in which
the place of effective management of the enterprise is situated.
29
A. Hirsch and G. V. Abeele, Working in several countries: tax and social security implications of cross-border
employment/self-employment between Belgium and its neighboring countries (France, Germany, Luxembourg and
the Netherlands), Vanden Eynde & Partners Law Firm, INTERNATIONAL LAWYERS NETWORK, 2004. P. 3.
30
Id. A. Hirsch. P.3.
Id. A. Hirsch. P. 3.
32
For instance, the double taxation treaties of Belgium with France, Germany and the Netherlands provide special
rules for frontier-workers.
33
Supra. A. Hirsch, p. 4.
34
Para. 10, Commentary on Art. 15 of the OECD MC.
35
Para. 9, Commentary on Art. 15 of the OECD MC.
31
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Commentary on Art. 8 OECD MC indicates that States may agree to confer the right to tax such
income on the State of the enterprise operating the ship, boats or aircrafts. The reasons for
introducing that possibility in the case of income from shipping, inland waterways and air
transports are valid also in respect of the remuneration of the crew. Such a provision, as well as
Art. 15 (3), assumes that the domestic laws of the State on which the right to tax is conferred
allows it to tax the remuneration of a person in the service of the enterprise concerned,
irrespective of his residence.
Though the sub-article 3 of Art. 15 OECD MC is the same with its parallel provisions under the
UN MC and the Ethio-China Treaty, a minor modification is introduced under the Ethio-UK
Treaty. It has the following to say:
(3) Notwithstanding the preceding provisions of this Article, remuneration derived by a
[resident] of a Contracting State in respect of an employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the Contracting State in which the place of
effective management of the enterprise is situated.36
The Ethio-UK Treaty is at odd from the OECD MC, UN MC and the Ethio-China Treaty in two
aspects. First, it clearly specifies the status of the recipient of the remuneration. Accordingly, it
applies only to ‘residents’ thereby addressing a potential controversy that could otherwise arise
under the provision. This is the case in particular where States claim tax jurisdiction on grounds
other than residence. The issue at hand deserves a special consideration because the first two
paragraphs of Art. 15 in all the three cases have clearly referred to ‘residence’ whereas they
opted not to employ the term in the third paragraph. Second, unlike the other three regimes, Art.
15 (3) of the Ethio-UK Treaty only refers to employment exercised aboard a ship or aircraft
operated in international traffic. The OECD, UN and Ethio-China Treaties, however, regulate not
only employment activity related to aboard a ship or aircraft but also a boat.
6. Visiting Professors and Students
The OECD MC, UN MC, and Ethio-UK Treaty are devoid of provisions governing the taxation
of remuneration acquired by visiting professors or students in respect of services they render.
Many conventions contain provisions on such a case to facilitate cultural relations by providing
for a limited tax exemption since the absence of specific rules should not be interpreted as
constituting an obstacle to the inclusion of such rules in bilateral conventions whenever this is
felt desirable.37 Although Arts. 14, 15, 19 and 23 of the OECD MC and UN MC and their
counterpart under other treaties may generally be adequate to prevent double taxation of visiting
teachers, some countries may wish to include a visiting teachers article in their treaties.38
36
Art. 15 (3), Ethio-UK Tax Treaty.
Para. 11 of Commentary on Art. 15 of the OECD MC; Para. 1 of Commentary on Art. 15 of the UN MC.
38
Para. 2 of Commentary on Art. 15 of the UN MC. Reference is also made to paragraphs 11 to 13 of the
Commentary on Art. 20 of OECD MC and UN MC for a comprehensive treatment of this subject.
37
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Of the four legal regimes under consideration in this piece, only the Ethio-China Treaty provides
for rules on taxation of visiting professors. It regulates the taxation of remuneration of teachers
and researchers as follows:
1) Remuneration which an individual who is or was immediately before visiting a
Contracting State a resident of the other Contracting State and who is present in the firstmentioned State for the primary purpose of teaching, giving lectures or conducting
research at the invitation of any university, college, school or other similar nonprofitable educational institution or scientific research institution recognized by the
government of the first-mentioned State derives for the purpose of such teaching, lectures
or research shall not be taxed in the first-mentioned State, for a period of three years
from the date of his first arrival in the first-mentioned State.39
According to the foregoing provision, the State hosting the teacher or the researcher in
question is required not to tax the remuneration acquired by the teacher or the researcher for
a period of three years commencing from his first arrival. In other words, such a teacher or
researcher is accountable only to his home State as far as his tax liability is concerned.
However, the preceding provision is not applicable to income from research if such research
is undertaken for the private benefit of a specific person or persons.40 It seems that, under this
provision, teachers or researchers engaged in their works at a private educational or research
institutions are not covered.
With respect to students, two categories of payments are there. First, there are payments for
the purpose of the student’s maintenance, education or training, which are regulated under
the respective Arts. 20 of the OECD MC, UN MC, Ethio-UK Treaty and Art. 21 (1) of the
Ethio-China Treaty and which are beyond the scope of this piece. Second, there are
remunerations acquired by a student for services rendered in another country. This latter
scenario is regulated nowhere under the preceding tax regimes with the exception of the
Ethio-China Treaty. In this regard, the Ethio-China Treaty has the following to say:
2) A student or business apprentice who is or was immediately before visiting a Contracting
State a resident of the other Contracting State and who is present in the first-mentioned
State for a continuous period not exceeding four year shall not be taxed in the firstmentioned State in respect of remuneration for services rendered in that State, provided
that the services are in connection with his duties or training and the remuneration
constitutes earnings necessary for his maintenance.41
39
Art. 20 (1), Ethio-China Tax Treaty.
