Article 5

Impact of COVID travel restrictions on day count tests for PE status

The Guidance on international income tax issues raised by the COVID-19 crisis, which speaks to relief for the impact of COVID travel restrictions regarding whether a non-resident entity will have a permanent establishment under the 183-day test in the services permanent establishment provision, could also provide relief under similar provisions such as the 12-month period referenced in the building site and installation or drilling rig provisions.

Finding of PE in Formula One (p. 125)

The Supreme Court of India ("Supreme Court") decided in 2017 [in Formula One] that Formula One World Championship Limited ("FOWC"), a U.K. corporation, had a permanent establishment in India as a result of its role in the 2011-2013 Indian Grand Prix races….

Formula One contravenes the requirement for separate-entity determination of a PE (p. 126)

Philip Morris … held that an Italian corporation can be considered the permanent establishment of multiple non-resident members of the same corporate group. … [In response] paragraph 41.1 of The 20I0 Model Treaty Commentary on Article 5(7) (now paragraph 117 of the 2017 Model Treaty Commentary) states that:

The determination of the existence of a permanent establishment under the rules of paragraph 1 or 5 of the Article must, however, be done separately for each company of the group.

The Formula One decision directly contravenes the revised commentary….

The Court's failure to respect the corporate separateness of FOWC from its affiliates, its focus on control over the race, and the insufficient details provided in the decision regarding the relative functions of the parties, makes it impossible to determine whether it was indeed FOWC's business which was conducted at the Indian facilities or not.

Control exercised analogous to that of franchisor (pp. 127-128)

[T]he high degree of control provided for in its contract with Jaypee should be acceptable given FOWC's reasonable concern for preserving a quality product … . [T]he venue was not in fact used to carry on FOWC's business, any more than it can be said that a franchisor runs every franchise location by virtue of its franchise agreements, which commonly provide for a high degree of control and common specifications.

Inappropriate reliance on Fowler (p. 128)

Fowler has never been followed in Canada … . Toronto Blue Jays…dealt with the status of facilities used by the Blue Jays, a Toronto professional baseball team, in "away games"…The number of such games and days occupied far exceeds that of FOWC in India. The Court of Appeal nevertheless concluded that the team did not have the required element of ownership, management and authority over the establishments and concluded that the team's control over the venues was so transitory that it could not be considered a fixed place of business. …

The application of the exception for short-term recurring activities was clarified in the revised 2017 Model Treaty Commentary, which explained that a short-term activity might give rise to a permanent establishment when nature of the business dictates that shorter term. [fn 31: 2017 Model Treaty Commentary, art. 5, ¶29.]

Conclusion (p. 129)

1. The Supreme Court of India improperly considered the activities of all affiliated entities globally in concluding that a business was being carried on in India by FOWC. No foundation was laid for such an approach in the treaty (even under article 5(4.1) of the 2017 Model Treaty Commentary).

2. The Court focused entirely on control without regard to whose business was actually being carried on in India and without sufficient factual analysis to support its conclusion.

3. The Court's acceptance that a presence of three weeks per year in India, in respect of a commercial venture that operated for only three days per year, suffices to give rise to a permanent establishment is not supported by the Model Treaty and the overwhelming weight of case law, and does violence to the policy behind the existence of this threshold to domestic taxation.

Finding in Dell (p. 558)

[I] have reported on controversial cases considering the question of whether sales effected through a civil law commissionaire should be regarded as creating a deemed permanent establishment (PE) of its principal…The Supreme Court Of Spain has now rendered its decision in one of those cases, concluding that sales effected through Dell España SA as commissionaire appointed under article 246 of the Spanish civil code created a PE of its principal, Dell Products Ltd., an Irish company. The Court expressly recognized that its decision conflicted with prior decisions on the same issue by the Supreme Courts of France and Norway. [fn 3: CE 31 mars 2010 n°304715 et 308525, 10° et 9° s.-s., Sté Zimmer Ltd.; Borgarting Lagmannsrett, dated 2 March 2011, Dell Products vs. Skatt Øst, ref 10-032855ASD-BORG/0. The Italian Supreme Court also reached the same conclusion finding no deemed PE in Boston Scientific, Italian Supreme Court, Tax Section, n. 3769 of Mar. 9, 2012.]

Fixed place of business/functional analysis re agent PE (pp. 555-6)

The Spanish decision is notable in two aspects beyond the scope of the interpretation of the deemed PE rule of Art. 5(5), which is the normal context of the issue of whether a commissionaire creates a PE. [fn 4: …The Ireland-Spain Income Tax Treaty applicable in this case adopted J language identical to the OECD Model in its relevant provisions.]

First, the Court initially found a PE based not on the dependent agent rule of Art. 5(5), but on the basis of a "fixed place of business" under Art. 5(1), even though the principal did not occupy any premises in Spain through its own employees. This interpretation of the Art. 5(1) rule has implications far beyond the scope of commissionaire structures.

Second, the Court rejected a literal interpretation of the dependent agent paragraph in Art. 5(5) in favor of an analysis based on "the functional-economical-material doctrine," which the Court employed to reach a result that it concluded was more in line with the purpose of the Treaty, in light of the new "global commercial scenario." This approach conceivably has implications across a wide range of treaty interpretation issues, as it is a notable departure from the normal principles of treaty interpretation as developed under the Vienna Convention on the Law of Treaties.

Facts of commissionaire arrangement (p. 556)

[T]he Spanish entity promoted the products of its principal, concluded sales, managed orders, provided marketing and advertising services focused on the Spanish market, provided warehousing and logistics services, managed credit reviews of customers, and monitored receivables….As is normally the case in a commissionaire relationship, the sales contracts were entered into solely in the name of the Spanish entity, although the contracts were for the benefit of the principal.

Fixed place of business analysis based on activity on account of NR (pp. 556-7)

[T]he Court…logically concluded that where an issue had been raised under the separate theories of a "fixed place of business" (FPOB) under Art. 5(1) and a deemed dependent agent PE (DAPE) under Art. 5(5), then it was appropriate to analyze the FPOB issue first….

The Court…referr[ed] initially to the point that the [OECD] Commentary expressly states that premises can be at the disposal of a nonresident even if the nonresident does not hold a formal legal right to use those premises. In the critical analytical step, the Court…provided the following interpretation of paragraph 10 [of the OECD Commentary]:

...in addition, with the same broad scope, disposal also includes, under the wide interpretation given by the applicable regulations, activity on account of the company.

