Employment Income Taxand Asia Junior School 2019 July 29-31, 2019

OECD Model Art. 15 - Overview General provision:- Art. 15 - Income from employment Para. 1 (General rule) State of residence → Exclusive taxation right unless “… the employment is exercised in the other Contracting State” → Source State has primary taxation right (see para. 2) Para. 2 Exception to para. 1 for employment exercised in Source State Para. 3 Employment exercised aboard a ship or aircraft → primary taxation right given to State where place of effective management of the enterprise is located

Art. 15: Relationship to other Articles Special provisions: Art. 15 para 1 - Subject to: Art. 16 - Directors’ fees Art. 18 - Pensions Art. 19 - Government service Art. 20 - Students Art. 17 para 1 – Subject to: Art. 17 - Artistes and sportsmen

Art. 15, Para. 1: What does this cover? “Salaries, wages and other similar remuneration” - includes benefits in kind received in respect of an employment (para 2.1) “in respect of an employment” - place of exercising employment (para 2.2) “taxable only in that State” - taxability of employment income according to domestic law

Art. 15(1): “Similar Remuneration” – What does this mean? Assume Mr. X’s contract is terminated - Upon termination of his contract, he receives payment from his former employer to ensure that he will refrain from competing with his former employer. Does Art. 15 “similar remuneration” apply to this payment?

Where is Employment Exercised? Comm. on Art. 15, para. 1 “Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid”. Meaning → a resident of a Contracting State (A State) exercises employment in A State but derives employment income, from sources in the other State (B State). He cannot be taxed in B State in respect of that income merely because he is paid from there and the results of this work are exploited in B State

OECD Model Art. 15(2) Exception - An employee is resident in Country C and exercises employment in the other country (Country D), he shall be taxable only in Country C if: he is present in Country D for a period or periods not exceeding 183 days in aggregate in any twelve month period commencing or ending in the fiscal year concerned AND salary paid by employer who is NOT a resident of Country D AND the salary is NOT borne by a PE of the employer in Country D.

Summary – Art. 15 para. 2 Employment income? Yes Does Art. 16,18,19 apply? No Residence state Where employment exercised? Source state Residence state taxation All conditions satisfied? (183 days, employer, PE) No Yes Residence state taxation Source state relief Source state taxation Residence state relief

Art. 15 Para. 2(A) – Conditions Conditions to satisfy: “… present in the work state for period/ periods ≤ 183 days…” “… in any 12 month period commencing or ending in the fiscal year concerned” (different from 1963 and 1977 Models)

183-day Rule How is the 183-day rule computed? Refers to days of physical presence To be included in the calculation: part of a day, day of arrival, day of departure, Saturdays, Sundays and public holidays, short breaks, days of sickness

183-day Rule Example: Individual Mr. A was employed by Company X (a Japanese Co) to work in Malaysia. Mr. A arrived in Malaysia on 1 Feb 2012 and left the country on 15 May 2012 (i.e. his employment in Malaysia was exercised for a total of 104 days in the calendar year 2012) Question: Does A qualify for relief?

183-day Rule A qualifies for relief – not taxable in Malaysia Answer: Criteria Exempt Status Present in Malaysia for less than 183 days? Yes Remuneration borne by a non-resident employer? Remuneration not borne by a PE which the employer has in Malaysia? A qualifies for relief – not taxable in Malaysia

“In any 12 month period…” “in any 12 month period commencing or ending in the fiscal year concerned” Earlier 1963 and 1977 models – “in the fiscal year concerned”. Fiscal years can differ in different States - e.g. UK fiscal year runs from 6 April of Year 1 to the following 5 April in Year 2; Malaysian fiscal year = calendar year Current model All possible periods of 12 consecutive months must be considered Does away with tax avoidance

Physical presence: 98 days (in total) 183-day Rule “183 days in any 12-month period commencing or ending in the fiscal year concerned” - assume the fiscal year is a calendar year End of fiscal year End of 12-month period 1/4/11 31/12/11 31/3/12 Physical presence: 98 days (in total) 90 days (in total) Has the “183-day rule” been met for fiscal year 2011? NO – total number of days in the 12-month period is 188 days (i.e. no exemption)