Art. 20 (2), Ethio-China Tax Treaty. The message of this provision is that, for the remuneration of the teacher or
researcher to fall under the exemption, the activity conducted by the teacher or researcher should have been
undertaken in the public interest. At this juncture, it has to be noted that the meaning of public interest remains
vague thereby paving ways for subjective and, probably, inconsistent application of the article.
41
Art. 21 (2), Ethio-China Treaty.
40
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For the student rendering a service in another country to benefit out of the protection under this
provision, two requirements should be satisfied. First, the provided services should be in
connection with the student’s duties or training. Second, the remuneration should form part of
the earnings necessary for the student’s maintenance.
7. Termination (Severance) Payment
For many years, there has been little international agreement on severance or termination
payments. When an individual’s employment comes to an end, termination payments can be
made in a variety of forms. The tax treatment of these payments often causes conflict in
interpretations across jurisdictions. To avert this, the Organization for Economic Cooperation
and Development has issued an update to the Model Tax Convention that includes new
commentary on the cross-border tax treatment of termination payments in order to clarify how
these payments should be taxed.42
There is currently a potential overlap between Art. 15 and Art. 18 of the OECD Model, and as it
stands only paragraph 4-6 of the OECD Commentary on Art. 18 addresses this overlap.43 Art. 15,
which addresses sourcing on income from employment, refers to “…other remuneration for
work performed in a Contracting State…” and usually results in taxation in the country of
source. However, Art. 18 on pensions refers to “…other remuneration in consideration of past
employment…” and usually results in taxation in the country of residence.
The lack of explicit allocation guidance leaves it up to States to apply their domestic legislation
to determine the nature of a termination payment, and to determine which article of the tax treaty
is relevant to apply to source such a payment. The main purpose of the new draft commentary is
to establish the difference between payments which are to be considered as salary, thus following
art. 15, and those to be considered as pension, thus following Art. 18. Other than the OECD’s
attempt, all the legal regimes under consideration are devoid of a single provision aimed at
avoiding double taxation or double non-taxation when it comes to taxation of severance
payment.
42
New draft commentary to OECD Model Treaty regarding termination payments released for public discussion,
2013. Although in theory the Commentary on the OECD MC merely provides guidelines for the interpretation of
bilateral treaties, it is often a conclusive reference in resolving discussions on the attribution of the right of taxation.
43
Id.
12 | P a g e
8. Conclusion
Despite the rise in number of cross-border employment relationships, a comprehensive legal
regime to regulate the taxation of income from employment is lacking. The effort of the OECD
and the UN to introduce a single convention on the subject matter, at least as of today, remains
futile. Instead, States preferred to regulate the taxation of income from offshore employment
through bilateral treaties. Ethiopia, for instance, have concluded six tax treaties two of which are
comparatively examined with the OECD and the UN Model Conventions.
Art. 15 which principally applies to income from employment connotes almost the same message
under all the OECD MC, UN MC as well as the Ethio-China and Ethio-UK Treaties. In effect,
telling their differences is by far easier than explaining their similarities. No differences is visible
between Art. 15 of the OECD MC and of the UN MC.44 With respect to paragraph 1 of Art. 15,
only the Ethio-China Treaty is at odd from the rest by mentioning two additional provisions [Art.
20 (teachers and researchers) and Art. 21 (2) (students)] dealing with that cannot be affected
when applying the paragraph. Concerning the provisions of Arts. 16, 18 and 19, they all have the
same stance. Paragraph 2 is articulated in the similar ways in all the four scenarios.
The scope of paragraph 3 of Art. 15 is restricted under the Ethio-UK Treaty. Whereas the
counterpart provision of the OECD MC, UN MC and Ethio-China regulate employment
exercised aboard a ship, aircraft or a boat, the Ethio-UK Treaty limits the application of the
paragraph only to an employment exercised aboard a ship or aircraft. Finally, the Ethio-China
Treaty governs the taxation of visiting professors (Art. 20) and students (Art. 21(2)) whereas no
counterpart provisions are found under the OECD MC, UN MC and Ethio-UK Treaty.
44
B. Kosters, The United Nations Model Tax Convention and Its Recent Developments, International Bureau of
Fiscal Documentation, ASIA-PACIFIC TAX BULLETIN, 2004, P. 5; See also V. Daurer and R. Krever, Choosing
between the UN and OECD Tax Policy Models: an African Case Study, EUI Working Paer RSCAS 2012/60, 2012.
13 | P a g e
References
Laws
1. AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLES’ REPUBLIC OF
CHINA AND THE GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLIC
OF ETHIOPIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.
2. Model Double Taxation Convention Between Developed and Developing Countries,
United Nations, 1980, New York.
3. The Organization for Economic Cooperation and Development Model Convention With
Respect to Taxes on Income and on Capital (Condensed Version) –ISBN 978-92-6408948-8-© OECD 2010.
4. UK/ETHIOPIA DOUBLE TAXATION CONVENTION SIGNED IN LONDON ON 9
JUNE 2011, Entered into force on 21 February 2013.
Commentaries
1. COMMENTARIES ON THE ARTICLES OF THE OECD MODEL TAX
CONVENTION, 2010.
2. Commentaries on the articles of the United Nations Model Double Taxation Convention
between Developed and Developing Countries, Department of Economic and Social
Affairs, United Nations, New York, 2001.
3. New draft commentary to OECD Model Treaty regarding termination payments released
for public discussion, 2013.
Books and Journals
1. A. Hirsch and G. V. Abeele, Working in several countries: tax and social security
implications of cross-border employment/self-employment between Belgium and its
neighboring countries (France, Germany, Luxembourg and the Netherlands), Vanden
Eynde & Partners Law Firm, INTERNATIONAL LAWYERS NETWORK, 2004.
