n Stellenbosch Law Review = Stellenbosch Regstydskrif - An analysis of what constitutes royalty income for treaty purposes : a survey of the origin and evolution of the OECD Model Tax Convention's Royalty Provision

Volume 24, Issue 1
  • ISSN : 1016-4359
  • E-ISSN: 1996-2193



One of the primary reasons for the occurrence of double taxation on cross-border transactions is the fact that all countries do not tax income in the same manner. Double taxation has led to a proliferation of agreements between States to prevent or reduce juridical double tax as an inhibiting factor to economic activity.

The ever-increasing importance of intangible assets, and the creation of value through their development and use, was highlighted by an OECD report in 2007. Uncertainty often exists regarding what constitutes a royalty payment.
The objective of the article is to elucidate the use of the term "royalty" and analyse its origin and development throughout the various versions of the OECD Model Tax Conventions ("MTC"s) and earlier versions prior to the establishment of the OECD. South African and international case law is briefly considered, while the contents of the various OECD MTCs are thoroughly scrutinised to determine whether there has been significant changes in the definition and treatment of royalty income by MTCs. It has been established that the modern definition of royalties originated from the 1928 League of Nations Draft Models ("Geneva Model") and evolved throughout successive MTCs, with the first issued by the OECD in 1961 and the latest in 2010.
The article concludes that there has been no significant change to the definition of royalties and that the Commentaries to the OECD MTCs have been greatly expanded upon, in order to provide more certainty regarding the use of the term.

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