Assistant Director of Income Tax-I, New Delhi v. M/s E-Funds IT Solution Inc., Civil Appeal No. 6082 of 2015, 24 October 2017
The assessees were two American Companies, e-Funds Corporation, USA (e-Funds Corp) and e-Funds IT Solutions Group Inc., USA (e-Funds Inc). They operated ATM networks in North America and provided related servicing such as processing payments as well as servicing retail point of sale systems and also helped merchants reduce bad cheque risks and banks avoid losses on new accounts. 40% of the worldwide staff of the group were employed by an indirect Indian subsidiary of the first assessee (e-Fund India), which operated a call centre as well as providing software troubleshooting and testing services. Revenue sought to tax the assesses on the basis that they had a permanent establishment (PE) in India based on there being a fixed place of business there, or under the services PE provision in the India-U.S. Treaty which (in Art. 5(2)(l)), in relevant part, referred to “the furnishing of services…within a Contracting State by an enterprise through employees or other personnel.” Revenue submitted that the employees of e-Fund India “were de facto working under the control and supervision of e-Funds Corp” and that e-Funds Corp had seconded two senior employees to e-Fund India (para. 3).
In finding that the assessees did not have fixed places of business in India, Nariman J quoted extensively from Formula One and stated (at para 12):
…[I]t is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding … that … any fixed place of business has been put at the disposal of these companies. … The High Court … held:
...It is clear … that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad.
Nariman J further found that there was no services PE under Article 5(2)(l), stating (at paras 17, 18, 20):
Insofar as a service PE is concerned, the requirement of Article 5(2)(l) of the DTAA is that an enterprise must furnish services “within India” through employees or other personnel. …
It has already been seen that none of the customers of the assessees are located in India or have received any services in India. This being the case, it is clear that the very first ingredient contained in Article 5(2)(l) is not satisfied. …
If any customer is rendered a service in India, whether resident in India or outside India, a “service PE” would be established in India. ... All its customers receive services only in locations outside India. Only auxiliary operations that facilitate such services are carried out in India.
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|Tax Topics - Treaties - Income Tax Conventions - Article 26||MAP agreement re PEs not binding for subsequent years||101|
Google Ireland Ltd. v. France (2017), No. 1505113/1-1 (Tribunal Administratif de Paris)
A French company (“Google France”) agreed pursuant to a Marketing and Services Agreement (the "Agreement") with a sister corporation (“Google Ireland”) to provide marketing assistance to Google Ireland in connection with the Google “AdWords”) program in France (under which French advertisers paid “per click” amounts for having their messages appear alongside related Google search results) in consideration for being reimbursed for its costs plus an 8% margin. Google France covenanted not to act as agent for and sign any contract in the name of Google Ireland, or to negotiate contracts or accept orders for the Google Ireland account.
Art. 2, para. 9(c) of the French-Irish Treaty provided:
A person acting in a Contracting State on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom subparagraph (d) applies, shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise.
The Court noted that although the functions performed by Google France staff exceeded the bounds set in the
Agreement, e.g., hiring a lawyer to negotiate contracts and entering into confidentiality agreements, “none of these elements establish that the staff in question had the authority to act for the account and in the name of [Google Ireland]” (para. 12, similarly at para. 14), and also on similar grounds rejected a submission of the Revenue authority that although Google Ireland signed the contracts with the French advertisers (albeit, only electronically), this was only a “purely formal control.” The Court concluded (at para. 16, TaxInterpretations translation):
[I]f SARL Google France had the character of dependent agent within the meaning of (c) of paragraph 9 of Article 2 of the French-Irish Tax Convention, it nonetheless did not exercise, in the years under litigation, the power to bind Google Ireland Limited in commercial relations respecting the transactions constituting the activities of the latter corporation; it follows from this that the Service was incorrect in considering that Google Ireland Limited exercised, through a permanent establishment that was formed by SARL Google France, an activity in France within the meaning of section 182 of the General Income Tax Code… .
Formula One World Championship Ltd v. Commissioner of Income Tax, International Taxation – 3, Delhi & Anr., Civil Appeal No. 3849 of 2017
A U.K. corporation (“FOWC”), which held all rights to commercially exploit the Formula One World (car-racing) Championships by virtue of an agreement with another company (“FOAM”), entered into an agreement (the “RPC”) with an Indian corporation (“Jaypee”) that, in consideration of US$40 million payable by Jaypee, Jaypee would host, stage and promote the Formula One Grand Prix event at a commercial racing circuit in India (the “Buddh International Circuit” or “circuit”) to be constructed by it (with FOWC also having the right to exploit the TV feed for the events, which it assigned to an affiliate). The RPC had a term of five years (renewable for another five years) and gave FOWC access to the circuit for a period of up to six weeks leading up to and encompassing each annual (three-day) championship event. Jaypee immediately gave back media and title sponsorship rights to three FOWC affiliates, which generated revenue therefrom. On the day of the race, FOAM engaged FOWC under a Service Agreement to provide various servicers including supervising the teams and other parties at the event.