2. B. Kosters, The United Nations Model Tax Convention and Its Recent Developments,
International Bureau of Fiscal Documentation, ASIA-PACIFIC TAX BULLETIN, 2004, P.
5.
3. Caroline Gratte, The interpretation of the term “employer” in Article 15(2) (b) OECD
MC and its implication on short-term secondments -from a Swedish Perspective, 2009.
4. K. Dziurdz, Article 15 of the OECD Model:The 183-Day Rule and the Meaning of
“Borne by a Permanent Establishment”. BULLETIN FOR INTERNATIONAL TAXATION,
MARCH 2013.
5. Klaus Vogel, Double Tax Treaties and Their Interpretation, 4 INT’L TAX & BUS.
LAW. 1 (1986). Available at: http://scholarship.law.berkeley.edu/bjil/vol4/iss1/1.
14 | P a g e
6. Proposed changes to the Commentary on Art. 15 (2) of the OECD Model and their effect
on the interpretation of “employer” for treaty purposes, Bulletin for International
Taxation, 2007 (Volume 61), No. 11.
7. V. Daurer and R. Krever, Choosing between the UN and OECD Tax Policy Models: an
African Case Study, EUI Working Paer RSCAS 2012/60, 2012.
15 | P a g e
Model Convention, the UN Model Convention, the Ethio-China Tax Treaty and
the Ethio-UK Tax Treaty
By: Wakgari Kebeta Djigsa
July 2016
Electronic copy available at: http://ssrn.com/abstract=2809489
1. Introduction
With the advent of globalization and technological advancement, an offshore employment
relationships are proliferating more than ever making it possible the application of States’
domestic laws in the situations no more. The problem is more exacerbated when it comes to the
taxation of the remuneration derived from such employment relationships. Most commonly,
double taxation arise because States tax not only domestic assets and transactions but also assets
and transactions in other States which benefit resident taxpayers, resulting in the overlap of the
States’ tax claims.1 In order to tackle this pressing problem, devising a mechanism by which
employment income could be taxed is proved a matter of no alternative.
Not surprisingly, States hesitate to come up with a single multilateral convention on this subject.
Nevertheless, two widely accepted model conventions are there with no binding force. In
addition, States also preferred to address the issue bilaterally Ethiopia being no exception.
Against this background, this piece is aimed at examining how the taxation of [income from
employment] is addressed under the OECD2 and the UN3 Model Conventions as well as the
Ethio-China4 and Ethio-UK5 Treaties on comparative basis. Since the latter three conventions are
principally reproduced from the OECD MC with only slight difference, to avoid unnecessary
redundancy, a mentioning of legal provisions in the work stands for all the conventions except
where a specific reference is made otherwise.
The taxation of Income from a cross-border employment is primarily treated under Art. 15 of all
the four legal regimes under consideration.6 Nevertheless, a resort to other relevant provisions
will also be inevitable. The three sub-provisions of Art. 15 of the OECD, the UN, the EthioChina and Ethio-UK7 Conventions each represent three different scenarios. The first sub-article
1
Klaus Vogel, Double Tax Treaties and Their Interpretation, 4 INT’L TAX & BUS. LAW. 1 (1986). Available at:
http://scholarship.law.berkeley.edu/bjil/vol4/iss1/1.
2
The Organization for Economic Cooperation and Development Model Convention With Respect to Taxes on
Income and on Capital (Condensed Version) –ISBN 978-92-64-08948-8-© OECD 2010 (the OECD MC hereafter).
3
Articles of the United Nations Model Double Taxation Convention Between Developed and Developing Countries,
United Nations, 2001 (the UN MC hereafter).
4
AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLES’ REPUBLIC OF CHINA AND THE
GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA FOR THE AVOIDANCE OF
DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME (the Ethio-China Treaty hereafter).
5
UK/ETHIOPIA DOUBLE TAXATION CONVENTION SIGNED IN LONDON ON 9 JUNE 2011, Entered into
force on 21 February 2013 (the Ethio-UK hereafter).
6
Before it was changed to “Income from Employment” in 2000, the caption of Art. 15 were “Dependent Personal
Services” as opposed to the “Independent Personal Services” of the former Art. 14. The change of wording was
initiated by the removal of Art. 14 OECD MC and has not changed the scope of the article. Currently, the UN MC
and the Ethio-China Treaty employ the term “Dependent Personal Services” whereas the Ethio-UK Treaty uses
“Income from Employment”. See, for instance, Caroline Gratte, The interpretation of the term “employer” in Article
15(2) (b) OECD MC and its implication on short-term secondments -from a Swedish Perspective, 2009, p. 10.
7
The Ethio-UK double taxation convention entered into force on 21 February 2013 and became effective in Ethiopia
from 1 March 2013 for taxes withheld at source and 8 July 2013 for taxes on income. In the UK, it’s effective from
2|P a g e
Electronic copy available at: http://ssrn.com/abstract=2809489
constitutes both a general rule and an exception with respect to the employment income tax. The
second sub-article, on its part, provides for exceptions to the exception per the first sub-article.
Certain special cases are treated under the last sub-article.
