Electronic copy available at: http://ssrn.com/abstract=2809489
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
Electronic copy available at: http://ssrn.com/abstract=2809489 2 | P a g e
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 Ethio-China 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.
7The Ethio-UK double taxation convention entered into force on 21 February 2013 and became effective in Ethiopia
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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.
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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 short-term 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. 13 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
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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.
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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. 22 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
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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.
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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
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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, INTERNATIONALLAWYERSNETWORK, 2004. P. 3.
30 Id. A. Hirsch. P.3. 31 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.
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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.
37 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
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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 first-mentioned State for the primary purpose of teaching, giving lectures or conducting research at the invitation of any university, college, school or other similar non-profitable 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 first-mentioned 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.
40 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.
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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.
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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
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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 978-92-64-08948-8-© 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.
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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.
