OECD model: Substance over form

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: The tax treaty model of the Organisation of Economic Co-operation and Development (OECD) and the commentary of OECD on the model are followed by various countries including countries which are not members of the OECD. The Indian appellate authorities also rely on the OECD commentary for the purpose of interpretation. Before amending the commentary, the OECD generally invites comments from various interested parties and the comments are discussed in public consultation. The author was invited and participated in a recent public consultation on the proposed amendment to the commentary on Article 15 organised by the OECD in Paris.

This article summarises the proposed amendments.

In terms of Article 15(2), salaries earned by an employee resident of a contracting state (resident state) from exercise of employment in other contracting state (source state) is not subject to tax in the source tax provided three conditions are satisfied, viz. the presence of employee in the source state does not exceed 183 days, the remuneration is paid by or on behalf of an employer who is not a resident of the source state and the salaries are not borne by the permanent establishment which the employer has in the source state.

The existing commentary on Article 15(2) takes note of abuse of these conditions by adoption of the practice known as "international hiring-out of labour". As per this method an agency outside the source country is engaged as an employer. Although the formal employment contract is with an agency outside the source country the employee effectively serves an enterprise resident of the source state and such resident enterprise is an employer of the employees for all practical purposes. The existing commentary lays down various criterions to determine whether there is a genuine case of employment. The criterions include who bears the responsibility of the work carried out by the employees, who instructs the employee etc.

It is now proposed that whether the benefit of the article is available or not should be examined even in those cases wherein the arrangements are not for the purpose of avoidance of tax or wherein the transactions are not tax motivated. The proposed commentary gives two alternatives for the purpose of denying benefit of Article 15(2) wherein the benefit is unintended.