2. General Rule and Its Exception
As mentioned earlier, paragraph 1 of Art. 15 recognizes the general rule for the taxation of
income from employment. Not surprisingly, the general rule is that an employment income
derived by a resident of a contracting state is taxable only in the residence state. The relevant part
of the provision reads:
“…salaries, wages and other similar remuneration8 derived by a resident of a Contracting State
in respect of an employment shall be taxable only in that state…”9
Accordingly, in principle, it is the state where the employee resides that the salaries, wages and
other similar remuneration of the latter are to be taxed. This, however, is not always the case. As
one can observe from the further reading of sub-article 1, there is one permissive exception to
this general rule whereby the taxation power to levy and collect taxes on employment income
goes to a State other than that of the residence. It goes on saying:
“…unless the employment is exercised in the other Contracting State. If the employment is so
exercised, such remuneration as is derived therefrom may be taxed in that other State.”10
In case where the employment activity is exercised in another Contracting State, the latter is
entitled to impose tax on the income. The condition provided by the Article for taxation by the
State of source is the salaries, wages and other similar remuneration be derived from the exercise
of employment in that State. This applies regardless of when that income may be paid to,
credited to or otherwise or otherwise definitely acquired by the employee.11 A point to be made
here is the vivid terminological difference while allocating the power of taxation between the
State of residence and to the other Contracting State, i.e. the source State. The term ‘shall’ is
employed in the former case whereas it is ‘may’ for the latter. In my opinion, such a divergence
is intentional with the aim to tighten the taxation power of the source State.
At this juncture, it has to be pointed out that Art. 15 (1) is applicable to employment income
without prejudice to Arts. 16 (Non-employment remuneration of members of Board of Directors
1 March 2013 for taxes withheld at source, 1 April 2013 for Corporation Tax and 6 April 2013 for Income Tax and
Capital Gains Tax.
8
Member countries to the OECD have generally understood the term “salaries, wages and other similar
remuneration” to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a
residence or automobile, health or life insurance coverage and club memberships).
9
See Art. 15 (1) OECD MC. See para. 2.1 of Art. 15 Commentary on the OECD MC.
10
Id. The last alinea of the first sentence of sub-article 1 and its last sentence.
11
See para. 2.2 of Art. 15 Commentary on the OECD MC.
3|P a g e
of companies), 18(Pensions) and 19(Government Services) of the OECD, UN, Ethio-China,
Ethio-UK as well as Arts. 20 (Teachers and Researchers) and 21 (Students and Trainees) of the
Ethio-China Conventions. In this regard, the Ethio-China is at odd as it regulates the taxation of
visiting professors and students and trainees.12
3. Exceptions to Exception
The fact that a recipient exercises an employment in a State other than the Residence State, of
itself, does not suffice to enable a non-residence State to impose tax. The second paragraph of
Art. 15 stipulates an exception to exception, which reverts the allocation of the taxing rights back
to the State of residence, regardless of the fact that the employment has been carried out in
another State. Gratte believes that the purpose of this provision is to facilitate international shortterm secondments of employees.13 A secondment can preferably be described as a situation
where an employee is sent abroad by his employer to work for a company within the same
group.14 This exception covers all individuals rendering services in the course of an employment
like sales representatives, construction workers, engineers, etc to the extent that their
remuneration does not fall under the provisions of other Articles, such as those applying to
government services and artists and sportsmen.15 It is the scenario whereby the employer has
neither residence nor a permanent establishment in the State of source.16
The applicability of the supplementary exception under Art. 15(2) of the four legal regimes is
dependent on three cumulative conditions. If these conditions are fulfilled, the Contracting State
of source is restrained from levying income tax on remuneration derived from an employment
exercised within its jurisdiction. In the foregoing paragraphs, a detailed discussion of the
conditions will be in order.
A) The 183-day Rule
In the history of the tax conventions, the 183-day Rule traces back to the League of Nations’
Mexico Model (1943) and the London Model (1946) with the aim to facilitate the operations of
enterprises engaged in international trade and the movement of workers across national
borders.17 Accordingly, the rule avoids an excessive administrative burden for employees and
employers. An administrative burden is regarded as excessive if neither the employee, as the
employee is temporarily present in the source State under Art. 15 (2) (a), nor the employer, under
Art. 15 (b) and (c), has a sufficient level of presence in the source State.
12
See Art. 20 and 21 (2), the Ethio-China Treaty. This issue will be discussed at length later.
Supra 7, Caroline Gratte, 2009, p.11.
14
Id. P.11.
15
See para. 3 of Art. 15 Commentary on the OECD MC.
16
Supra 7, Caroline Gratte, 2009, p.12.
17
See K. Dziurdz, Article 15 of the OECD Model:The 183-Day Rule and the Meaning of “Borne by a Permanent
Establishment”. BULLETIN FOR INTERNATIONAL TAXATION, MARCH 2013, P. 123.
13
4|P a g e
Under the Art. 15 (2) (a), the source State is duty bound to vacate the employment income where
the recipient is present therein for a period of less than 183 days. For the purpose of ease
understanding, the relevant part is reproduced below.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a
Contracting State in respect of an employment exercised in the other Contracting State shall be
taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding in the
aggregate 183 [in any twelve month period commencing or ending in the fiscal year
concerned].18
Though literatures have no concrete answer why the period of 183-days is selected, it,
nevertheless, serves as a demarcation line between the points where the taxation power of the
residence State ceases to exist and where that of the source State starts to count. Accordingly, all
income derived from an employment in a source State through the presence of the recipient in
the latter State for a period not exceeding 183 days is subject to tax in the State of residence. On
the other hand, employment income derived as a result of the recipient’s presence in the source
State for a period beyond 183 days is taxable in the source State. The presence can be
consecutively or intermittently. The rule, however, is subject to the conditions per Art. 15 (2) (b)
and (c).
Though there is no consensus on the method of calculation of the 183 days, there is only one way
which is consistent with the wording of the paragraph-the “days of physical presence” method.19
The application of this method is straightforward as the individual is either present in a country
or he is not. The presence could also relatively easily be documented by the taxpayer when
evidence is required by the tax authorities.20
B) Remuneration “Paid by, or on Behalf of, an Employer”
For the residence State to levy tax on employment income, it is not sufficient to indicate the
compliance with the 183-Day Rule. It is equally important that the remuneration was paid in
accordance with Art. 15 (2) (b) which has the following to say:
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other
State.
