OECD Model Convention: The Organisation for Economic Co-operation and Development introduced its Model Tax Convention in 1963, with regular updates since. OECD members are predominantly developed, capital-exporting nations — USA, UK, Germany, France, Japan, Canada. These countries want their multinational corporations to pay tax primarily in their home country (residence). So the OECD Model naturally favors residence-country taxation — reducing the withholding burden in source countries where these MNCs operate.

UN Model Convention: The United Nations published its Model Double Taxation Convention in 1980, specifically designed to address the concerns of developing nations. Countries like India, Brazil, China, and others are capital-importing — foreign companies come in, generate income, and repatriate profits. The UN Model gives source countries stronger taxing rights, ensuring developing nations can collect a fair share of tax on income generated within their borders.

1. Permanent Establishment (PE) — Article 5

PE is the threshold concept — if a foreign company has a PE in India, India can tax its business profits. Both models define PE differently, and the UN Model creates PE far more easily.

India-USA DTAA example: The India-US treaty follows a 9-month service PE threshold — clear UN Model influence. If a US company’s employee works in India for more than 9 months, a PE is created and India can tax the associated business profits.

2. Business Profits — Article 7

Force of Attraction explained: Under the UN Model, once a PE exists, the source country can tax not just the PE’s direct income but also similar transactions the foreign company conducts directly in that country without going through the PE. The OECD Model strictly limits taxation to profits attributable to the PE.

3. Dividends — Article 10

India-USA DTAA carries 15–25% dividend withholding — reflecting UN Model influence. Historically, India-Netherlands DTAA had lower rates due to OECD-influenced negotiation, though this has been revised in recent years.

4. Interest — Article 11

Most of India’s DTAAs carry 10–15% withholding on interest — a UN Model preference. Compare this with treaties between two OECD nations where interest withholding can be as low as 0–5%.

5. Royalties and Fees for Technical Services (FTS) — Article 12 / 12A

This is the most consequential difference for Indian businesses — directly relevant to Suresh’s Sadar Bazaar example at the beginning of this article.

Coming back to Suresh: the US company receives royalties — India-USA DTAA (UN-influenced) allows India to withhold 15%. A Netherlands company in a historically OECD-influenced treaty might have faced only 10%. That’s the direct commercial impact of model treaty differences.

Foreign Tax Credit (FTC) — How Indian Residents Can Claim Relief

6. Capital Gains — Article 13

India has consistently pushed for source-based capital gains taxation in all treaties. The Mauritius DTAA controversy is a classic example of the OECD Model being exploited — Mauritius residents paid zero capital gains tax in India under the old treaty structure. The 2016 amendment brought India’s approach closer to the UN Model for capital gains.

7. Other Income — Article 21

Different India DTAAs reflect different degrees of OECD vs UN Model influence:

• India-USA DTAA: Mix of OECD + UN — FTS clause included, higher withholding rates, broader PE definition
• India-UK DTAA: Older treaty — some UN Model features, FTS clause present
• India-Singapore DTAA: More OECD-influenced — lower rates, though amended significantly post-2016
• India-Mauritius DTAA: OECD-influenced capital gains — led to treaty shopping abuse — amended in 2016 to bring India’s taxing rights back
• India-Netherlands DTAA: OECD-influenced — historically lower withholding rates

How to Claim DTAA Benefits — TRC and Form 10F Guide

Through its BEPS (Base Erosion and Profit Shifting) project, the OECD developed the Multilateral Instrument (MLI) — a single mechanism to modify existing bilateral DTAAs and implement minimum anti-abuse standards:

• Principal Purpose Test (PPT): Denies treaty benefits if the principal purpose of a transaction was to obtain that benefit — effectively closing treaty shopping loopholes
• Tighter PE definitions: Closing artificial arrangements to avoid PE status
• Improved dispute resolution: Mandatory binding arbitration in some cases

India has signed the MLI. As bilateral notifications are completed, MLI provisions are automatically overlaid on India’s existing DTAAs — moving the overall framework toward a middle ground between OECD and UN positions.

Mistake 1: Assuming all DTAAs are the same
Fact: Every DTAA is unique — bilaterally negotiated. The Model Convention is only a starting template. Always verify actual rates and provisions from the specific treaty text, available on the CBDT website.

Mistake 2: Assuming a lower DTAA rate applies automatically
Fact: To claim a DTAA benefit, a Tax Residency Certificate (TRC) and Form 10F are mandatory. Without proper documentation, the DTAA benefit can be denied and domestic withholding rates apply.
DTAA Benefit Documentation — TRC and Form 10F Process

Mistake 3: Confusing FTS and Royalty payments
Fact: Royalty = payment for the use of intellectual property (software license, patents). FTS = payment for managerial, technical, or consultancy services. India taxes both under withholding provisions, but at potentially different rates. Misclassification leads to incorrect TDS deduction and potential notices.