9 December 2008 Roundtable, 2008-0300941C6 - Sub 9(b) of Article V of the Canada-US Treaty

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. Will CRA provide specific examples of what it considers to be the "same or connected project" for purposes of subparagraph 9(b) of Article V of the Canada-US Treaty (the "Treaty")? 2. Would CRA define "third parties" for purposes of subparagraph 9(b) of Article V of the Treaty? Are related parties considered third parties? What constitutes an "enterprise" for purposes of subparagraph 9(b) of Article V of the Treaty?

Position: See below

TEI Conference

Question 3 A 1 - Implementation and Interpretation of the New Canada-U.S. Protocol - Article V Permanent Establishment (PE)

The 5th Protocol to the Canada-U.S. Income Tax Convention (hereafter "the Protocol") revises paragraph 9 of Article V to prescribe new rules clarifying when a non-resident cross-border service provider will be deemed to have a PE in the country where the services are performed.

Under new proposed subparagraph 9(b), where an enterprise's services are provided in a host State for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are either residents of the host country or who maintain a PE in the host State, the enterprise providing the services is considered to have a PE in the host State. In particular, proposed subparagraph 9(b) of Article V of the Treaty provides as follows:

"Subject to paragraph 3, where an enterprise of a Contracting State provides services in the other Contracting State, if that enterprise is found not to have a permanent establishment in that other State by virtue of the preceding paragraphs of this Article, that enterprise shall be deemed to provide those services through a permanent establishment in that other State if and only if:

(b) The services are provided in that other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected projects for customers who are either residents of that other State or who maintain a permanent establishment in that other State and the services are provided in respect of that permanent establishment."

We invite a discussion about the application of the new PE rules based on the following questions:

Paragraph 2 of Annex B to the Protocol (hereafter "the General Note") states that projects are considered "connected" if they constitute a coherent whole, commercially and geographically. Will CRA provide specific examples of what it considers to be the "same or connected project?"

Answer to Question 3 A 1:

What constitutes the "same or connected project" is a question of fact and therefore, must be determined on a case by case basis. However, the TE is instructive in determining the factors we must consider in making this determination. In particular, the TE states as follows:

"For purposes of determining whether the time threshold has been met, subparagraph 9(b) permits the aggregation of services that are provided with respect to connected projects. Paragraph 2 of the General Note provides that for purposes of subparagraph 9(b), projects shall be considered to be connected if they constitute a coherent whole, commercially and geographically. The determination of whether projects are connected should be determined from the point of view of the enterprise (not that of the customer), and will depend on the facts and circumstances of each case. In determining the existence of commercial coherence, factors that would be relevant include: 1) whether the projects would, in the absence of tax planning considerations, have been concluded pursuant to a single contract; 2) whether the nature of the work involved under different projects is the same; and 3) whether the same individuals are providing the services under the different projects. Whether the work provided is covered by one or multiple contracts may be relevant, but not determinative, in finding that projects are commercially coherent."

The TE has some examples from which we expect to obtain direction when we review factual situations. The Commentary to Article V of the OECD Model Tax Convention also discusses some examples of what constitutes a coherent whole commercially and geographically. In addition, the 2008 Commentary to the OECD Model Tax Convention discusses a services PE provision which is similar to proposed paragraph 9 of Article V of the Treaty and we expect to find the 2008 Commentary a useful tool in interpreting the new PE provision in the Protocol.

Examples:

We can draw from the following example described in paragraph 42.44 of the 2008 Commentary to Article V of the OECD Model Convention.

Example #3: Z Co, a resident of the State R, has outsourced to company OCO, which is a resident of State S, the technical support that it provides by telephone to its clients. OCO operates a call centre for a number of companies similar to Z Co. During the period of 1 January 00 to 31 December 00, the employees of OCO provide technical support to various clients of Z Co. Since the employees of OCO are not under the supervision, direction or control of Z Co, it cannot be considered, for the purposes of subparagraph (b), that Z Co is performing services in State S through these employees. Additionally, whilst the services provided by OCO's employees to the various clients of Z Co are similar, these are provided under different contracts concluded by Z Co with unrelated clients; these services cannot, therefore, be considered to be rendered for the same or connected projects."

The US Model Convention Commentary pertaining to the construction PE provision concludes that the construction of a housing development would also be considered a single project even if each house were constructed for a different purchaser. As well, several drilling rigs operated by a drilling contractor in the same sector of the continental shelf would normally be treated as a single project. We generally agree with these comments in the U.S. Model Commentary and consider them instructive in interpreting the services PE provisions.

Question 3 A 2: Implementation and Interpretation of the New Canada-U.S. Protocol - Article V Permanent Establishment (PE)

The Technical Explanation to the Protocol prepared by the U.S. Treasury Department (the "TE") states that the test in new subparagraph 9(b) "applies only to the provision of services, and only to services provided by the enterprise to third parties."

Question 3 A2 Part I: Would CRA define what a "third party" is for purposes of this provision?

Question 3 A2 Part II: Are related parties considered third parties?

Question 3 A2 Part III: What constitutes an "enterprise" for purposes of subparagraph 9(b) of Article V of the Treaty?

Answers to Question 3 A2:

Question 3 A2 Part I: It is our view that the term "third party" used in paragraph 9 of Article V of the Treaty should be interpreted to mean any person other than the person operating the enterprise in question.

Question 3 A2 Part II: A related person in reference to a particular person is considered a "third party" for purposes of paragraph 9 of Article V of the Treaty.

Question 3 A2 Part III: Our view is that the term "enterprise" refers, to a resident of a contracting state but only in reference to a particular line of business carried on by such resident. Therefore where a resident of a contracting state carries on two lines of business, that resident may have a permanent establishment in the other contracting state by reference to one of such lines of business but not the other.