General Rules of Taxation. (1) A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention. For this purpose, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income.
General Rules of Taxation. Paragraph 1 states the general rule that a Contracting State may tax a resident of the other Contracting State only with respect to income derived from sources in the first-mentioned State. The source rules to be used for this purpose are contained in Article 7 (Source of Income). Paragraph 2 States the general rule that the Convention is intended to benefit taxpayers and not to make them worse off than they would be in its absence. Thus, a taxpayer may always elect to apply the rules of domestic law or of another agreement between the Contracting States in lieu of the treaty rules. A taxpayer may not, however, make inconsistent choices between the rules of the Code and the rules of the Convention. For example, a taxpayer may not choose to apply the Convention's permanent establishment rules to one U.S. business operation and the Code trade or business rules to another to vary the treatment of profitable and loss operations, but it could apply the trade or business rules to all U.S. business operations and claim the reduced withholding rats under the Convention on U.S. dividends not effectively connected with a U.S. trade or business. Paragraph 3 provides a "saving clause" which excepts the residents or citizens of a Contracting State from treaty benefits conferred by that States. Each State also preserves its right to tax certain former citizens under domestic law. (The latter provision, which is currently applicable only to the United States, preserves the taxing rules of Internal Revenue Code section 877.) Residence is defined under Article 4 (Fiscal Residence) for all purposes of the Convention, including this provision. Thus, a U.S. resident alien, who under the Convention is determined to be a resident of Indonesia, is a resident of Indonesia for all purposes of the Convention, including the limitations of tax at source provided, for example, in Article 11 (Dividends). A U.S. citizen resident in Indonesia under the Convention generally remains subject to U.S. tax on his worldwide income in accordance with the rules of the Internal Revenue Code. Paragraph 4 provides certain exceptions to the saving clause of paragraph 3. U.S. residents, as determined under Article 4 (Fiscal Residence), and U.S. citizens are entitled to certain treaty benefits provided by the United States. Those benefits are the right to correlative adjustments of tax provided under paragraph 3 of Article 10 (Related Persons), the exemption from tax at source of alimony and child supp...