Sikri J found that the circuit was “a fixed place of business through which the business of [FOWC] is wholly or partly carried on” and, thus, was a permanent establishment of FOWC under Art. 5 of the U.K.-India Treaty. He stated (at paras. 27, 67):
[A]n establishment has a fixed place of business…[if] physically located premises [are]… ‘at the disposal’ of the enterprise. ... The place would be treated as ‘at the disposal’ of the enterprise when the enterprise has right to use the said place and has control thereupon. …
[The] Buddh International Circuit is a fixed place. From this circuit different races, including the Grand Prix is [sic] conducted, which is undoubtedly an economic/business activity. …
Respecting whether the circuit was a fixed place of business of FOWC, he referenced the control rights accorded to FOWC under the Service Agreement, and stated (also at para. 67):
… The … arrangement clearly demonstrates that the entire event is taken over and controlled by FOWC and its affiliates. There cannot be any race without participating/competing teams, a circuit and a paddock. All these are controlled by FOWC and its affiliates. … Omnipresence of FOWC and its stamp over the event is loud, clear and firm. … [A] commonsense and plain thinking of the entire situation would lead to the conclusion that FOWC had made their earning in India through the said track over which they had complete control during the period of [the] race.
Respecting whether the circuit was “permanent” notwithstanding the three-day duration of the annual races, Sikri J stated (at paras 70-71):
[H]aving regard to the duration of the event, which was for limited days, and [that] for the entire duration FOWC had full access through its personnel, [the] number of days for which the access was there would not make any difference. This aspect is discussed by the High Court in the following manner, and rightly so:
[FOWC’s] exclusive circuit access - to the team and its personnel or those contracted by it, was for up-to six weeks at a time during the F1 Championship season. This nature of activity, i.e racing and exploitation of all the bundle of rights the FOWC had as CRH, meant that it was a shifting or moving presence: the teams competed in the race in a given place and after its conclusion, moved on to another locale where a similar race is conducted. … [B]oth the exclusive nature of the access and the period for which it is accessed…makes the presence of a kind contemplated under Article 5(1), i.e. it is fixed. …
Having regard to the OECD commentary and Klaus Vogel's commentary…that as long as the presence is in a physically defined geographical area, permanence in such fixed place could be relative having regard to the nature of the business, it is hereby held that the circuit itself constituted a fixed place of business.
A stand at a trade fair, occupied regularly for three weeks a year, through which an enterprise obtained contracts for a significant part of its annual sales, was held [in Fowler] to constitute a PE.
Technip Singapore Pte Ltd. v. Director of Income Tax, W.P.(C)--7416/2012, 2 June 2016 (Delhi High Court)
The taxpayer was a Singapore company which installed a marine crude oil receiving facility for an Indian company ("IOCL") at a contract price of U.S.$18.6 million. Dr Muralidhar J found that the taxpayer did not have a permanent establishment in India under the Singapore-India Double Taxation Avoidance Agreement, stating (at para. 27):
Under Article 5(3) the Petitioner can be said to have a PE in India only if the installation or construction activity is carried on in India for a period exceeding 183 days in any fiscal year. The Petitioner was … present in India… for 41 days during 2008-09 for rendering the contract of service to IOCL.
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|Tax Topics - Treaties - Income Tax Conventions - Article 12||charges for use of the installer’s own equipment were not royalties for equipment use||181|
Adobe Systems Inc. v. ADIT, W.P.(C) 2384/2013 (Delhi High Court)
A wholly owned Indian subsidiary of the taxpayer (“Adobe India”) provided software related research and development (R&D) services on a cost plus 15% basis to the taxpayer, which was a U.S.-resident corporation not having any business operations in India. The R&D services rendered by Adobe India were paid for by the taxpayer on cost plus basis. For the third assessment year in question (2006-2007), Adobe India had successfully appealed to the Income Tax Appellate Tribunal an assessment made on it on the basis that its cost-plus pricing for its services did not accord with the arm’s length standard, and an appeal of this decision before the High Court of Delhi was pending.
After finding that even if the taxpayer had a permanent establishement in India, the assessment officer no ability to tax the taxpayer on the fee income of Adobe India, as such income already was subject to tax in accordance with the arm's length pricing standard, Bakhru J went on to find that the taxpayer did not have a PE in India under Article 5(1) (fixed place of business), 5(2)(l) (services PE) or 5(5) (dependent agent) of the India-U.S. Double Taxation Avoidance Agreement (“DTAA”).