The Court then noted the following, which appears to be an expression of treaty interpretation that gives license to a court (and tax authorities) to depart from the literal language of a treaty:

Furthermore, given the function and purpose of these Treaties — regulating international taxation issues — one must not lose sight of the new reality and global commercial scenario, which necessarily mean that applicable regulations should be interpreted in light of this new reality, where it is essential to take into account the substance of new forms of business activity.

Viewing the Commentary from this perspective, the Court concluded that there is no requirement for the nonresident to have any actual personnel located on the premises, as the "fixed place" could be found solely due to activities performed by employees of the Spanish affiliate. In reaching this decision, the Court expressly adopted a statement by the lower court that the business activities recited above as performed by the commissionaire should be regarded for treaty interpretation purposes as the business of the non-resident carried on in Spain at the premises of the Spanish affiliate

Finding of dependent agent PE (p. 557)

The Court [also] concluded that a DAPE existed…Apparently relying on the OECD Art. 5 Commentary at ¶ 33, the Court stated that there needs to be only a "functional link" between the customer and the principal, so that an agent may be "sufficiently empowered to bind the principal" even if there is no actual legal authority to do so.

Proposed change in BEPS final action plan to agency PE effectively elevates "habitually" requirement (p. 1142)

[A]rticle 5(5) will no longer require the dependent agent to conclude contracts in the principal's name; it will be sufficient that the dependent agent habitually plays the principal role leading to the routine conclusion of contracts without material modification by the enterprise — that is, the principal. Given that dependent agents will likely play that role, the existence of a PE will often largely depend on whether the habituality requirement can be considered fulfilled.

Transient less risky than close to 6 months/recurrence v. habituality (p. 1143)

The longer the duration, the higher the risk of creating a PE. In fact, a mere transient presence in a country is less likely to give rise to a PE than is a presence amounting to almost six months. [fn 6: Oliver R. Hoor, "The Concept of Permanent Establishments," 54 Eur Tax'n 124 (2014); and Hendrik-Jan van Duijn and Rocco O. Ijsselmuiden, "Will the Netherlands Threshold for Levying Taxes on PEs Be Lowered by Proposed Changes in Line With BEPS Action 7: Preventing the Artificial Avoidance of PE Status?" 56 Eur Tax'n 81 (2016).] According to some German literature, habituality cannot be established if the activity of the dependent agent in the other country lasts for less than six months. [fn 7: 'Franz Wassermeyer, Kommentar OECD Musterabkommen 195 (2014).]

An activity that is exercised recurrently is generally considered habitual, even if its duration does not exceed six months. Accordingly, a dependent agent who spends every Thursday in another country negotiating contracts that are binding on his employer is at a high risk of creating a PE for his employer.

The recurrence is so important for the characterization of an agency PE that some authors think it should be the only criterion for habituality. [fn 8: Brian Arnold, "Time Thresholds in Tax Treaties," 62 Bull. Int'l Tax'n 230 (2008). For an interpretation of the word "habitual" as a synonym of "frequent," see Tim Wustenberghs and Ethel Puncher, "Zimmer à la Belge: Could a Commissionaire Arrangement Create an Agency Permanent Establishment in Belgium?" 65 Bull. Int'l Tax'n 242 (2011).]…

Intention of recurrence may establish PE at outset (p. 1143)

The attestable intention of the parties that the dependent agent act recurrently in the other state might be sufficient for the tax authorities to consider that a PE exists as of the beginning of the dependent agent's activities in the other state. [fn 10: Günther Strunk, Bert Kaminski, and Stefan Köhler, DBA Kommentar 117 (2016).)

Regular recurring trips aggregating less than 60 days each year belwo the threshold (p. 1143)

In 2005 the German Federal Tax Court (Bundesfinanzhof) issued a decision in a case in which a director of a Portuguese company traveled to Germany eight times in 1995, 10 times in 1996, 13 times in 1997, and 14 times in 1998 [fn 12: Bundesfinanzhof, case no. IR 87/04 (2005).] During each trip, which lasted two to five days, he concluded contracts with clients and contacted actual and prospective clients. In 1998 he spent 43 days in Germany.

The German Federal Tax Court affirmed that the director's presence in Germany in 1998 should not trigger an agency PE for the Portuguese company. It said a total presence of less than 60 days in one year is insufficient to give rise to an agency PE, even if the agent was present at least once a month in a six-month period and traveled to Germany for four subsequent years.

Lower threshold for seasonal businesses or exclusive outlet (p. 1145)

Whether the business is temporary by nature will be important in determining whether a PE exists. Examples of business like that are seasonal businesses, such as ice cream shops that open only in the summer,…

Also of note is whether the business activities are carried out exclusively in the country where the agent acts for the principal. Consider a wine producer in State A that sells all its wine at a festival in State B…. [T]hat agent would be at high risk of creating a PE for the wine producer... .

Construction site clause: exemption or deeming clause (p. 211)

Article 5(3) of the OECD model states that:

A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

According to Sasseville and Skaar (Cahiers de Droit Fiscal, Vol 94a, 2009), this clause is generally viewed as an exemption clause, with a building site or construction or installation project only constituting a PE if it lasts for more than 12 months. The authors point out that there is no common understanding between OECD member countries as to whether this clause is also a "deeming clause" whereby an activity that does not meet the general conditions for a PE under article 5(1) of the OECD Model is deemed to constitute a PE if it relates to a construction or installation project and if it lasts for more than 12 months.

Mobile drilling rigs as fixed places of business (p. 213)

Whether mobile drilling rigs are considered to be fixed depends on the circumstances. A drilling rig that is anchored to the seabed for a long period of time could meet the fixed criterion. The same applies to semi-submersible rigs and drill ships, which, even though they might not be anchored to the seabed as other types of drilling installations, can remain in the same place for a long time on the same contract with the same customer…Schaffner (2013) suggests that this issue should be approached by considering each oil field to be one geographical area; a floating platform or rig moving around in the same oil field would, therefore, satisfy the geographically fixed criterion, though it is not fixed to the ground.

Lessor can have PE if sufficient services (p. 213)

[T]he Commentary on Article 5 of the OECD Model mentions that tangible property leased to a third party through a fixed place of business can constitute the business a PE, depending on the level of service provided to maintain the equipment. [fn 42: Para. 8 OECD Model: Commentary on Article 5 (2014).] In this context, it should be noted that the Norwegian HR case of Trinc/Trag (1997) dealt with leasing out of equipment in the offshore industry and the "carrying on business" criterion under Norwegian law. If In this case, the HR held that the rental of a drilling rig on bareboat terms was insufficient to cause the rig owner to be taxable in Norway, as the rig owner did not take part in the risk of operating the drilling rig.