Physical presence: 240 days (in total) 183-day Rule Criteria: “183 days in any 12-month period commencing or ending in the fiscal year concerned” End of fiscal year Date of departure 1/5/11 31/12/11 30/4/12 Physical presence: 240 days (in total) 120 days (in total) Has the “183-day rule” been met for fiscal year 2012? NO – total number of days in the 12-month period is 360 days (no exemption)

Art. 15(2)(B): “Paid by…An Employer” Definition of “employer” – not provided Example of circumventing Art. 15, para 2: International hiring out of labour - use of an intermediary company to hire

Art. 15(2)(B): “Paid by…An Employer” Example: A company in Country A wishes to employ foreign employees (from Country B) for short term, e.g 120 days Local Company – Country A hires directly Result: Remuneration borne by employer in Country A Taxable in Country A

Art. 15(2)(B): “Paid by…An Employer” Alternative planning: Foreign Co – Country B employs hires out employees to Local Co. in Country A for a fee Local Co- Country A

Art. 15(2)(B): “Paid by…An Employer” Will the employees enjoy treaty relief? Prima facie yes, as the 3 conditions for exemption under the DTA are met, i.e.: Number of days present in the country A is less than 183 days The remuneration is paid by a non-resident employer (i.e. Foreign Co – Country B); and The remuneration is not borne by a PE which Foreign Co has in Country A* * It is assumed in this example that the presence of the employees will not create a PE for Foreign Co

Art. 15(2)(B): “Paid by…An Employer” Would the arrangement above potentially be subject to challenge by the respective tax authorities? Yes – need to look at “substance over form” In this context, who is the “real” employer? Foreign Co – Country B? or Local Co – Country A?

Art. 15(2)(B): “Paid by…An Employer” Local Co – Country A could be seen to be the “real” employer under the following circumstances: Local Co bears the responsibility or risk for the results/ performance of the ‘employees’ Local Co determines qualifications required by ‘employee’ to undertake the work ‘Employees’ take instructions from Local Co The work is performed at a place which is under the control and responsibility of Local Co Tools and materials are essentially provided for the ‘employees’’ use by Local Co

Art. 15 Para 2 (C): Remuneration not borne by a PE Comm. on Art.15 - para 7 Phrase “borne by” must be interpreted in the light of the underlying purpose of subpara c) of the Article, which is to ensure that the exception provided for in para. 2 (of Art. 15) does not apply to remuneration that could give rise to a deduction, ..., in computing the profits of a PE situated in the State in which the employment is exercised Whether the employer has, or has not, claimed a deduction is not necessarily conclusive. Proper test is whether any deduction otherwise available for that remuneration would be allocated to the permanent establishment.

Consider … A Canadian resident employed by a Canadian company is sent to India to work on an installation project which is expected to take approximately 26 months in total. The project starts on 1 October 2010. The individual is in India for a total of 7 months being the following periods: 1 Oct 2010 to 30 Nov 2010 – 61 days 10 Jan 2011 to 8 June 2011 – 149 days During that period he interrupts his work to spend one month of vacation in Canada fully paid by his employer. Is his entire salary taxable in India?

Stock Options – Employment benefit v. Capital Gain Timing Mismatches Source State may tax at any time Residence State forced to grant relief Connection between option and service: Facts & circumstances General guidance in the OECD Comm Art. 15 – benefit derived from option until exercised, sold or alienated Art. 13 – option exercised, subsequent gain

Art. 16 – Directors’ Fees “Directors fees and other similar payments” “...in his capacity as a member of the board of directors..” “.. may be taxed in the other State.” Comm. on Art.16 "fees and other similar payments" - includes benefits in kind received by a person in that person's capacity as a member of the board of directors Does not apply to remuneration received in respect of other functions Company must be a resident of the other Contracting State “Director” – can be a legal person

Thank you.

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