The exercise by the taxpayer of management over Adobe India did not make it a PE, in light of Art. 5(6) of the DTAA, which provided:
The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other."
Respecting Art. 5(1), Bakhru J stated (at para 32):
[I]n Director of Income Tax v. E-Funds IT Solution:  364 ITR 256 (Delhi)… this Court held that "[t]he term 'through' postulates that the taxpayer should have the power or liberty to control the place and, hence, the right to determine the conditions according to its needs". … There is no evidence that the Assessee has any right to use the premises or any fixed place at its disposal.
Respecting the absence of a service PE, Bakhru J stated (at para 35):
Clause 5.5 of the agreement referred to by the AO indicates that the Assessee is authorized to audit the Indian subsidiary (Adobe India), so as to ensure that Adobe India adheres to the standards required by the Assessee. The same cannot possibly lead to the inference that the Assessee has been rendering services to Adobe India.
Respecting the absence of dependent agent status of Adobe India, he stated (at para. 37):
[T]here is no allegation that Adobe India is authorised to conclude contracts on behalf of the Assessee or has been habitually doing so.
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|Tax Topics - Treaties - Income Tax Conventions - Article 7||no ability to tax US resident on fees of Indian sub which already were subject to tax in accordance with the arm's length pricing standard||288|
Columbia Sportswear Co. v. Director of Income Tax, (2015) W.P. No. 39548/2012 (T-IT) (Karnataka High Court)
The petitioner (“Columbia”) was a U.S.-resident company engaged in the sale of outdoor apparel. It did not distribute or retail its products in India, but established a liaison office (“LO”) there to purchase, for export, products that had been manufactured in India by independent enterprises. The LO’s duties included identification of appropriate manufacturers, price negotiations, acting as a go-between (between Columbia’s head office and the vendors) and monitoring of quality (including product testing) and of vendor compliance with stipulated standards related to delivery, pricing and labour conditions and with applicable laws.
Primarily at issue was the exclusion, in Art. 5, para. 3(d) of the definition in the India-US Income Tax Convention of “permanent establishment,” for:
the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.
The position of the Director of Taxation was that the LO’s activities in India “cannot be said to be an activity solely for the purpose of purchasing the goods or for collecting information for the enterprise” (para. 14), so that such activities (which were viewed as creating a taxable presence for Columbia in India under the Income Tax Law) gave rise to a permanent establishment under the Convention.
Kundahar J, speaking for a panel of two, found that Columbia did not have a permanent establishment, stating (at para. 14):
If the petitioner has to purchase goods for the purpose of export, an obligation is cast…to see that the goods…[are] acceptable to the customer outside India…Otherwise, the goods…may not find a customer outside India…[A]ll those acts are necessary to be performed …before export of goods…That liaison office is established only for the purpose of carrying on business of purchasing goods for the purpose of export and all that activity also falls within the meaning of the words “collecting information “ for the enterprise.
AB LLC and BD Holdings LLC v. Commrs. of South African Revenue Services, Case No. 13276, 15 May 2015, South Africa Tax Court
The taxpayer (a U.S.-resident company, whose particulars and relevant transactions were treated as being representative of the second appellant) provided "strategic and financial advisory services" (para. 8) for a South African client during a three-phase engagement that went from February 2007 to May 2008. During this period it made 17 of its employees available, who came to South Africa as required – and three employees were each present in South Africa on a rotational basis (so that employees were present in South Africa for more than 183 days in 2007). The employees used the office premises of the client during normal business hours and "always had a presence" in (and the "exclusive use of" - para. 42) a particular boardroom (although other areas on the premises were also occupied from time to time) (para. 8). It did not file South African returns.
Art. 5(1) and 5(2)(a) to (f) of the South Africa-U.S. Double Taxation Agreement (the "DTA") were in the standard OECD Model form. However, subpara. 5(2)(k) also included:
the furnishing of services, including consultancy services, within a Contracting State by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or a connected project) within that State for a period or periods aggregating more than 183 days in any twelve-month period commencing or ending in the taxable year concerned.
After being referred by the taxpayer to a statement in the OECD Commentary that the listed examples in 5(2)(a) to (f) "constitute permanent establishments only if they meet the requirements of paragraph 1," Vally J stated (at para. 29) that the word "include" introducing the listed items in 5(2) expanded the meaning of permanent establishment so that "there is no need for a further…inquiry as to whether the requirements of article 5(1) are met", that the OECD comments on 5(2)(a) to (f) had no bearing on subpara. 5(2)(k) which "is very different …[as] it does not refer to a place of work, but rather to a form of work" (para. 31) and that the Technical Explanation indicated that the concept "that the place of business must be ‘fixed' in the sense that a particular building or physical location is used" did not apply respecting "the furnishing of services under subparagraph (k)" (para. 38).