Services threshold satisfied with time charter (p. 214)

The Commentary on Article 5 of the OECD Model does not specifically address the most common way of chartering a drilling rig or vessel to a third party, i.e. under a time charter contract. However, as a time charter of a drilling rig or a vessel, in essence, is the hiring out of equipment including a full crew to operate the equipment while maintaining the full operational risk, a time charter would meet the "carrying on business through" test.

Examples of service and supply ships (p. 214)

Platform supply vessels (PSVs): these are used for transporting supplies from a port to a drilling rig or other installation in an oil field. PSV activity, is often carried out in a single jurisdiction….

Anchor handling tug supply vessels (AHTSVs): these are used for towing drilling rigs and performing anchor handling for drilling rigs as well as PSV ties for the drilling rigs….

Construction support vessels (CSVs) and multi-purpose support vessels (MSVs): these are used for supporting or performing subsea construction work….

Emergency response rescue vessels (ERRVs): these are vessels that operate along offshore installations in an oil field….

Application of fixed place of business test for vessels (pp. 215-216)

If a vessel operates in an area that is considered to be geographically and commercially coherent, the fixed test may be satisfied. This could be the case for PSVs transporting supplies, sailing the same route repeatedly, or CSVs working on only one subsea installation in the same oil field.

On the other hand, if the vessel works in more than one oil field on a country's continental shelf, geographical coherence may not be considered to exist and, if a vessel is working in the same area for different customers, commercial coherence may not exist. However, the Danish 1984 ruling should be noted, which considered different oil fields on the Danish continental shelf to be one geographical area for deeming a PE to exist in respect of a drilling operator… .

ERRVs are required by law to be present alongside drilling rigs for 365 days a year. These types of vessels are, therefore, required to be present in a single place in the sea for a longer period of time. Moreover, if one vessel fulfils this requirement for a customer, it is likely that the geographical and commercial criteria are both satisfied. The same may apply to salvage vessels if they operate in a single spot….

If AHTSVs perform anchor handling for drilling rigs, placing and moving and/or removing anchors, this can be done in one area with the duration varying and the discussion on whether they are fixed is the same as for the other types of vessels.

Level of services test for carrying on business through a vessel (p. 216)

[CRA in 2006-0211991R3] concluded that entering into a bare boat agreement for a ship to be used in Canadian waters could not be regarded as carrying on business….

Vessels viewed as construction PEs

[I]f a vessel is contracted to support the installation or removal of pipelines, subsea constructions or drilling rigs, this could be covered by the construction and installation provision in article 5(3) of the OECD Model.

The Commentary on Article 5(3) of the OECD Model states that the time spent by subcontractors working on a building site is considered to be time spent by the general contractor on the building project, but that the subcontractors should count the time working on the same project separately. [fn 67: Para. 19 OECD Model: Commentary on Article 5 (2014)] This indicates that, if the primary contractor is considered to have a building site and subcontracts part of the work to a service provider, the service provider can use a 12-month threshold in respect of the activity. In the offshore industry, this could be the case if a company operating a pipe-laying barge or a drilling rig hires a service vessel to move anchors for the barge or rig or to provide a stand-by service during part of the project.

Pipelines (p. 217)

Even though no single geographical place can be identified, a pipeline on the seabed is, as such, fixed to the seabed in the source state. As pipelines can span more than one jurisdiction, they can be considered to be fixed in more than one state….

For companies owning or operating pipelines, the business may consist of either renting out the pipelines, i.e. not dealing with any maintenance, or offering to transport oil and gas and dealing with any necessary maintenance. The Commentary on Article 5 of the OECD Model states that the leasing out of equipment to another enterprise with no responsibility for maintenance is not considered a PE, unless this is done through a fixed place in a given state.

lf a business transports its own oil or gas through its own pipeline, it would be considered to be "carrying on business through" the pipeline. On the other hand, according to Schaffner, a company using another company's pipeline to transport oil and gas would not be deemed to have a PE in the place where the pipeline passes.

CRA not accepting apparent Joint Committee view that services PE in Canada-U.S. Treaty can apply to services provided to related party (pp. 785-6)

[A] statement in the JCT Report on the Fifth Protocol…provides, "According to the [Treasury Department] Technical Explanation, paragraph 9 applies only to services provided by the enterprise to third parties, and not to services provided to that enterprise (i.e., intercompany services)." (Emphasis added.) However, in CRA Technical Interpretation 2009-0319441C6, CRA held that Article V(9) is not limited to services provided to a third party and applies even to services provided to an affiliated entity….

While CRA is correct in noting that a related party can be considered a third party in one sense of that term, this interpretation on its face contradicts the plain language of the JCT Report which concludes that paragraph 9 does not apply to "intercompany services," which seems to indicate that the JCT Report is using the term "third party" in an alternative narrower sense to exclude related parties….

Joint Committee comment may only be excluding services provided to a non-resident enterprise by related party (pp. 786-7)

The parenthetical reference to intercompany services at the end of the sentence follows immediately after the reference to services provided to that enterprise and seems on its face to be an elaboration of the type of services provided to an enterprise that don't result in a PE under paragraph 9 rather than an elaboration of the type of services provided by an enterprise….

The foregoing interpretation is supported by the explanation appearing in the 2008 update to the OECD Model Commentaries, which include a services PE provision substantially identical to the one that is incorporated in Article V(9) of the Treaty:…

It seems reasonable to conclude that the parenthetical reference to intercompany services in the JCT Report is alluding to the point made in the last sentence of the quoted OECD commentary that services provided to the non-resident enterprise by its affiliates do not result in a PE to the enterprise to whom the services are provided…[rather than] excluding services provided by the enterprise to related parties….

[I]n fact, the actual language of the TE, which is the original source of the explanation by the JCT Report, strongly implies that the intent of the "third party" reference is simply to exclude services provided to the enterprise itself:…

Exclusion of auxiliary or preparatory activities from ambit of services PE (pp. 787-8)

Another aspect of the services PE rule that is unclear is the interaction between the Article V(9) services PE rule and the Article V(6) exception for preparatory or auxiliary activities….

[O]ne possibility is that this exception applies to activities undertaken by the entity providing the services which are preparatory or auxiliary to the services being provided….

For example, if an individual or a company that is providing services through an employee spends five days preparing his tools before beginning to actually perform the service for which the individual is being compensated and then spends 180 days actually performing the repair for the customer, the five days of preparation would not count toward the 183-day threshold.

…It is unclear whether the drafters of the Treaty intended for the determination of the character of a particular service as preparatory or auxiliary to be based on the significance of the service to the service provider or to the recipient, but neither alternative seems very plausible….

