When The Burden Shifts: Exceptions to the Residence State’s Obligation to Relieve Double Taxation

Under the OECD Model Convention, the residence State generally relieves double taxation. However, exceptions shift this obligation to the State hosting a permanent establishment (PE). First, if the residence State is also the source of income attributable to the PE, the PE State must credit the residence State's source tax. Second, in "triangular cases" where a PE earns income from a third State, the PE State must relieve the third-State tax by extending domestic unilateral relief to the PE via non-discrimination principles, or through specific treaty clauses. Practitioners must carefully account for these exceptions in their cross-border financial models.

I. THE GENERAL RULE

1. The architecture of double taxation relief under the OECD Model Convention rests on a simple division- the State of source taxes first, and the State of residence relieves. Articles 23A (exemption method) and 23B (credit method) apply only to the State of residence (State R). They oblige that State either to exempt income which the Convention permits the other Contracting State to tax, or to credit the tax paid in the other State against its own levy. Paragraph 8 of the Commentary on the said Articles makes this explicit by stating that the Articles “apply only to the State of residence and do not prescribe how the other Contracting State has to proceed.â€