As businesses operate in a globalized world, they often face the issue of double taxation. This situation arises when a company’s income is taxed in both the country in which it is earned and the country in which the company is headquartered. To avoid such a situation, many countries have signed double taxation avoidance agreements. Article 12 of these agreements is of particular importance as it deals with the taxation of royalties and fees for technical services.
Article 12 of Double Taxation Avoidance Agreement is a critical part that deals with the taxation of royalties and fees for technical services. In essence, it lays down the rules that govern the taxation of payments made by residents of one country to residents of another country for these types of services. The article is particularly important for multinational companies that operate in several countries and have intellectual property rights, such as patents, copyrights, and trademarks.
The article defines which payments are considered as royalties and fees for technical services. Royalties are payments made for the use of intellectual property rights, while fees for technical services are payments made for services related to the application of technical knowledge or skills. Payments made for the use of trademarks, designs, and patents are also considered royalties.
The article sets out the tax rates that can be applied to royalties and fees for technical services. The maximum tax rate that can be applied is 15% of the gross amount of the payment. However, some countries have agreed to reduce this rate further under bilateral tax treaties.
Moreover, the article establishes the conditions under which the payments can be taxed in the country in which they are received. The country in which the payments are received can tax them only if the recipient has a permanent establishment in that country. If the recipient does not have a permanent establishment in the country, the payment is taxable only in the country in which the payer resides.
Finally, the article lays down the conditions for the exchange of information between the countries. The countries are obliged to share information that is necessary for the implementation of the agreement. This includes information related to the payments made under Article 12, as well as information related to any tax liability.
In conclusion, Article 12 of the double taxation avoidance agreement is essential for multinational companies that operate in several countries and have intellectual property rights. It provides a framework for the taxation of royalties and fees for technical services. By establishing clear rules and tax rates, the article helps to prevent double taxation and promote international trade and investment.