…This…compels the conclusion that the determination of whether a service is preparatory or auxiliary is based on the significance of the service to the overall services being provided by the service provider… .

Categories of Cloud-based services (p.132)

The models for providing cloud-based services have traditionally been divided into three categories: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (laaS). SaaS offers ready-made applications for end-users. PaaS is more like an operating system, such as Microsoft Windows Azure, which allows the client to design applications with appropriate programming tools. laaS is the most open-ended solution, where the end-user has the largest degree of control over the technology in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components.

[I]ntegration Platform as a Service (iPaaS)… is a cloud integration platform, enabling connectivity to SaaS and other cloud services, and it offers a platform for SaaS users and cloud vendors to build and host packaged integration solutions which ensure that the data provided is available in a synchronized fashion across mobile, social and online mechanisms….

Use of Cloud reduces incidence of a server in source jurisdiction (pp.138-9)

In the pre-cloud era, this erosion of tax base could to some extent be mitigated by the "server as PE" rule whereby the maintenance of a server in the source jurisdiction would allow its tax authorities to contend that the server constituted a permanent establishment for tax treaty purposes. But with the widespread shift of e-commerce to the cloud it is no longer plausible to count on this rule to effectively deal with the problem because the server need not be located in the source jurisdiction….

[T]here is widespread consensus that using another entity's server will rarely, if ever, lead to the creation of a PE….

See also summary under Treaties – Art. 9.

Art. 5(3)(b) of UN model treaty (pp. 319-20)

[T]he United Nations…in 1980 published a model income tax treaty that contained a provision—article 5(3)(b)—that was designed to create a PE (a "services PE")… .[under which] an enterprise of the residence state will be deemed to have a PE in the source state if it provides services in the source state through a single employee who is present in the source state for more than 183 days in any 12-month period, or if two or more employees are present collectively in the source state for more than 183 days in that period and provide services on the same project or on two or more "connected" projects….

Scope of V(9) of Canada-US Treaty (326-7)

[H]owever, the foreign relations committee report [of the US Senate Joint Committee staff on the 2008 protocol] notes that article V(9) is somewhat narrower than the OECD provisions:…

• [I]f you are not providing services in one place, our rule doesn't apply. The OECD rule is broader in that extent. [fn 24: S exec. rep. no. 110-15, 110^th Cong., 2d sess. (September 11, 2008), at 123.] …

[T]he report of the US Senate's foreign relations committee confirms that article V(9) was inserted to overrule (or perhaps more accurately, to render irrelevant) the decision in the Dudney case….

• [I]t appears that physical presence of an employee in the source state is required, but days of preparation in the residence state do not count….

Construction site services excluded from V(9) of Canada-US Treaty (p. 341)

The meaning of the words "Subject to paragraph 3" is not perfectly clear…Others suggest that it means that if the services are performed in connection with a construction site, then one must ignore article V(9) altogether and focus only on article V(3). [fn 67: Di Maio and Hutchinson, supra note 21, at 3:3-4; and Loma Sinclair, "The Services PE Provision of the Canada-US Income Tax Treaty," in…2009 Conference Report ([CTF], 2010), 22:1-29, at 22:2.] The second explanation appears to be correct. … [T]he joint committee explanation states:

• …[P]aragraph 9 does not apply to construction services that do not meet the requirements of paragraph 3 for permanent establishment….

Limitation-on-source-state purpose of Services PE (p. 345)

If the services PE rule provided that any provision of services for more than 183 days would create a PE, then that would merely create situations where a foreign enterprise might be saddled with a P E despite having relatively little connection to the source state in respect of any one project. To avoid this possibility, the UN drafted the provision to require that the 183 days be spent on a single project or on two or more connected projects.

In other words, the connected project rule was inserted as a limitation, to ensure that the services PE provision did not capture service income from unrelated projects….

Anti-abuse purpose of Services PE (p. 350)

[I]n 1980,…[t]he [ad hoc UN ]committee suggested that the connected project concept was really an anti-abuse rule, designed to prevent "contract splitting," which would allow non-residents to perform services in the source state while avoiding the 183-day rule. [fn 98: See United Nations, Economic and Social Council, Committee of Experts on International Cooperation in Tax Matters, Proposal for Amendments to Article 5 of the United Nations Model Double Taxation Convention Between Developed and Developing Countries, U N publication no. E/C.18/2006/4 (New York: United Nations, 2006), at paragraph 20.]…

Both geographical and commercial coherence required for Services PE (p. 362)

It is clear from the case law and administrative material that both commercial and geographical coherence are required for two or more construction projects to form a coherently whole project for the purposes of the 12-month test in article 5(3) of the OECD model treaty. It is difficult to see why geographical coherence is not also required when determining whether two or more projects are connected for the purposes of the 183-day test in the services PE rule.

Discussion of

25 February 2014 Memo 2013-0475161I7 (p. 377-8)

The memo first noted that if USco's employees had been seconded to the Canadian affiliates, then their services could not be counted in determining whether USco had either a construction site PE or a services PE. As noted above [including discussion of Morgan Stanley, Centrica and Bamford], the case law suggests that a true secondment is difficult to achieve. …

[T]he memo then stated:

• However, if USCo does not have a PE under paragraph 3 of Article V, then all of the services rendered in Canada, including those rendered at the construction site, can be considered when making a determination under paragraph 9…

I disagree with this interpretation. As explained earlier in this article, my view is that the words "Subject to paragraph 3" in article V(9) mean that construction site days count only toward the 12-month rule….

EPCI contract described (p. 229)

[I]t is a great time to test article 5(3) [of the OECD model convention], which is specific to construction sites, through the example of engineering, procurement, construction, and installation (EPCI) contracts involving a French company.

In an EPCI contract, the full responsibility of the project lies with the contractor…

Art. 5(3) applies on project-by project basis (pp. 241-2)

Article 5(3) sets a criterion applicable project by project, and it is therefore possible for an enterprise resident in a state to operate in another country on a significant scale, in terms of cumulative time and total volume of business, without having a PE in this country. [fn 37: Arvid S. Skaar, Permanent Establishment - Erosion of a Tax Treaty Principle, Series on International Taxation, Kluwer Law and Taxation Publishers (1991).]…

For example, a contractor performs a first project in country A, from March 1 n to January 31 n +1 (11 months), and then a second project from January 1 to July 31 n +1 (seven months). Though his business is carried out over a total period of 17 months, the contractor will not have a PE in country A, since none of the sites has a duration exceeding 12 months. This result is not satisfactory. However, it is difficult to find a realistic alternative. Indeed, until the end of year n, the company cannot know precisely what its future activity will be in country A…

Meaning of "coherent whole" in para. 18 of OECD commentary (p. 242)

Paragraph 18 …also state that:

• a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically. …

According to some, [fn 38: E.g., Vogel, and Skaar, supra note [37]] to constitute a coherent whole, the work must be made in the same place and for the same client. For others [fn 39: Skaar…], such a position assumes that the drafters of the commentary have reached an agreement on specific criteria, although they have used ambiguous criteria in the text of the commentary…

[I]f relatively specific criteria ("same customer" and "same place") had been the intention of the parties, they would have used a less ambiguous expression than "coherent whole commercially and geographically"…

Example of coherent installation project:country-side radar system (p. 242)

[I]f a foreign company has an extended presence in the source state because of an underlying identity of activities carried out there, the taxing right of this state should not be affected by the division of this activity in multiple contracts.