18
This contrasts with the 1963 Draft Convention and the 1977 Model Convention which provided that the 183 day
period should not be exceeded “in the fiscal year concerned”, a formulation that created difficulties where the fiscal
years of the States did not coincide and which opened up opportunities for tax avoidance. See also para. 4 of the Art.
15 Commentary on the OECD MC.
19
Paragraph 5 of the Commentary on Art. 15 of the OECD MC.
20
Id. Para 5.
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This provision lays down two important requirements. First, the remuneration must be paid by,
or on behalf of, an employer. In the literature, it is argued that “paid by, or on behalf of” is a
condition independent from the question of who the employer is and that there is a requirement
that the employer economically bear the remuneration.21 However, if an employee has only one
employer, the question of “paid by or on behalf of” is of secondary importance, i.e. either the
employer pays the remuneration or somebody else pays the remuneration on behalf of the
employer.
If “paid by, or on behalf of” is understood to be a condition that is independent from the question
of who the employer is, in certain cases, there may be no relevant employer, i.e. where the
employer does not pay the remuneration and the person paying the remuneration is not an
employer and does not pay the remuneration on behalf of the employer.22 In such a case, the
condition under Art. 15 (2) (b) is never fulfilled as there is no paying employer. If “paid by, or on
behalf of” is understood to be an independent condition that is not connected to the status of the
employer, the object and purpose of the 183-Day Rule, i.e. avoidance of excessive administrative
burden, will not be achieved.
Accordingly, it can be said that the phrases “paid by, or on behalf of” and “an employer” in Art.
15 (2) (b) are interrelated and must be considered together. The Commentary on Art. 15 of the
OECD MC also confirms that the condition “paid by, or on behalf of” is not independent of the
question of who the employer is. Rather, a charge to a person is regarded as an indication of
whether or not that person is an employer.23 Ultimately, the remuneration is always “paid by, or
on behalf of” the person who mainly exercises the relevant employer functions, i.e. the employer.
Not surprisingly, the term “employer” is understood in OECD member States in different ways.
The two widely practiced concepts are legal approach (formal employer) and material
approach (economic employer).24 The first method has its point of departure in the legal
circumstances surrounding the employment. Consequently, States that advocate the legal
approach attach a great significance to the formal contract of employment. The second approach
differs from the former to the extent that the company with a formal contract of employment is
not consistently equivalent to the employer. On the contrary, the material approach concentrates
on the reality of the employment. Hence, great emphasis25 is attached to factors such as the
beneficiary of the assignment and the actual bearer of the cost and the risk of the employment. It
21
Supra 18, K. Dziurdz, 2013, p. 124.
Id. p. 124.
23
Para. 8 OECD MC Commentary (2010) on Art. 15. However, the extent of the applicability of the paragraph is
controversial since it explicitly concerns cases of international hiring-out of labor.
24
Supra 7, Caroline Gratte, 2009, P. 12.
25
Rather than looking at the “legal” or “economic” employer, the OECD Commentary focuses on factors that
indicate whether the individual is integrated into the business and under the control of a host State entity in order to
test whether there is an employment relationship. There is, therefore, a distinction between individuals who provide
services to an entity in an employment relationship (contract of service) and those who provide services as part of a
contract between two separate entities (contract for services).
22
6|P a g e
goes without saying that the divided understanding of the term “employer” might even lead to
cases of double taxation, despite the existence of a tax treaty.
In 2007, OECD Working Party No. 1 released the 2007 Discussion Draft entitled Revised Draft
Changes to the Commentary on Paragraph 2 of Art. 15, which was designed to improve on the
2004 Discussion Draft on the scope of Art. 15 (2) of the OECD Model Tax Convention.26 These
Discussion Drafts seek to clarify the explanation and interpretation of “employer” for purposes
of Art. 15 (2) (b) of the OECD MC. The explanation and interpretation of “employer” include, as
one of the conditions, that the failure to satisfy Art. 15 (2) (b) means that the work State has the
right to tax a proportionate part of the employee’s salary. This condition plays an important part
in the cross-border secondment of employees. The 2007 Discussion Draft also seeks to respond,
at least in part, to the criticism made in the legal literature of para. 8 of the Commentary on Art.
15 of the OECD MC.
The second condition under Art. 15 (2) (b) is that the employer in question should not be a
resident of the source State. For the taxation power of the residence State to override that of the
source State, it must be established that the paying employer is not a resident of the latter. If this
is not the case, the power of taxation resides with the State of source. Nevertheless, it is not a
requirement that the employer be a resident of the State of residence of the employee. According
to the OECD Commentary, some member countries may, however, consider that it is
inappropriate to extend the exception of paragraph 2 to cases where the employer is not a
resident of the State of residence of the employee, as there might then be administrative
difficulties in determining the employment income of the employee or in enforcing withholding
obligations on the employer.27
C) Meaning of “Borne by” based on the Arm’s Length Principle
In addition to the two conditions addressed so far, the Art. 15 (2) exception begs the fulfillment
of the third condition which reads:
(c) the remuneration is not borne by a permanent establishment which the employer has in the
other State.
As one can understand from this provision, it is mandatory that the remuneration be not borne by
a permanent establishment in the source State. Art. 15 (2) (c) and Art. 7 have several things in
common. Both refer to the permanent establishment under Art. 5, both require that a distinction
be made between different parts of an enterprise and both require assigning expenses to a
permanent establishment.
