The Collection of Income Tax on Business Profits under Article 7 of the Double Taxation Convention: A Case Study of NATWEST I

Abstract

According to the Double Taxation Agreement, if a permanent establishment is located in a source state, the source state reserves the right to tax profits earned through that permanent establishment. The following issue is how the Business Profits should be treated under Article 7 of the Double Taxation Agreement. A history of the Business Profit can be traced back as same as the permanent establishment definition, in addition, taxpayers and tax authorities argue frequently over business profits issue. This article refers to a dispute over an interest paid between branch and intra-corporate on whether it should be treated, according to Business Profits under the Double Taxation Agreement, as a separate entity or not. A critical argument is related to a principle found in Article 7 paragraph 2 which states that “…there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and independent enterprise…” The US Court explains the issue in accordance with the OECD Model and concludes that US domestic law cannot be contrary to or inconsistent with the principles of the Double Taxation Agreement signed with the contracting state. This case has become a significant case study on the Business Profits article until now. However, there are no Revenue Department guidelines or rulings in Thailand regarding “separate entity” or any guidelines for foreign enterprise carrying on business through a permanent establishment and liable under the Business Profits clause under the Double Taxation Agreement. Thus, the study of international tax cases will strengthen the enforcement of the Double Taxation Agreement in addition to domestic law.