For example: A contractor has an EPCI contract with a customer for the design, delivery, and installation of a radar system to cover the airspace of a country. Ten antennas are to be installed in different parts of the country, each installation site lasts 15 days, and the period between the first day of work on the first site and the last day on the last site is greater than 12 months. An interpretation consistent with the benefit and participation principles of "coherent whole commercially and geographically" would imply that the company has a PE, although the sites are far apart from each other. In another contractual scheme, for example if the same single sky coverage system for the use of the air traffic control organization is subject to 10 separate contracts with 10 airport companies, the company should also have a PE.

Suspension of running of 12-month period when work suspended for external reasons (p. 243)

[P]aragraph 19 of the commentary states since 1977:

• A site should not be regarded as ceasing to exist when work is temporarily discontinued…Temporary interruptions should be included in determining the life of-a-site…

[W]hen a site is completely stopped, the intensity of the presence of the company in the source state of source is (almost) zero. Legal certainty and administrative considerations also imply that the company should be able to anticipate its PE situation before the work begins. For example, a business that initially has a 10-month site will not have a PE. If weather conditions oblige the company to completely stop construction for more than two months, there will be a PE. Consequences in terms of complexity and administrative costs for the company, and to a lesser extent for the states concerned, will be important [sic]. Accordingly, this rule should allow for a suspension of the 12-month period if the taxpayer provides sufficient evidence of total interruption of work because of external reasons.

What is a commissionaire arrangement? (pp. 63-63)

The commissionnaire arrangement is a civil law concept that has no direct counterpart in common law. A commissionnaire is an intermediary that acts toward customers in its own name, but for the account of a principal. Consequently, a commissionnaire arrangement always involves the following three parties:

• the principal, which calls on the services of an intermediary;
• the commissionnaire, which acts for the account of the principal in exchange for remuneration; and
• a third-party customer, which conducts business with the commissionnaire.

Under the law of contracts, there are two separate contractual relationships:

• one between the principal and the commissionnaire (that is, the commissionnaire agreement); and
• one between the commissionnaire and the third-party customer.

A commissionnaire arrangement, therefore, entails an "indirect representation." Since the commissionnaire acts in its own name, it is the only one that is personally liable toward the third-party customer (and vice-versa). [fn 36: Michael F. Swanick, Mark Mudrick, and Erik Bouwman, "Tax and Practical Issues in Commissionaire Structures," Tax Notes, Jan. 27, 1997, p. 499]

Agent pe definition (p.63)

Under article 5(5) of the OECD model treaty, a PE exists if the commissionnaire has authority to conclude contracts in the name of the principal, and therefore has authority to bind the principal….

Different treatment at civil and common law (p. 63)

The tax treatment of a principal under a commissionnaire arrangement will vary depending on whether it is located in a common law or a civil law country. Common law countries generally treat the undisclosed agent as binding the principal, whereas in civil law countries the principal is not bound unless the commissionnaire is acting in the name of the principal and not in its own name. Therefore, a commissionnaire arrangement almost always will be deemed to give rise to a PE in common law countries. In civil law countries, the risk of having a taxable presence only would arise when domestic law treats the commissionnaire as binding the principal.

Zimmer and Dell (p. 64)

The issue in both the Zimmer and Dell cases was whether Zimmer SAS and Dell AS, acting in the commercial capacity as commissionnaire for their respective principals, exercised an authority to conclude contracts "in the name of" their principal….

Para. 32 "not actually in [its] name" (p. 64)

Paragraph 32.1 of the OECD commentary on article 5 provides that:

The authority to conclude contracts in the name of the enterprise does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise.

Zimmer decision (p. 65)

The Supreme Administrative Court stated that the legal definition of a commissionnaire is a person who can act in its own name on behalf of its principal without binding the latter to its co-contracting parties. Therefore, as long as the commissionnaire arrangement does not create a direct link between the foreign principal and its domestic contracting parties, the commissionnaire cannot be treated as a dependent agent of the foreign principal.

Dell decision (p. 65)

In Dell, the Borgarting High Court concluded that paragraph 32.1 means that the treaty "cannot be interpreted literally." It then proceeded to rely on factors such as the following as justifications for concluding that a dependent agency PE existed:

• the fact that the products were sold under the Dell trademark;
• that the sales terms were standard; and
• that Dell Products Ltd. shipped products against all orders forwarded by Dell AS.

Issue: pe status of oil and gas coordination centres (p. 466)

This article analyses what seems to be a more general issue in the oil and gas industry, i.e. the PE implications arising from the establishment of an unincorporated coordination centre that provides support to various exploration and production blocks within the same jurisdiction….

What is a coordination centre? (p. 466)

It is assumed that the activities within each exploration and production block constitutes a distinct PE of the company in that jurisdiction. This is because each exploration and production block is separated geographically and the related activities are carried out with different commercial partners.

Where the company acts as the operator of one or more exploration and production blocks, it establishes within that jurisdiction an unincorporated coordination centre, generally, in the form of a registered branch, to provide support to the various exploration and production blocks. Typically, the main functions to be undertaken by the coordination centre include corporate functions, i.e. accounting, administration, finance, human resources, treasury, information and communication, technical support, and supervision activities.

…In general, the coordination centre is located in a main city of the country, while the exploration and production blocks are either onshore or offshore. The coordination centre carries on its activities in a designated office that is often rented by the Company which acts as the operator of the joint venture. The costs incurred by the coordination centre in relation to the activities performed for the exploration and production blocks are attributed by way of a direct charge to the blocks.

Preparatory/auxiliary issue (p. 468)

For a fixed place of business to qualify as a basic rule PE, the business activities carried on through it must not qualify as preparatory or auxiliary activities….