26
See Proposed changes to the Commentary on Art. 15 (2) of the OECD Model and their effect on the interpretation
of “employer” for treaty purposes, Bulletin for International Taxation, 2007 (Volume 61), No. 11.
27
Para. 6 of Art. 15 Commentary on the OECD MC.
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If the employer has a permanent establishment in the State in which the employment is
exercised, the exemption is given on condition that the remuneration is not borne by that
permanent establishment. The phrase “borne by” must be interpreted in the light of the
underlying purpose of sub-paragraph c of the Article, which is to ensure that the exception
provided for in paragraph 2 does not apply to remuneration that could give rise to a deduction,
having regard to the principle of Art. 7 and the nature of the remuneration in computing the
profits of a permanent establishment situated in the State in which the employment is
exercised.28
Art. 7 (2), on its part, determines whether or not profits, i.e. earnings and expenses, such as
remuneration in respect of an employment, are attributable to a permanent establishment in the
source State. It provides that profits attributable to the permanent establishment are:
…the profits it might be expected to make, in particular in its dealings with other parts of the
enterprise, if it were a separate and independent enterprise engaged in the same or similar
activities under the same or similar conditions, taking in to account the functions performed,
assets used and risks assumed by the enterprise through the permanent establishment and
through other parts of the enterprise.
Accordingly, the arm’s length principle under Art. 7 (2) can be applied in answering the question
of whether or not, under Art. 15 (2) (c), the remuneration is born by a permanent establishment
that the employer has in the source State. At this juncture, it must be asked how and why the
remuneration is attributable to the permanent establishment. If it is attributable as part of a fee
for goods delivered or services rendered, it is not borne by the permanent establishment.
However, between independent enterprises, the question of whether the remuneration is charged
as part of a fee for goods delivered or services provided depends on who the employer is. In
order to establish whether or not the remuneration is borne by the permanent establishment,
whether the permanent establishment, as a separate and independent enterprise, would mainly
exercise the relevant employer functions must be examined. The remuneration is borne by the
permanent establishment if the permanent establishment, as a separate and independent
enterprise engaged in the same or similar activities under the same or similar conditions would
be the employer within the meaning of Art. 15 (2) (b).
To sum up this section, the employee income remains taxable remains taxable in the country of
residence of the employee, if the recipient is present in the other state for a period or periods not
exceeding the aggregated 183 days in any twelve month-period commencing or ending in the
fiscal year concerned and if the remuneration is paid by, or on behalf of, an employer who is not
a resident of the other state and if the remuneration is not born by a permanent establishment that
the employer has in the source State. In order to escape from the application of the 183-days rule,
it is sufficient that one of the three aforementioned conditions is not fulfilled. In view of a split
28
See Para. 7 of Art. 15 Commentary on the OECD MC.
8|P a g e
taxation scheme, it is important to take into account that the presence of more than 183 days in
the work state (first condition) is a fact to be established by the employee-taxpayer.29
Furthermore, it is necessary to prove the existence of two employment contracts (second
condition), if need be (e.g. less than 183 days in the work state), which might be difficult in the
case of a single payroll.30
4. A Regime for Frontier-workers
None of the four legal regimes provides a rule for frontier-workers.31 According to three double
taxation treaties,32 a frontier-worker can be defined as a person who works in the frontier zone of
the work-state, who is resident in the frontier-zone of his State of residence and where he usually
returns. According to this system, the frontier-worker will be taxed in his State of residence, even
if he should be taxed in the State in which his employment is exercised under the 183-days rule.
For the establishment of split taxation schemes with the neighboring countries, it is important to
avoid not only the application of the 183-days rule but also to avoid the application of the regime
of the frontier-workers.33 By the same token, no special rules regarding the taxation of income of
employees working on trucks and trains travelling between States are included as it would be
more suitable for the problems created by local conditions to be solved directly between the
Sates concerned.34
5. Employment exercised aboard a ship, aircraft or a [boat]
Art. 15 (3) OECD MC applies to the remuneration of crews of ships or aircrafts operated in
international traffic, or of [boats] engaged in inland waterways transport, a rule which follows up
to a certain extent the rule applied to the income from shipping, inland waterways transport and
air transport, i.e. to tax them in the State in which the place of the effective management of the
enterprise concerned is situated.35 The provision reads:
(3) Notwithstanding the preceding provisions of this Article, remuneration derived in respect of
an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a
[boat] engaged in inland waterways transport, may be taxed in the Contracting State in which
the place of effective management of the enterprise is situated.
29
A. Hirsch and G. V. Abeele, Working in several countries: tax and social security implications of cross-border
employment/self-employment between Belgium and its neighboring countries (France, Germany, Luxembourg and
the Netherlands), Vanden Eynde & Partners Law Firm, INTERNATIONAL LAWYERS NETWORK, 2004. P. 3.
30
Id. A. Hirsch. P.3.
Id. A. Hirsch. P. 3.
32
For instance, the double taxation treaties of Belgium with France, Germany and the Netherlands provide special
rules for frontier-workers.
33
Supra. A. Hirsch, p. 4.
34
Para. 10, Commentary on Art. 15 of the OECD MC.
35
Para. 9, Commentary on Art. 15 of the OECD MC.
31
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Commentary on Art. 8 OECD MC indicates that States may agree to confer the right to tax such
income on the State of the enterprise operating the ship, boats or aircrafts. The reasons for
introducing that possibility in the case of income from shipping, inland waterways and air
transports are valid also in respect of the remuneration of the crew. Such a provision, as well as
Art. 15 (3), assumes that the domestic laws of the State on which the right to tax is conferred
allows it to tax the remuneration of a person in the service of the enterprise concerned,
irrespective of his residence.
