Article 6 provides the rules for the taxation by a

Contracting State of the business profits of a resident of the other Contracting State. Currently, the rate of tax on profits in Kazakhstan is 30 percent, and the rate on corporate profits in the United States is 35 percent.

Paragraph 1 states the general rule that business profits (as defined in paragraph 6) of a resident of one Contracting State may not be taxed by the other Contracting State unless the resident carries on or has carried on business in the other Contracting State through a permanent establishment (as defined in Article 5 (Permanent Establishment)) situated in that other State. Where that condition is met, the other State may tax the business profits attributable to the assets or activity of the permanent establishment. The State in which the permanent establishment is situated may also tax the business profits derived from the sales in that State of goods or merchandise of the same kind as those sold through the permanent establishment and the business profits from the resident's other business activities in that State if the activities are the same kind as those performed through the permanent establishment. The latter rule derives from the U.N. Model and is similar to provisions that appear in the United States treaties with Mexico, Indonesia, and India. It amounts to a partial "force of attraction," by attributing to the permanent establishment sales of goods or performance of services by the home office if the goods or services are the same kind as those sold or performed, respectively, through the permanent establishment. This "force of attraction" attributes profits to the permanent establishment whether or not the assets and activities of the permanent establishment were involved in the sale or performance. Such a "force of attraction" rule is often requested by developing countries to prevent avoidance of their tax at source, although it is not the preferred U.S. position.

Paragraph 1 incorporates the rule of section 864 (c)(6) of

the Code with respect to deferred payments. Thus, if income was attributable to a permanent establishment or fixed base when earned, it is taxable by the State where the permanent establishment or fixed base was located, even if receipt of the income is deferred until the permanent establishment or fixed base has ceased to exist. This same approach is reflected in the provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 14 (Independent Personal Services) dealing with amounts attributable to a permanent establishment or fixed base.

Paragraph 2 provides that the Contracting States will

attribute to a permanent establishment the profits that it would be expected to make if it were an independent entity, engaged in the same or similar activities under the same or similar conditions. Profits so attributable to a permanent establishment are taxable in the State where the permanent establishment is situated or was situated at the time the profits were made.

The profits attributable to a permanent establishment may be

from sources within or without a Contracting State. Thus, certain items of foreign source income described in section 864(c)(4)(B) or (C) of the Code may be attributed to a U.S. permanent establishment of a resident of Kazakhstan and be subject to tax in the United States. The concept of "attributable to" in the Convention is narrower than the concept of "effectively connected" in section 864(c) of the Code. The limited "force of attraction" rule in Code section 864(c)(3), therefore, is not applicable under the Convention to the extent it is broader than the rule of subparagraphs b) and c) of paragraph 1 of this Article.

Paragraph 3 provides that the tax base must be reduced by deductions for expenses incurred for the purposes of the permanent establishment. These include expenses directly incurred by the permanent establishment and a reasonable allocation of expenses, as long as the expenses were incurred on behalf of the resident's business enterprise as a whole or a part of it that includes the permanent establishment and as long as the expenses relate to the business activities of the resident. Allocable expenses would include executive and general administrative expenses, research and development expenses, interest, and charges for management, consultancy, or technical assistance, wherever incurred and without regard to whether they are actually reimbursed by the permanent establishment. The permanent establishment must be able to document such expenses, if so requested by the tax authorities of the State in which it is located.

To ensure continuous and consistent tax treatment, paragraph 3 also requires that the method for calculating the profits and losses of a permanent establishment be the same from year to year unless there is a good and sufficient reason to change the method. A taxpayer may not vary the method from year to year simply because a different method achieves a more favorable tax result.

Paragraph 3 also clarifies, as does the U.N. Model and the commentary to the OECD Model, that a permanent establishment may not take deductions for royalties, fees, commissions, or service fees paid to its home office or any other office of the resident. There was no intention, however, to deny deductions for such payments when they are made as reimbursement of actual expenses incurred by the home office or another office. The point of this provision is to clarify that, because the home office and the permanent establishment are parts of a single entity, there should be no profit element in intra-company transfers.

Point 8 b) of the Protocol ensures that Kazakhstan will permit a full deduction of interest expense in computing the profits of a U.S. resident's permanent establishment in . Kazakhstan. Kazakhstan is not, however, required to allow a deduction for interest in excess of any limitation specified in Kazakh law, as long as that limit permits deduction of an arm's length interest rate, taking into account a reasonable risk premium.

Paragraph 4 provides that no business profits will be attributed to a permanent establishment because it purchases goods or merchandise for the enterprise of which it is a permanent establishment. This rule refers to a permanent establishment that performs more than one function for the enterprise, including purchasing. For example, the permanent establishment may purchase raw materials for the enterprise's manufacturing operation and may sell the manufactured output. While business profits may be attributable to the permanent establishment with respect to its sales activities, no profits are attributable with respect to its purchasing activities. If the sole activity were the purchasing of goods or merchandise for the enterprise, the issue of the attribution of income would not arise, because under subparagraph 4(d) of Article 5 (Permanent Establishment) there would be no permanent establishment.

Paragraph 5 of this Article applies where the information available either from the taxpayer or through competent authority is insufficient to calculate business profits under the other provisions of the Article. In particular, paragraph 5 applies where there is insufficient information concerning expenses. In that event, either Contracting State may apply its internal laws to determine the profits of the permanent establishment. These internal laws may make assumptions about expenses and thus may

estimate profits, rather than compute them with complete certainty.

The Memorandum of Understanding between the Contracting States makes clear that paragraph 5, and thus any internal law of either country that presumes expenses, may not be applied if books and records audited by a certified public accountant are available. In that case, the audited books and records will be considered adequate for calculating actual profits, and it will not be necessary— or permissible— to resort to presumptions. In addition, paragraph 5 itself provides that information will be considered readily obtainable by the competent authority if the taxpayer provides the information within 91 days of that competent authority's written request. This provision effectively establishes the procedure to be followed by a competent authority before it may invoke this paragraph to apply any internal law, and it ensures that the taxpayer is consulted and given an opportunity to cooperate.

Paragraph 6 illustrates the meaning of the term "business profits," as it is used in this Article. The term includes income from manufacturing, mercantile, transportation, communication, or extractive activities (including the operation of a mine), as well as income from the furnishing of the services of others. It does not include income from the rental of tangible personal property or income from the rental or licensing of cinematographic films or films or tapes used for radio or television broadcasting. Compensation received by an individual for his or her personal services, whether the individual is self­ employed or an employee, is not within the scope of "business profits." Rather, that compensation is covered by Article 14 (Independent Personal Services) if the individual is self­ employed or by Article 15 (Income from Employment) if the individual is an employee.

Paragraph 7 coordinates the provisions of this Article and other provisions of the Convention. Under paragraph 7, where business profits include items of income that are dealt with separately under other articles of the Convention, the provisions of those articles will, except where they specifically provide to the contrary, take precedence over the provisions of Article 6. Thus, for example, the taxation of interest will be determined by the rules of Article 11 (Interest) except where, as provided in paragraph 4 of Article ll, the interest is attributable to a permanent establishment, in which case the provisions of Article 6 will apply.