…If the coordination centre is established with the purpose of supervising and coordinating functions of other departments of the company located within that specific jurisdiction, i.e. the activities carried out at the level of the exploration and production blocks, it has a core role within the company, going beyond what might be considered to be activities of a preparatory or auxiliary nature. The coordination centre also carries out financing and engineering services, which represent an essential part of a business.

Single or multiple pe's? (p. 469)

Assuming that the coordination centre constitutes a PE of the company and each of the exploration and production blocks located within the same country also constitutes a different PE, this section analyses whether, in the country where the coordination centre is established, the company would have several PEs, i.e. each of the exploration and production blocks located within that country and the coordination centre, or whether the coordination centre and the exploration and production blocks could constitute a single place of business.

Test in OECD Commentary on Art. 5 (p. 469)

…Put simply, multiple places of business may be aggregated and treated as one PE if these places of business form a geographical and commercial coherent whole.

Non-Satisfaction of geographic coherence test (p. 470)

…While the exploration and production blocks are located in specific areas both onshore and offshore, being defined by the concession contracts signed for each of them, the coordination centre carries on its activities through an office in one of the major cities within the respective country. In this situation, it would be very difficult to argue that the exploration and production blocks and the coordination centre are one geographically coherent whole….

Non-Satisfaction of commercial coherence test (p. 470)

The exploration and production blocks are performing exploration and production activities under distinct concession contracts assigned to joint ventures with different partners, while the coordination centre provides administrative and technical support, and supervisory activities to them. Therefore, the exploration and production blocks and the coordination centre carry on different activities, which cannot be regarded as one single project. These activities are also not covered by a single master contract or by contracts concluded with the same persons. The nature of the work that the exploration and production blocks and the coordination centre perform is also different, as different functions are undertaken by each….

Considering this, it is difficult to argue that the coordination centre and the exploration and production blocks are commercially coherent.

A June 14, 2013 conference sponsored by the Vienna University of Economics and Business discussed the dependent agent permanent establishment concept in Article 5(5) of the OECD Model treaty, which provides:

Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

Lee Sheppard provided an excellent summary of comments by various speakers, only some of which are extracted below:

Derivation of "habitually exercises … an authority to conclude contracts in the name of the enterprise" (pp. 10-11)

The original article 5 appears to have been drafted in English, translated into French, then partially mistranslated back into English. The key phrase in article 5(5) is ‘‘habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise . . . .'' [Philip] Baker [delivering a paper on behalf of John Avery Jones] explained that this phrase originally appeared in treaties between the United Kingdom and Germany because the British were thinking in terms of the common law concept of agency. Avery Jones concluded that the drafters were talking past each other because they failed to focus on who was being bound by the agent's actions. ‘‘What mattered from the U.K. point of view was merely whether there was a contract at all,'' he wrote. Civil law drafters fussed about whether the person was acting for himself or another, and who was bound….

In 1954 the words ‘‘on behalf of '' were added. This phrase was changed to ‘‘in the name of '' — the literal wording of the French version — in 1958 for no discernible reason. ...

[T]he German view is that these troublesome phrases might not have been intentional changes. (See Hans Pijl, ‘‘Agency Permanent Establishments: In the Name of and the Relationship Between Article 5(5) and 5(6),'' Bulletin for International Taxation, January 2013 (Part 1) and February 2013 (Part 2).)

Katharina Daxkobler of the Vienna University of Economics and Business mused that the French version— which contained the mischievous words ‘‘in the name of '' — might have been re-translated too literally because article 5(5) really asks whether the agent can bind the principal. Citing Pijl, she concluded that the seemingly differing French and English versions should be seen as mutually interchangeable and should all be construed to mean that the agent can bind the principal.

Determination of authority to conclude contracts (p.11)

[I]f the principal merely ratifies every contract the agent brings to it without further analysis or investigation, the agent can be said to possess implied authority. Or if the agent exceeds its authority and the principal nonetheless ratifies it, the agent has implied authority, according to Daxkobler. Paragraph 33 of the OECD model commentary on article 5 confirms this view.

Interhome – business linkage (p. 12)

[Sabine] Schmidjell-Dommes [of BMF] argued that a linkage between the parent's business and the subsidiary's business is required for article 5(5) to create a PE. In Interhome AG (Conseil d'Etat, No. 224407 (June 20, 2003)), the Conseil d'Etat held that no dependent agent PE existed because the French subsidiary was engaged in a different activity than its parent.

Boston Scientific - "independent' commissionaire" (p.12)

Boston Scientific

(Corte Suprema di Cassazione, No. 3769/2012) emphasized factual independence over legal relationships, Schmidjell-Dommes explained. In that case, the Italian Supreme Court held that an Italian commissionnaire was not a PE. It was a subsidiary of the Dutch principal company established by their mutual U.S. parent, a medical equipment maker. The Italian Supreme Court stated that the issue was whether the commissionnaire had the power to execute contracts on behalf of its Dutch parent. The Court dismissed the government's appeal for failure to state a case, effectively affirming the lower court decisions that the commissionnaire was independent. ...

Customer complaints went to the commissionnaire, which engaged in an impressive level of non-sales activity in the name of the parent. As the Court noted, the lower courts paradoxically thought that these actions demonstrated independence. The Court concurred, stating that there would be a PE if the Dutch parent bossed the Italian commissionnaire as if it were an employee.

"Habitually" (p. 12)

Raffaele Petruzzi of the Vienna University of Economics and Business argued that because permanence is required, a time threshold should be read into the word ‘‘habitually.'' If the agent is in the country less than six months, it should mean that there is no PE. ...

Pasquale Pistone of the Vienna University of Economics and Business noted that the word ‘‘habitually'' previously read ‘‘regularly.'' He and Alejandro Ruiz Jiménez, also of the Vienna University of Economics and Business, debated whether either concept was satisfied when the taxpayer's agent negotiated a single contract. Jiménez argued that habitually required a specific number of contracts negotiated over a given time frame.

Italian case/ Unisys on "habitually" (pp. 12-13)

What if the agent gets lucky and successfully negotiates a billion-dollar contract during a month spent in the host country? The Italian Supreme Court faced this question (Corte Suprema di Cassazione, No. 9776/2003). The decision was that the habitual exercise of contractual authority exists if a contract is complicated, large, and sufficiently important to the company's business. There were two contracts in the Italian case. Baker noted that two contracts did not establish habitual exercise of contractual authority in Unisys Corp. v. Federal Commissioner of Taxation, [2002] NSW SC 1115 (December4, 2002). But the circumstances were unusual. ...

Commissionaire/synthetic commissionaire (p. 13)

In a bog-standard restructuring, a buy-sell distribution subsidiary is reorganized so that income is stripped out of its host country, where it is necessary for the group to operate….The distribution subsidiary's contract is restated to make it a commissionnaire….

