The Organisation for Economic Co-operation and Development (OECD) has released the latest updates to the OECD Model Tax Convention on Income and Capital. This update includes detailed guidance on taxing cross-border remote work as well as new provisions related to natural resource extraction activities.
Originally published in 1963, the Model Convention serves as a reference for OECD member countries when drafting bilateral tax treaties. Its primary goal is to minimize double taxation, which can otherwise impede cross-border trade and investment.
Evolution of the OECD Model Tax Convention and the Role of the MLI
Since its inception, the OECD Model Tax Convention has been continuously refined. One of the most notable developments is the Multilateral Instrument (MLI), designed to curb base erosion and profit shifting. The MLI allows countries to amend tax treaties without the need for lengthy bilateral renegotiations.
Today, the MLI has been adopted in more than 100 tax jurisdictions, giving countries greater flexibility to update international tax agreements in response to global economic developments.
Two Main Focus Areas in the 2025 Update
Taxation Rights over Cross-Border Remote Work
The OECD has clarified provisions regarding remote work performed by non-resident taxpayers. According to commentary in Article 5, a home or location used for work beyond preparatory activities can be classified as a permanent establishment (PE).
Taxation of Natural Resource Extraction Activities
The OECD offers two alternative frameworks for source countries in taxing offshore natural resource extraction:
- Retaining the existing provisions that classify such activities as relevant activities that may create a PE; or
- Explicitly stating that offshore extraction activities constitute a PE.
This policy aims to ensure that source countries secure fairer taxation rights, especially since offshore extraction often does not establish a PE due to the mobile nature of the equipment involved.
Under Article 7 of the OECD Tax Treaty Model, source countries can only tax non-resident entities if a PE exists within their territory. This update strengthens the fiscal position of developing countries engaged in natural resource sectors.
Strategic Impact for Developing Countries
The 2025 OECD Tax Treaty Model update represents a significant advancement in reinforcing the taxation rights of developing countries, particularly in the context of increasing digitalization of work and the growing scale of cross-border extractive industries.
To help illustrate the practical implications of the 2025 update, below are some of the most frequently asked questions about the concept of PE, taxing rights, and their application in international tax practice.
Can a private home be considered a PE?
Yes. Under the 2025 update, a home used for non-preparatory work activities can qualify as a permanent establishment.
Why are offshore extraction activities a concern for the OECD?
These activities often do not constitute PE, leading to source countries losing out on taxation rights that they should rightfully have.
What are the benefits of the MLI in tax treaties?
The MLI facilitates quicker, more flexible adjustments to tax agreements between countries, thereby avoiding the complexities of bilateral renegotiations.
