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ARTICLE 14
INDEPENDENT PERSONAL SERVICES
(1) Income derived by a resident of a Contracting State in
respect of professional services or other activities of an independent character shall be
taxable only in that State except in the following. circumstances, when such income may
also be taxed in the other Contracting State:
(a) if he has a fixed base regularly available to him in the other Contracting State for
the purpose of performing his activities; in that case, only so much of the income as is
attributable to that fixed base may be taxed in that other Contracting State; or
(b) if his stay in the other Contracting State is for a period or periods amounting to or
exceeding in the aggregate 183 days in the fiscal year concerned; in that case, only so
much of the income as is derived from his activities performed in that other State may be
taxed in that other State; or
(c) if the remuneration for his activities in the other Contracting State is paid by a
resident of that Contracting State or is borne by a permanent establishment or a fixed
base situated in that Contracting State and exceeds in the fiscal year (the amount is to
be established through bilateral negotiations).
(2) The term "professional services" includes especially independent scientific,
literary, artistic, educational or teaching activities as well as the independent
activities of physicians, lawyers, engineers, architects, dentists and accountants.
81. Scope
This Article deals with income arising from the activities of a resident of the
Contracting State in another Contracting State, which are in the nature of independent
personal or professional services. Professional services are of two types:
Independent professional service - business
Dependent professional service - employment income
Income derived from the independent professional activity is dealt with in Article 14 of
the UN Model and dependent professional activity in Article 15.
However, dependent professional entertainers and sports persons are dealt with separately
in Article 17. This Article does not include industrial or commercial activities and also
professional services performed in employment. Professional services generally are taxed
as trading income. 'Trade' in its primary meaning, is the exchanging of goods for goods or
goods for money; in the secondary sense it is repeated activity in the nature of business
carried on with a profit motive, the activity being manual or mercantile, as distinguished
from liberal arts or learned professions or agriculture. The new trend is veering round trade in services, though services are
fundamentally different from other kinds of economic activity. Service is traded as goods,
for money; and, therefore, income arising from such trade is taxed on the same rule as the
income from the trade in goods. Otherwise also business does not necessarily mean trade or
manufacture only, it is being used as including within its scope professions, vocations
and callings for a fairly long time. The word ‘business’ is of wide import and
it means an activity carried on continuously and systematically by a person by the
application of his labour and skill with a view to earning income. Therefore, professional activities exercised continuously and
systematically with a profit motive generally is to be taxed as if business income. For
that purpose the concept of fixed base akin to the concept of permanent establishment
becomes necessary for the assessability of income from professional activities.
82. Independent personal services
Basically the right to tax income from professional activity is given to the State of
residence; but in case the presence of the taxpayer is prolonged or continued or he has
established a fixed base, the source country is entitled to levy tax. The OECD Model has
laid the criterion of the existence of a fixed base for the activity, analogous to the
existence of a fixed place of business for the taxability of income from business
activity. But the developing countries objected to such a criterion. According to them the
source of income should be the only criterion. The UN Model provided a compromise and
suggested that the source country would have the right to levy tax if the criteria as are
found in sub-paragraphs (a), (b) and (c) of paragraph (1) of Article 14 of the UN Model
are satisfied.
82.1 Similarity between Article 14 and Article 7 - Income
arising from material services are taxable as business profits under Article 7, which
could be taxed by the source country only if there is a permanent establishment. Such as
fixed place of business is an essential ingredient for the taxability of business income
by the source country, a fixed base for the professional or independent activity is an
important determinative factor for the income arising therefrom enabling the source
country to tax it. The continued presence of the activity for a prolonged period say for
183 days or more in a fiscal year is another criterion to enable the source country to tax
the income, similar to the continued existence of the activity relating to construction
and assembly for business profits.
So much income derived by a resident of a Contracting State from the professional or
independent activity as is attributable to the fixed base or to the activities performed
in the other State is taxable in the source State. The principle of attribution of income
to the fixed base or to the performance or exercise of the activity is applied in the same
manner as is provided in Article 7 for the attribution of the business income to the
permanent establishment. Articles 14 and 7 are based on the same principle. What is
‘permanent establishment' to the business or industrial activity, 'fixed base' is to
the independent and professional activities. The fixity of the place or base is the sine
qua non for the taxability of income by the source State, so much as is attributable to
that place or base in the case of business income, or professional or independent
activity. The term 'fixed base' has not been defined as the expression 'permanent
establishment' has been done. Such a definition is not perhaps necessary, because of its
closeness to the expression 'permanent establishment' which has been defined in Article 5.
That definition could provide guidelines to decide what the expression 'fixed base' may
connote. The closeness, however, does not suggest that the concept of 'permanent
establishment' is extended to the activities which are the subject-matter of Article 14.