In civil law, a commissionnaire is an entity that sells in its own name for the account of another. Theoretically, the customer cannot sue the principal. It enters into contracts with customers, usually with set prices or pricing guidelines, and then enters into an identical contract with the principal. Commissionnaire is a different legal relationship than agency or distributorship, because commercial risks are in the hands of the principal. ...

What if the host country is a common-law country that would find an undisclosed agent? The planners draft the contract in an attempt to limit agency by creating a synthetic commissionnaire. The contract states that the parent is not bound. ...

Baker opined that synthetic commissionnaire planning might prevail in a British court, unless it was badly implemented, because companies have legal opinions from corporate lawyers that agency can be constrained. ... HM Revenue & Customs begs to differ. An HMRC participant said the synthetic commissionnaire could be a loser in court….HMRC's manual for examiners states that under British law, a commissionnaire could be an undisclosed agent and therefore bind the foreign principal.

Zimmer – commissionaire not a dependent agent (p. 14)

Zimmer Ltd.'s restructured subsidiary had the power to accept orders, negotiate price discounts, and set payment methods without prior approval from the parent. It did not own inventory or take inventory risk. It had no clients or activity other than selling Zimmer products. (Société Zimmer Ltd., Conseil d'Etat, Nos. 304715 and 308525 (March 31, 2010).) The Conseil d'Etat relied heavily on established French law and practice governing commissionnaires for its holding that a commissionnaire with no power to legally bind its principal was not a dependent agent.

Dell – commissionaire did not act for principal (p. 14)

In Dell Products (NUF) v. Tax East, HR-2-11-2245-a (December 2, 2011), Dell had accepted all of the contracts entered into by its Norwegian commissionnaire, which had only Dell's Irish principal company as a client. Standard form contracts were used and not altered. The principal and the commissionnaire had integrated accounting systems and shared board members.

The parties agreed that the commissionnaire was a dependent agent. But they disagreed about whether it had the authority to conclude contracts under the treaty. Norwegian law states that a commissionaire acts only for itself, not for its principal. The Norwegian Supreme Court held that Dell's Irish principal company had no Norwegian PE.

Allocation of profits to a dependent agent PE (pp. 14-15)

[T]he OECD authorized approach to the allocation of profits to a PE ... creates a dependent agent PE standing alongside the subsidiary. (The deemed PE has to file a separate tax return, and some countries assess penalties for failure to file.). ... The authorized approach first asks where the people are. It then attributes assets to the people functions. ...

Even after all that rigamarole, the PE would not have been allocated all of the income that the parent stripped out when it restructured the subsidiary. Alfred Storck of the Vienna University of Economics and Business noted that the number of people on the ground in the host country effectively limits the amount of attribution of profits to the PE. In real life, the parent bears all the risks. But in the never-never land of the authorized approach, risk follows function, which follows people, so some risk could be attributed to the PE.

Independent agent article of OECD Model Convention (pp. 15-16)

Article 5(6) states:

An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.

Meaning of "independent" agent/"ordinary course" (p. 16)

Daniel Fuentes of the Vienna University of Economics and Business explained that article 5(6) had a general commission agent in mind. According to Fuentes, the relevant factors in determining the independence of an agent are control of its own actions, lack of entrepreneurial risk, and the number of principals it acts for. Fuentes argued that the presence of a single principal should be irrelevant. ....

[Claus] Staringer [an Austrian tax lawyer and professor for tax law at Vienna University of Economics and Business] fretted about the use of the phrase ‘‘the ordinary course of business,'' which does not appear in the German translation….Usually when the question is whether the agent has acted in the ordinary course of its business, the real question is whether it is independent, Staringer explained. In German thinking, that means not acting according to the instructions of a principal. In Boston Scientific, the government unsuccessfully argued that the commissionnaire was acting outside the ordinary course of its business because it had entered equipment leases, factoring, and insurance transactions on behalf of its Dutch parent.

Is an "agent" who lacks the ability to bind its principal exempted under Art. 5(6)?/Roche (pp. 16-17)

Staringer argued that article 5(6) is so narrowly drafted that an arguably independent agent that does not have a traditional agency deal with its principal could be excluded from protection.

Relying on a 1993 Intertax article by Sidney Roberts of Roberts & Holland LLP, multinationals [instead] have taken the position that an independent agent is merely an agent that cannot sign contracts. After all, a broker can't sign contracts. That is, the differentiating factor between the two agency clauses is the ability to bind the principal. (Roberts, ‘‘The Agency Element of Permanent Establishment: The OECD Commentaries from the Civil Law View,'' 21 Intertax issue 9, p. 396 (1993) (Part One) and 21 Intertax, issue 10, p. 488 (1993) (Part Two).)….

Avery Jones disagreed with Roberts's view, arguing that an apparent agent that lacks the power to bind its principal is covered by neither article 5(5) nor article 5(6). But the Roche decision implies that there is no third category of non-PE agents (Roche Vitamins Europe Ltd., No. 1626/2008 (Jan. 11, 2012)).

Roche

considered whether the subsidiary did the parent's business in Spain. The Swiss parent's Spanish subsidiary, Roche Spain, was an importer, manufacturer, and distributor of Roche products. After it was restructured, Roche Spain's activities were limited to contract manufacturing and sales promotion. It lacked the legal authority to negotiate the terms of sale or to conclude contracts. ...

The Spanish Supreme Court believed that the combination of Roche Spain's manufacturing activity and lack of legal and economic risks produced dependent agency. In the Court's view, the treaty permitted a finding of dependent agency even in the absence of authority to contract.

Effect of extensive subcontracting

After noting that the OECD Working Party 1 had prepared a Revised PE Discussion Draft which inter alia considered whether an enterprise (the contractor) that has undertaken performance of a comprehensive project would have a permanent establishment if it subcontracts all aspects of that contract to other enterprises (the subcontractors), Barbara Angus discussed (at pp. 266-267) the Offshore Accommodation Service case:

A situation involving the subcontracting of all of the activities with respect to a given project in a context outside the construction setting was the subject of litigation in Norway. The fact pattern under consideration here seems to have been inspired in part by the 2001 decision of the Norwegian Supreme Court in Offshore Accommodation Service AB v. Government of Norway. At issue in that case was a special provision in the Nordic treaty that deems a permanent establishment to exist if a non-resident enterprise carries on activities related to exploration for or exploitation of hydrocarbon deposits for a minimum of 30 days. However, in reaching its decision finding a permanent establishment, the Norwegian court cited language from paragraph 19 of the OECD Commentary on the Article 5(3) special rule for building sites and construction projects.