Though the sub-article 3 of Art. 15 OECD MC is the same with its parallel provisions under the
UN MC and the Ethio-China Treaty, a minor modification is introduced under the Ethio-UK
Treaty. It has the following to say:
(3) Notwithstanding the preceding provisions of this Article, remuneration derived by a
[resident] of a Contracting State in respect of an employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the Contracting State in which the place of
effective management of the enterprise is situated.36
The Ethio-UK Treaty is at odd from the OECD MC, UN MC and the Ethio-China Treaty in two
aspects. First, it clearly specifies the status of the recipient of the remuneration. Accordingly, it
applies only to ‘residents’ thereby addressing a potential controversy that could otherwise arise
under the provision. This is the case in particular where States claim tax jurisdiction on grounds
other than residence. The issue at hand deserves a special consideration because the first two
paragraphs of Art. 15 in all the three cases have clearly referred to ‘residence’ whereas they
opted not to employ the term in the third paragraph. Second, unlike the other three regimes, Art.
15 (3) of the Ethio-UK Treaty only refers to employment exercised aboard a ship or aircraft
operated in international traffic. The OECD, UN and Ethio-China Treaties, however, regulate not
only employment activity related to aboard a ship or aircraft but also a boat.
6. Visiting Professors and Students
The OECD MC, UN MC, and Ethio-UK Treaty are devoid of provisions governing the taxation
of remuneration acquired by visiting professors or students in respect of services they render.
Many conventions contain provisions on such a case to facilitate cultural relations by providing
for a limited tax exemption since the absence of specific rules should not be interpreted as
constituting an obstacle to the inclusion of such rules in bilateral conventions whenever this is
felt desirable.37 Although Arts. 14, 15, 19 and 23 of the OECD MC and UN MC and their
counterpart under other treaties may generally be adequate to prevent double taxation of visiting
teachers, some countries may wish to include a visiting teachers article in their treaties.38
36
Art. 15 (3), Ethio-UK Tax Treaty.
Para. 11 of Commentary on Art. 15 of the OECD MC; Para. 1 of Commentary on Art. 15 of the UN MC.
38
Para. 2 of Commentary on Art. 15 of the UN MC. Reference is also made to paragraphs 11 to 13 of the
Commentary on Art. 20 of OECD MC and UN MC for a comprehensive treatment of this subject.
37
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Of the four legal regimes under consideration in this piece, only the Ethio-China Treaty provides
for rules on taxation of visiting professors. It regulates the taxation of remuneration of teachers
and researchers as follows:
1) Remuneration which an individual who is or was immediately before visiting a
Contracting State a resident of the other Contracting State and who is present in the firstmentioned State for the primary purpose of teaching, giving lectures or conducting
research at the invitation of any university, college, school or other similar nonprofitable educational institution or scientific research institution recognized by the
government of the first-mentioned State derives for the purpose of such teaching, lectures
or research shall not be taxed in the first-mentioned State, for a period of three years
from the date of his first arrival in the first-mentioned State.39
According to the foregoing provision, the State hosting the teacher or the researcher in
question is required not to tax the remuneration acquired by the teacher or the researcher for
a period of three years commencing from his first arrival. In other words, such a teacher or
researcher is accountable only to his home State as far as his tax liability is concerned.
However, the preceding provision is not applicable to income from research if such research
is undertaken for the private benefit of a specific person or persons.40 It seems that, under this
provision, teachers or researchers engaged in their works at a private educational or research
institutions are not covered.
With respect to students, two categories of payments are there. First, there are payments for
the purpose of the student’s maintenance, education or training, which are regulated under
the respective Arts. 20 of the OECD MC, UN MC, Ethio-UK Treaty and Art. 21 (1) of the
Ethio-China Treaty and which are beyond the scope of this piece. Second, there are
remunerations acquired by a student for services rendered in another country. This latter
scenario is regulated nowhere under the preceding tax regimes with the exception of the
Ethio-China Treaty. In this regard, the Ethio-China Treaty has the following to say:
2) A student or business apprentice who is or was immediately before visiting a Contracting
State a resident of the other Contracting State and who is present in the first-mentioned
State for a continuous period not exceeding four year shall not be taxed in the firstmentioned State in respect of remuneration for services rendered in that State, provided
that the services are in connection with his duties or training and the remuneration
constitutes earnings necessary for his maintenance.41
39
Art. 20 (1), Ethio-China Tax Treaty.
Art. 20 (2), Ethio-China Tax Treaty. The message of this provision is that, for the remuneration of the teacher or
researcher to fall under the exemption, the activity conducted by the teacher or researcher should have been
undertaken in the public interest. At this juncture, it has to be noted that the meaning of public interest remains
vague thereby paving ways for subjective and, probably, inconsistent application of the article.
41
Art. 21 (2), Ethio-China Treaty.
40
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For the student rendering a service in another country to benefit out of the protection under this
provision, two requirements should be satisfied. First, the provided services should be in
connection with the student’s duties or training. Second, the remuneration should form part of
the earnings necessary for the student’s maintenance.
7. Termination (Severance) Payment
For many years, there has been little international agreement on severance or termination
payments. When an individual’s employment comes to an end, termination payments can be
made in a variety of forms. The tax treatment of these payments often causes conflict in
interpretations across jurisdictions. To avert this, the Organization for Economic Cooperation
and Development has issued an update to the Model Tax Convention that includes new
commentary on the cross-border tax treatment of termination payments in order to clarify how
these payments should be taxed.42
There is currently a potential overlap between Art. 15 and Art. 18 of the OECD Model, and as it
stands only paragraph 4-6 of the OECD Commentary on Art. 18 addresses this overlap.43 Art. 15,
which addresses sourcing on income from employment, refers to “…other remuneration for
work performed in a Contracting State…” and usually results in taxation in the country of
source. However, Art. 18 on pensions refers to “…other remuneration in consideration of past
employment…” and usually results in taxation in the country of residence.