This expression is exclusively reserved for commercial and industrial activities. The
parallelism between the two expressions enables one to draw meaning to the expression
'fixed base' by referring to the meaning assigned to 'permanent establishment'. Thus the
expression 'fixed base' is not substituted for 'permanent establishment'. A physician's
consulting room or an architect or lawyer's office as available to the physician or
architect or lawyer is the fixed base for him.
83. Source country's right to tax if there is fixed base or stay is
continued
The OECD Model Convention gives right to the residence State to levy tax on income
derived from the exercise of professional and other independent activities, and to the
source State only if the person concerned has a fixed base regularly available to him in
that State. Though services can neither be traded nor can be stored and they do not
physically cross a border the way goods do, their 'exportation' has become possible
because of recent technological advancement particularly in the areas of communication and
computerisation. The present emergence of services as a major force is the result of a
number of factors, such as the possibility of their timely and efficient production,
delivery and consumption on a world-wide scale.
The dividing line between the 'goods' and 'services' has now become tenuous. The
exportation of 'skills' is almost similar to exportation of tangible goods. Because of
such close resemblance and of the blurring of the distinction between goods and services,
the right to levy tax on income arising from the exercise of professional activities is
also to be given to the source State, on the analogy of business income under Article 7,
if there is something like 'permanent establishment' in the source State. The concept of
'fixed base' in relation to professional services is comparable to the concept of
'permanent establishment'. Under the OECD Model, professional income could be taxed by the
source State if there is a fixed base, and only to the extent as is attributable to that
fixed base. In the absence of such a fixed base, the source country is not authorised to
levy tax under the OECD Model.
Since the 'capital' investment in the production of income from professional services is
represented in the special or peculiar intellectual skill and educational qualification,
knowledge or experience, and the professed attainments of the person concerned, the
continued presence of that person in the host country results in the generation of income,
the source State has also a right to levy tax. The UN Model Convention strikes a
compromise between the conflicting claims of the residence and the source States. It
suggests three bases of taxation, viz:
- Maintenance of a fixed base in the host country.
- Presence of a person rendering the services in the host country for a minimum period of
time.
- Payment of remuneration exceeding a specified amount by the resident of the host State,
regardless of the stay in that State.
These criteria may be applied independently and separately or in combination before a host
State could impose tax. Such criteria are classified as in sub-paragraphs (a), (b) and (c)
of paragraph (1) of Article 14. The last criterion is not generally but rarely provided.
84. Computation of income and doctrine of attribution
What is subject to tax as income from the exercise of professional activity or similar
independent activity is the income attributable to the fixed base or derived from such
activity during the stay for the concerned period in that State (i.e, the net income
arrived at after deleting expenses from the gross income). If all the operations of a
professional activity are carried in Pakistan, the entire income accruing therefrom shall
be deemed to have accrued in Pakistan. If, however, all the operations are not so carried
on, the income from the exercise of professional service deemed to accrue in Pakistan
through or from 'professional connection' in Pakistan shall only be such income as is
reasonably attributable to that part of the activity carried on in Pakistan.
The doctrine of attribution is applicable if the person concerned
has a fixed base in Pakistan regularly available to him for the purpose of performing his
activities. Reasonable nexus between the professional activity and fixed base which has
led to the happening of event of accrual or arising of income, must have to be established
before the State where such fixed base is located could be entitled to levy tax on it. But
in case where the person's stay is the basis of taxability, income derived from the
activity is taxed by the State, i.e, when the income is obtained or received from exercise
of that activity in the concerned State. The activity in the State should be the effective
source of income, and not that it has contributed indirectly to the arising or its
accrual. The computation of income is to be made on the same rule as is applicable for
computation of trading or business income.
85. Professional services - Meaning of
Article 14 deals with what are commonly known as professional services such as those
relating to scientific, literary, artistic or teaching activities and with other
activities of independent character [such as activities of physicians, lawyers, engineers,
architects and accountants]. This does not include industrial and commercial activities,
and also professional services performed in employment. The term has not been defined
exhaustively. Some illustrative examples have been given to illustrate what this
expression could mean. These relate to typical liberal profession. The definition, as
given in paragraph (2) of Article 14, is inclusive.
The word profession involves the idea of an occupation requiring either purely
intellectual skill, or of manual skill controlled, as in painting and sculpture, or
surgery, by the intellectual skill of the operator, as distinguished from an occupation
which is substantially the production or sale or arrangements for the production or sale
of commodities. The line of demarcation may vary from time to time. The word
‘profession’ which was used to be confined to the three learned professions, the
Church, Medicine and Law has now a wider meaning. It
now also implies professed attainments, in special knowledge as distinguished from
mere skill; a practical dealing with affairs as distinguished from mere study or
investigation and an application of such knowledge to uses of others as a vocation, as
distinguished from its pursuit for its own purposes.
