The AI Legalese Decoder: Simplifying the Canada-Japan Tax Treaty Query for Effective Cross-Border Transactions
- October 12, 2023
- Posted by: legaleseblogger
- Category: Related News
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Article 15 of the tax treaty states that if a resident of one Contracting State earns salaries, wages, or similar remuneration through employment in that state, it will only be taxable in that state unless the employment is exercised in the other Contracting State. In the latter case, the remuneration derived from that employment may be taxed in the other Contracting State.
However, there are exceptions to this rule. According to paragraph 1, if a resident of one Contracting State earns remuneration through employment exercised in the other Contracting State, it will only be taxable in the first-mentioned Contracting State if the following conditions are met:
a) The recipient is present in the other Contracting State for a period or periods not exceeding a total of 183 days in the respective calendar year.
b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the other Contracting State.
c) The remuneration is not borne by a permanent establishment or a fixed base that the employer has in the other Contracting State.
Doubling the length and including how AI Legalese Decoder can help:
The aforementioned clause seems to suggest that if an individual earns income while working remotely, it will not be subject to taxation in Japan if the employer does not have a Permanent Establishment (PE) in Japan and if the individual spends less than a total of 183 days in Japan. However, when consulted with an accountant who has knowledge about tax treaties, it was indicated that this provision is typically applicable to short-term business travelers. Nonetheless, it is worth noting that the clause explicitly mentions the 183-day threshold, which raises questions about whether this limitation is too restrictive for individuals who work remotely for an extended period.
In this situation, the AI Legalese Decoder can be a beneficial tool. With its advanced artificial intelligence capabilities, the AI Legalese Decoder can accurately interpret and understand complex legal language. By utilizing this solution, individuals can easily navigate through intricate tax treaties and gain a comprehensive understanding of the specific clauses and their implications. The AI Legalese Decoder can help clarify the definition of a “fixed base” and provide insight into whether an apartment rented by a family member for personal use would be considered a “fixed base” for the employer, thereby assisting individuals in making informed decisions regarding their tax obligations.
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****** just grabbed a
> income earned while working remotely is NOT taxed in Japan if the employer does not have a PE in Japan and the employee is in Japan for less than 183 days
Yes, that’s right, assuming you mean income earned while working in Japan.
> he indicated that it only applies to short term business traveller
That is the typical scenario. The principles behind the 183-day exception are discussed in detail starting on page 877 of the [OECD’s Commentary on the Model Tax Treaty](https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-2017-full-version_g2g972ee-en#page877), which is always a good resource for understanding generic tax treaty clauses like this one.
Basically, the exception is intended to complement the rule in Article 7 of the model treaty (corresponding to Article 7 of the Japan-Canada treaty) regarding businesses only being taxed to the extent they have a “permanent establishment”. So the proper approach, when interpreting the 183-day rule, is to ask whether the relevant employer has a PE in Japan. If the employer doesn’t have a PE, then their employee can benefit from the 183-day exception.
> I guess it comes to what a ‘fixed base’ is and whether an apartment rented by a family member for personal use counts as a ‘fixed base’ for the employer.
“Fixed base” is a concept that only applies to sole proprietors performing “independent personal services” (see Article 14 of the Canada-Japan treaty). The classic examples of people who fall into this category are licensed professionals working alone (i.e., not as employees), such as lawyers, doctors, architects, etc. However, the concept of a “fixed base” is antiquated, and Article 14’s presence in the Japan-Canada treaty signifies that the treaty is in need of updating. Modern tax treaties have abandoned the concept.
During the late 20th century there was a prominent theory that the concept of a PE didn’t apply to a specific kind of sole proprietor (people performing “independent personal services”), possibly because such people can often operate without dedicated business premises. Thus the taxation of such businesses was governed by the concept of a “fixed base” instead. However, that distinction was put to bed at the turn of the century by [a comprehensive OECD analysis](https://www.oecd-ilibrary.org/taxation/no-07-issues-related-to-article-14-of-the-oecd-model-tax-convention_9789264181236-en) of Article 14. The conclusion was that there is no meaningful difference between the concept of a “fixed base” and a PE, and that the taxation of all sole proprietors could be handled by Article 7 (business profits).
In your case, unless your employer is a sole proprietor performing independent personal services, you can ignore the term “fixed base” with respect to the 183-day exception. All you need to think about is whether your employer has a PE.
Disclaimer: I’m not a lawyer nor do I know the specific terminology, so this is just based on an attempt at reading comprehension.
Here’s my read of the part with the special conditions, assuming Japanese tax residence but you can switch if you need (as long as it’s done consistently):
> Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State, if:
If you are a resident of Japan (the first mentioned contracting state) and have performed work in Canada, Japan has the sole right to tax you if:
> a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
a) you are staying in Canada for less than 183 days in the concerned calendar year,
> b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State; and
b) your compensation is paid by or on behalf of an employer that is not resident of Canada, and
> c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State.
c) the compensation is not paid by a PE of the employer in Canada.
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So, generally (the first part which I didn’t quote) if you are a resident of Japan and work in Canada for a Canadian company for some time, you can be taxed on the derived income only there.
However, if you stay in Canada for less than 183 days, you are neither paid by a Canadian employer nor a PE of your employer in Canada, Japan retains taxation rights.
I believe this is to cover the case where you go on business trips to Canada for your (most likely but doesn’t have to be) Japanese employer without a PE in Canada.
Note that someone doing a bunch of business trips could possibly exceed the half-year limit.
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I’m not super clear on what your specific situation is that you want clarity on. What you mean by doing remote work isn’t clear, nor which parties are involved. More specifics can help folks to either find support for or against a given interpretation of the treaty text.
But let’s put that statement into perspective:
> This clause seems to say that income earned while working remotely is NOT taxed in Japan if the employer does not have a PE in Japan and the employee is in Japan for less than 183 days.
If you are a (tax) resident of Canada, come to Japan and work here for less than 183 in a given calendar year etc. (PE stuff), Japan cannot tax you, only Canada.
If you are (tax) resident of Japan, come to Canada and work there for less than 183 in a given calendar year etc. (PE stuff), Canada cannot tax you, only Japan.
It goes without saying that if you are not a tax resident of Canada or Japan and performing work in the other country all this (likely the whole treaty) doesn’t apply to you. Other laws / treaties likely do apply though.
That’s not any easy clause to read if you’re not a lawyer (and I’m not; nor an accountant, talk to one who understands international tax).
But basically, yes if you’re there less than 183 days in a tax year, it suspends the right of the state you’re exercising the employment in (Japan in this case), from taxing you on the grounds of income *source*. It doesn’t however affect the case where you’re tax *resident* in Japan. If you’re living there (“have your living base in Japan”, aka “domicile”), you’re taxed regardless.
Permanent establishment is basically voodoo, but you just being there can’t create permanent establishment by itself — otherwise the whole clause is pointless. There’s other criteria, such as you executing sales for them etc.