The case involved a Swedish company (the contractor) that entered into an agreement under which it would provide catering services on a housing rig for an oil well site in Norwegian territorial waters in exchange for a fixed fee. It subcontracted with a Norwegian company (the subcontractor) to provide the catering services in exchange for a cost-plus fee. However, the contractor remained responsible for such services. According to the contractual agreements and the compensation schemes, the contractor bore the real economic risk of the services provided in the oil rig.

The Norwegian tax authorities argued that the contractor was subject to tax in Norway on the basis that it was carrying on an activity in Norway for more than 30 days and therefore under the special Nordic treaty provision it had a deemed permanent establishment. The contractor challenged the tax authorities' argument on the grounds that it did not have nexus with Norway because it did not physically perform any services on the rig.

The Norwegian court ruled in favor of the tax authorities, citing the OECD Commentary to Article 5(3) as establishing that physical presence is not required because time spent by a subcontractor is considered as time spent by the general contractor on the project. The Norwegian court used this interpretation to rule that the contractor had performed the catering services on the rig that were performed by its subcontractor….

Requirement for principal to be legally bound?

The Working Party had also addressed the issue:

Does the phrase "to conclude contracts in the name of the enterprise" only refer to cases where the principal is legally bound vis-à-vis the third party, under agency law, by reason of the contract concluded by the agent, or is it sufficient that the foreign principal is economically bound by the contracts concluded by the person acting for it in order for a permanent establishment to exist (provided the other conditions are met)? [fn 35: PE Discussion Draft, ¶106]

She stated (at pp. 269-270):

The PE Discussion Draft indicates that the Working Party's discussion of this issue focused extensively on the recent court decisions in the Zimmer case in France (Supreme Administrative Court 2010) and the Dell case in Norway (Supreme Court 2011) addressing the treatment of commissionaire arrangements under the this treaty language. [fn 36: PE Discussion Draft, ¶110] There also have been two subsequent cases involving commissionaire arrangements: the DSM/Roche case in Spain (Supreme Court 2012 ) and the Boston Scientific case in Italy (Supreme Court 2012).

These cases involved the issue of whether a local commissionaire could create a permanent establishment for the foreign principal. In finding no permanent establishment, the French and Norwegian courts looked to the fact that the commissionaire concluded contracts in its own name and not on behalf of the principal and that such contracts were not binding on the principal. The Norwegian court specifically distinguished "legally binding" from "economically binding", concluding that the principal would have to be legally bound, which was not the fact in the case before it, in order to support a finding of a permanent establishment. The Italian court found no permanent establishment in the case before it as well, citing the facts that the commissionaire concluded contracts in its own name and on its own behalf and that it had operational autonomy that would not exist in a dependent agent relationship. In contrast, the Spanish court found a permanent establishment in a situation where the local entity involved in sales did not have the authority to conclude contracts on behalf of the principal; however, in that case, the court looked to other manufacturing activities performed by the local entity at issue for the principal and the larger relationship between such entity and the principal.

In the course of a detailed review of the law and history of permanent establishments and agency as it relates to the OECD Model Tax Convention, Hans Pijl argues that the history of the OECD Model suggests that, in common law jurisdictions, "in the name of" merely refers to an agency relationship rather than anything stricter:

The rise of the "exclusively literal" interpretation of "in the name of"

[T]his article revisits the two aspects of the agency PE that are central to the classical articles of Avery Jones and David A. Ward (1993) and Roberts (1993) [see end of quote], i.e. the phrase "to conclude contracts in the name of the enterprise" (emphasis added) and the relationship between article 5(5) and (6). As far as "in the name of" is concerned, this article demonstrates that there is no tension between a civil law based article 5(5) and a common law inspired article 5(6). "[I]n the name of", in the view of the 1950s OEEC/OECD drafters of the articles, was to reflect the substantial juridical bindingness between client and principal. By no means did they intend to stress the formal aspect of the conclusion of contracts literally "in the name of" the principal. Then, decades later, an [unreported] exclusively literal interpretation of "in the name of" by a UK court resulted in the United Kingdom making its 1992 observation (see Part 2, section 13.), which stimulated the thoughts developed in the two articles noted previously. With only a little exaggeration, this UK court decision, with its strict focus on a literal interpretation, is the cause of the continuing discussion.

[J.F. Avery Jones & David A. Ward, Agents as Permanent Establishments under the OECD Model Tax Convention, 33 Eur. Taxn. 5 (1993), Journals IBFD.]

[S.I. Roberts, "The Agency Element of Permanent Establishment: The OECD Commentaries from the Civil Law View" (Part One), Intertax 9, pp. 369-420 (1993) and (Part Two), Intertax 10 pp. 488-508 (1993).]

"In the name of" does not reflect a deliberate policy choice

The OECD records demonstrate that the phrase "on behalf of" (binding) was meant to be the PE-constituent criterion, rather than "in the name of", which was introduced by an obvious unfortunate combination of circumstances. (The UN records reveal that "in the name of" had a "binding" meaning from the beginning.) The Reports of Working Party 1 were always drafted in English as the original language... . The Reports consistently used to conclude contracts "on behalf of" and not "in the name of". ... The French translations at first correctly translated "on behalf of" as " ", but then, as a less adequate translation, started using "au nom de", where the English original continued with "on behalf of". When the French version became the original language in the report to the Council, "au nom de" became the leading term and English followed with "in the name of". Although the Chairman of the Fiscal Committee pointed out that the French text erroneously referred to "au nom de", this term, and the resulting "in the name of", was eventually approved... .

... Most likely, the terms appeared in an environment where they were traditionally understood as meaning the same, i.e. "binding".

"Binding" exclusively means "legally binding"

"[B]inding" is meant in the legal way. This meaning is confirmed by the language used in the OECD documents in the 1990s and is also how the Group of Experts of the United Nations explicitly qualified the term (see Part 2, section 11.1.) ... There is, therefore, nothing that convinces in the criticism of Arnold (2012) [see end of quote] of the Norwegian Supreme Court that ... [the] Court was "without any motivation" when interpreting "binding" as "legally binding".

...The anecdotal reference of Arnold (2012) that "to bind" has 16 meanings, only one of which means "to oblige by covenant", does not provide support for his view that "binding" has the unspecified "commercial meaning" of being "effectively bound", whatever that means in his view.

[B.J. Arnold, "Tax Treaty Case Law News", 66 Bull. Intl. Taxn. 4/5, sec. 1, (2012), Journals IBFD.]

Commentary on the 2011 OECD discussion draft.

Discussion of para. 9 of Art. V of the Canada-US Convention.