ARTICLE 8. BUSINESS PROFITS

This Article sets forth the typical treaty rule that industrial or commercial profits of a resident of one State are taxable in the other State only if the resident has a permanent establishment in that other State. Where there is a permanent establishment only the industrial or commercial profits attributable to the permanent establishment can be taxed by that other State.

This Article represents an acceptance by Trinidad and Tobago of the principle that investment income should be taxed separately from industrial and com­ mercial profits where appropriate. Absent the provision, Trinidad and Tobago would tax all income directly or indirectly accrued In or derived from Trinidad and Tobago, whether or not effectively connected with a permanent establish­ ment, at the regular rates.

Under most of the United States Conventions negotiated prior to the new French Treaty, industrial or commercial profits are not taxed in the absence of a permanent establishment. However, once there is a permanent establishment these conventions, and the old French Convention, provide that the provisions

reducing the tax rates on interest and dividends and exempting royalties are not applicable. This rule is known as the "force of httraction" principle and is

replaced in the proposed Convention, as in our new treaty with France, with the enrectively connected concept. Under the new approach, only that interest, divi­ dends and royalties which are effectively connected with the permanent estab­ lishment are taxable as part of the industrial or commercial profits and only such income does not benefit from the reduced rate or exemption.

In determining the proper attribution of industrial or commercial profits under the proposed Treaty, the permanent establishment is generally to be treated as an independent entity and considered as realizing the profits which would be realized if the permanent establishment dealt with the resident of which it is a permanent establishment on an arm's length basis. Expenses, wherever incurred, which are reasonably connected with profits attributable to the permanent establishment,

including executive and general administrative expenses, will be allowed as de­ ductions by the State in which the permanent establishment is located in com­ puting the tax due to such State. However, it is not necessary to allow a profit to the head office for ancillary services furnished to the permanent establishment

as long as the permanent establishment is allowed to deduct the allocable costs incurred by the head office.

The mere purchase of goods or merchandise in a State by the permanent estab­ lishment, or by the resident of which it is a permanent establishment, for the account of such resident will not cause attribution of profits to such permanent establishment.

The term "industrial or commercial profits" means income derived from the active conduct of a trade or business. For example, it includes profits from manu­ facturing, mercantile, agricultural, fishing, and transportation activities. How­

ever, the term also includes Investment income but only if the right or property giving rise to the income is effectively connected to a permanent establishment.

Income received by an individual as compensation for personal services (either as an employee or in an independent capacity) or insuraence premiums, are not included within the definition of industrial or commercial profits. Further, rentals from motion picture films or films or tapes for radio or television broadcasting

are not included within the definition of the term industrial or commercial profits under the proposed Convention.

This Article is substantially similar to the business profits article of the OECD Model Convention except that the Model Convention does not contain a definition of industrial or commercial profits.