The lack of explicit allocation guidance leaves it up to States to apply their domestic legislation
to determine the nature of a termination payment, and to determine which article of the tax treaty
is relevant to apply to source such a payment. The main purpose of the new draft commentary is
to establish the difference between payments which are to be considered as salary, thus following
art. 15, and those to be considered as pension, thus following Art. 18. Other than the OECD’s
attempt, all the legal regimes under consideration are devoid of a single provision aimed at
avoiding double taxation or double non-taxation when it comes to taxation of severance
payment.
42
New draft commentary to OECD Model Treaty regarding termination payments released for public discussion,
2013. Although in theory the Commentary on the OECD MC merely provides guidelines for the interpretation of
bilateral treaties, it is often a conclusive reference in resolving discussions on the attribution of the right of taxation.
43
Id.
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8. Conclusion
Despite the rise in number of cross-border employment relationships, a comprehensive legal
regime to regulate the taxation of income from employment is lacking. The effort of the OECD
and the UN to introduce a single convention on the subject matter, at least as of today, remains
futile. Instead, States preferred to regulate the taxation of income from offshore employment
through bilateral treaties. Ethiopia, for instance, have concluded six tax treaties two of which are
comparatively examined with the OECD and the UN Model Conventions.
Art. 15 which principally applies to income from employment connotes almost the same message
under all the OECD MC, UN MC as well as the Ethio-China and Ethio-UK Treaties. In effect,
telling their differences is by far easier than explaining their similarities. No differences is visible
between Art. 15 of the OECD MC and of the UN MC.44 With respect to paragraph 1 of Art. 15,
only the Ethio-China Treaty is at odd from the rest by mentioning two additional provisions [Art.
20 (teachers and researchers) and Art. 21 (2) (students)] dealing with that cannot be affected
when applying the paragraph. Concerning the provisions of Arts. 16, 18 and 19, they all have the
same stance. Paragraph 2 is articulated in the similar ways in all the four scenarios.
The scope of paragraph 3 of Art. 15 is restricted under the Ethio-UK Treaty. Whereas the
counterpart provision of the OECD MC, UN MC and Ethio-China regulate employment
exercised aboard a ship, aircraft or a boat, the Ethio-UK Treaty limits the application of the
paragraph only to an employment exercised aboard a ship or aircraft. Finally, the Ethio-China
Treaty governs the taxation of visiting professors (Art. 20) and students (Art. 21(2)) whereas no
counterpart provisions are found under the OECD MC, UN MC and Ethio-UK Treaty.
44
B. Kosters, The United Nations Model Tax Convention and Its Recent Developments, International Bureau of
Fiscal Documentation, ASIA-PACIFIC TAX BULLETIN, 2004, P. 5; See also V. Daurer and R. Krever, Choosing
between the UN and OECD Tax Policy Models: an African Case Study, EUI Working Paer RSCAS 2012/60, 2012.
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References
Laws
1. AGREEMENT BETWEEN THE GOVERNMENT OF THE PEOPLES’ REPUBLIC OF
CHINA AND THE GOVERNMENT OF THE FEDERAL DEMOCRATIC REPUBLIC
OF ETHIOPIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.
2. Model Double Taxation Convention Between Developed and Developing Countries,
United Nations, 1980, New York.
3. The Organization for Economic Cooperation and Development Model Convention With
Respect to Taxes on Income and on Capital (Condensed Version) –ISBN 978-92-6408948-8-© OECD 2010.
4. UK/ETHIOPIA DOUBLE TAXATION CONVENTION SIGNED IN LONDON ON 9
JUNE 2011, Entered into force on 21 February 2013.
Commentaries
1. COMMENTARIES ON THE ARTICLES OF THE OECD MODEL TAX
CONVENTION, 2010.
2. Commentaries on the articles of the United Nations Model Double Taxation Convention
between Developed and Developing Countries, Department of Economic and Social
Affairs, United Nations, New York, 2001.
3. New draft commentary to OECD Model Treaty regarding termination payments released
for public discussion, 2013.
Books and Journals
1. A. Hirsch and G. V. Abeele, Working in several countries: tax and social security
implications of cross-border employment/self-employment between Belgium and its
neighboring countries (France, Germany, Luxembourg and the Netherlands), Vanden
Eynde & Partners Law Firm, INTERNATIONAL LAWYERS NETWORK, 2004.
2. B. Kosters, The United Nations Model Tax Convention and Its Recent Developments,
International Bureau of Fiscal Documentation, ASIA-PACIFIC TAX BULLETIN, 2004, P.
5.
3. Caroline Gratte, The interpretation of the term “employer” in Article 15(2) (b) OECD
MC and its implication on short-term secondments -from a Swedish Perspective, 2009.
4. K. Dziurdz, Article 15 of the OECD Model:The 183-Day Rule and the Meaning of
“Borne by a Permanent Establishment”. BULLETIN FOR INTERNATIONAL TAXATION,
MARCH 2013.
5. Klaus Vogel, Double Tax Treaties and Their Interpretation, 4 INT’L TAX & BUS.
LAW. 1 (1986). Available at: http://scholarship.law.berkeley.edu/bjil/vol4/iss1/1.
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6. Proposed changes to the Commentary on Art. 15 (2) of the OECD Model and their effect
on the interpretation of “employer” for treaty purposes, Bulletin for International
Taxation, 2007 (Volume 61), No. 11.
7. V. Daurer and R. Krever, Choosing between the UN and OECD Tax Policy Models: an
African Case Study, EUI Working Paer RSCAS 2012/60, 2012.
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