MODEL CONVENTIONS ON DIRECT TAXATION OECD Model Convention After world war 1 first time need was felt

to harmonise the rules relating to taxation law by the various countries. It was the year 1921 when league of nations started preparing 1 model convention on avoidance of double taxation this model model which is popularly known as the Mexico Model and was completed by 1943. By that time there was WW 2. After WW 2 the United Nations initiated the same work on model tax conventions which was completed only in the year 1946 and was popularly known as London Model Convention. The task was further researched upon by the Organisation for European Economic Community (OEEC) and its successor OECD. In 1963 the OECD gave one draft model convention which is known as Draft Double Taxation Convention On Income And Capital (DDTCIC). In 1977 a model convention was formulated by the OECD which had its own commentary again given by OECD. In 1991 the OECD started a regular updation of the model tax treaty after 1991 the Non-OECD countries are also allowed to give inputs for updation of the model convention given by the OECD. UN Model Convention In 1980 a model convention was published by the United Nations Economic and Social Council. In 2000 this was reviewed and updated because The initial model convention was based on OECDs model treaty which laid more stress on residence based taxation, due to which there was a flow of funds from developing countries to the developed countries. As most of the goods and services were supplied by the developed countries to the developing countries. They wanted to review the principle behind taxation of passive incomes. To review the time for creation of permanent establishment. To review the rules relating to creation of permanent establishment in case of service enterprises. How to attribute profits to a permanent establishment.

Other Model Conventions Andean Model It is a model convention which is followed by the countries of Bolivia, Ecuador, Colombia, Peru and Venezuela. USA Model Netherlands Model Models of various regional models such as SAARC.

Out of all the above-mentioned model conventions, Indian treaties are either based on UN Model or OECD model. Contents of OECD and UN Model Both these model treaties have similar contents with slight variation. As far as assistance in tax collection is concerned which is found in Art. 27 of OECD model, the same is missing in UN Model. Chapter 1 elates to the scope of the convention which enumerates the taxes covered by such convention and the persons covered. Chapter 2 relates to definitions in general and that of residence and of permanent establishment in particular. Art. 3 general Definitions, Art. 4 residence definitions, Art. 5 permanent establishment Chapter 3 relates to taxation of income. This chapter contains provisions relating to the rules to decide the taxation on income from immovable property, employment, independent personal services, directors fee, income earned by artists, sportspersons, royalty, dividend, interest, capital gains etc. Chapter 4 taxation of capital Chapter 5 rule for elimination of double taxation. 2 main methods Credit method (Capital export neutrality) Exemption method (Capital import Neutrality)

Chapter 6 relates to other provisions like mutual exchange of information, assistance in tax collection, mutual agreement procedure, diplomatic relations and non-discrimination clause. Chapter 7 deals with the final provisions relating to date do enforcement and termination of tax treaty.

CROSS BORDER CONSUMPTION TAX ON DIGITAL SUPPLIES Indirect taxes are not the term used by the international community rather it uses the term Consumption Tax and it includes VAT and Service Tax. When there is a physical movement of goods between country A and B then VAT, excise, custom are applicable. Generally Capital Import Neutrality is followed. Also in Services Capital Import Neutrality is followed. Digital Supplies Sale over the internet platform. There is no custom frontier.

Need For International Tax Agreements In Indirect Taxes Indirect taxes are popularly known as Consumption Tax globally, because such taxes are ultimately paid by the consumer. It includes VAT, Custom, Central excise and Service tax. As far as physical movement of goods and services is concerned we have specific custom frontiers to decide the point of taxation. There is no problem of double taxation in physical movement because usually the exporting country itself forgoes its claim to tax and the importing country levies the indirect tax at the point of sale. 1. The problem of double taxation arises only in case of indirect taxes on Digital Supplies, because the Digital Supplies are moving on internet platform where there is no custom frontier. 2. There is a problem of classification with relation to digital supplies in case of indirect taxes. Different countries like Canada, Australia, India have unrealistically covered digital supplies in different heads. There is no uniform classification for digital supplies under a specific head. So this may result into double taxation or non-taxation of digital supplies in different countries, i.e. why we need harmonization. 3. The rate of taxation also differs because the digital supply is covered under different heads. Uniformity is also required in rate of taxation. Parameters Of Harmonizing Tax Principles In Relation To Taxability Of Digital Supplies 1. Neutrality 2. Legal efficiency relates to administrative co-operation and administrative competence. 3. Certainty and simplicity 4. Flexibility because this is a new regime and it will develop further in the near future.