Thus, professional activity is an activity carried on by an individual by personal skill
and intelligence.
There is a fundamental distinction between an activity of a professional activity and an
activity of a commercial character and unless the profession carried on by a person also
partakes of the character of a commercial nature, he cannot be said to be engaged in a
commercial activity.
Thus the distinction between two kinds of services, viz., profession and material is
marked and perceptible. Material services are not services which depend wholly or largely
upon the contribution of professional knowledge, skill, dexterity for the production of a
result. Such services being given to individual by individual which are services no doubt,
but not material services. Material services involve an activity carried on through
cooperation between employers and employees to provide the community with the use of
something such as electric power, water, transport, telephones and the like. In providing
these services, there may be employment of a trained man and even professional man but the
emphasis is not on what these men do but upon the productivity of a service organised as
an industry and commercially valuable. Thus, the services of a professional man involving
benefit of individuals according to their needs such as of doctors, lawyers, solicitors,
etc., are easily distinguishable from an activity such as transpo distinguishable from an
activity of the character in which something is brought into existence quite apart from
the benefit of particular individuals. A
systematic activity organised by cooperation between the employer and the employee or
production of goods and services calculated to satisfy human wants and wishes is material
service because the form of the activity is functional. The decisive factor is the nature
of the activity with special emphasis on the employer and the employee relationship.
The material services are placed at par with industry, which means employment of 'skills',
'dexterity', 'diligence', 'systematic work' or 'labour' 'habitual employment' in the
productivity acts of manufacturing. The expression 'industry' ordinarily means the process
of manufacture or production. Nowadays the expression 'business' is taken to be in the
wider context and implies activity carried on continuously and systematically by a person
by the application of his labour and skill with a view to earning an income. In view of this, therefore, the services, relating to banking insurance,
shipping, consultancy, manpower, telecommunication, data processing would mean that the
person who indulges in such activities has been carrying on trade and business and the
result obtained may be on account of employment of intellectual skill coupled with manual
skill with the association of labour and employees. The result obtained because of the
application of such skill may be not tangible as in the case of manufacturing or
production where goods are produced with a different identity from the raw materials. Thus
payments made to an enterprise in respect of furnishing by that enterprise of the
activities of the employees or other personnel are subject to Article 7. Though under
certain circumstances a professional activity is considered to be a business activity as
the word ‘business’ is of an ambiguous import and it takes its content from its
context; business normally does include the professional activity.
The Model Convention refers two kinds of activities, viz, professional services and other
activities of independent character. Professional activities are those in which professed
knowledge of some department of science or learning is used by its partial application to
the affairs of others, either in advising, guiding or teaching them or in servicing their
interests or welfare in the practice of an art founded on it. It implies professed
attainments in special knowledge as distinguished from mere skill. A practical dealing
with affairs as distinguished from mere study or investigation; and an application of such
knowledge to uses for others as a vocation, as distinguished from its pursuit for its own
purposes. The meaning of professional service has been extended by paragraph (2) of
Article 14 as to include two types of independent activities, namely.
* Scientific, literary, artistic, educational or teaching activities
* Independent activities of physicians, lawyers, engineers, architects, dentists and
accountants
There may be many activities other than those aforementioned which could be income
generating, undertaken independently. These are also covered by Article 14, under the
residuary expression 'other activities' of independent character. The word 'other' may
mean that activities need not be ejusdem generis with the activities mentioned earlier but
they must be analogous. The character of the activities is important. These should be of
independent in nature. The essence of 'independent character' is that generation of income
is dependent mainly upon the personal qualification of the person by whom the activity is
undertaken and. that can only be the individual, that is, the activity carried on by an
individual by his personal skill and intelligence. The capital he brings in this activity
is his special or peculiar intellectual and educational equipment, for the production of
income. The activities of professional entertainers, sports persons, film, radio, T.V.
artists, musicians and such other activities are analogous to the aforementioned
professional activities. But for such activities there is a separate Article (Article 17)
dealing with income arising from their exercise. There may be many other activities,
besides these, which could be encompassed within the expression 'other activities of an
independent character'.
Some of the Pakistani agreements use the
expression 'other independent activities of a similar character'. The word 'similar'
refers to akinness with the character of the activities which the 'professional services'
bears, though it is not synonymous with 'same'. An activity could be similar without its
being a slavish copy of what it is similar. The expression 'similar' does not mean
identical but it means corresponding to or resembling to in many respects; somewhat like,
or having a general likeness. If contents of the
activities are almost the same these could be said similar. Its use gives a wide amplitude
as to bring within the purview of Article 14, activities of independent character which
are analogous to professional services.