Even if a 5(2)(k) permanent establishment were required to be a fixed place of business, this requirement was satisfied as the taxpayer "was, at all times, present in the boardroom during the tenure of the contract" (in contrast to Dudney, where "a sole individual providing services moved from one area to another" (para. 42). The taxpayer's submission that it was only permitted to use the boardroom to service the client flew in the face of the "permanent establishment" definition including a fixed place of business through which the enterprise's business is "partly" carried on (para. 43).
Although the taxpayer's employees were not present in South Africa for more than 183 days in the taxpayer's 2008 taxation year, it was permissible to tack on days from the previous year to form a 12 month period ending in the 2008 taxation year (during which the 183–day test was satisfied) as "the signatories to the treaty intended…to allow for double counting of the days" (para. 48).
See summary under Treaties – Art. 7.
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|Tax Topics - Treaties - Income Tax Conventions - Article 7||subsequently earned success fee of consultant attributable to previous PE||84|
DIT v. FC Bamford Excavators Ltd., ITA No. 540/Del/2011 (14 March 2014 ITAT Delhi)
The taxpayer, a UK company licensed technology to its wholly owned subsidiary, JCB India Ltd, and also seconded eight employees to JCB India. The tribunal held (at para. 63) that there remained "absolutely no doubt that these eight personnel deputed from JCB UK to JCB India on assignment basis remained employees of the assesse and never became the employees of JCB India" given that they continued to remain on the taxpayer's payroll and maintained their rights as employees against the taxpayer.
Centrica India Offshore Pvt. Ltd. v. CIT, W.P. (C) No. 6807/2012 (Delhi High Ct)
A UK and Canadian affiliate ("the overseas entities") of the Indian taxpayer ("CIOP") outsourced their back-office support functions to third-party Indian service providers, with CIOP being charged with monitoring the quality of such services. Employees of the overseas entities, who were seconded to CIOP, were under its direct control and supervision, but remained on the overseas entities' payrolls, with CIOP reimbursing them therefor.
The court held that the employees remained employees of the overseas entities and were delivering services to CIOP, rather than performing services for the overseas entities as CIOP's employees, given that their salaries and other benefits were payable by the overseas entities, and there was no purported employment relationship between CIOP and the seconded employees. As a result, the overseas entities were subject to withholding in India.
Assistant Director of Income Tax, International Taxation, Circle 2(2), Mumbai v. Valentine Maritime (Mauritius) Ltd. (2010), 38 DTR 117 (Mumbai ITAT)
The taxpayer ("Valentine") was a Mauritius company which carried on several construction projects in India, in connection with which it provided construction services in India for various customers. Under article 5(2)(i) of the India-Mauritius tax treaty a PE included "a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months." None of the taxpayer's Indian projects individually exceeded nine months, but collectively they did.
The Income Tax Appellate Tribunal held that in absence of abuse, each project had to be tested separately, stating at para. 17:
[E]ven if these projects are commercially coherent in the sense that these projects are for the same organization directly or through a sub contractor, and geographically coherent in the sense that these are on nearby locations, these two factors would not necessarily mean that these projects are to be necessarily seen as a coherent whole—geographically and commercially. The true test, as we have noted above, is in interconnection and independence—in addition to geographical proximity and commercial nexus. …[A]ll the three contracts are for three different purposes – for charter of accommodation barge, for use of barge in domestic are [sic] and for replacement decks. None of these contracts are such that these can be viewed as interconnected or interdependent.
Deputy Director of Income Tax v. Tekmark Global Solutions LLC (2010), 38 SOT 7 (Mumbai ITAT)
As a U.S. resident (" Tekmark") had provided personnel only to work under the control and supervision of a resident of India ("Lucent") and did not render any technical services to Lucent through these personnel, the deputation of such personnel did not create a services PE.
Knights of Columbus v. The Queen, 2008 DTC 3648, 2008 TCC 307
The taxpayer, a U.S.-resident life insurance corporation, was found not to have a permanent establishment in Canada for purposes of the Canada-U.S. Treaty notwithstanding that it provided life insurance to its Canadian members. The Canadian "general agents" (who oversaw the "field agents", i.e., the Canadian agents who solicited applications for sales of the taxpayer's insurance products) were found to be agents of an independent status; and the field agents, although perhaps dependent agents, did not conclude contracts in Canada given that applications were required to be approved in Connecticut (and such approvals were not routine as they entailed detailed medical enquiries, and 10% of applications ultimately were rejected). Although in the meantime, the field agents provided temporary insurance coverage to applicants, a temporary insurance agreement was part of one contract for permanent insurance and, even if the temporary insurance were separate, the field agents' role in the process surrounding the temporary insurance was minimal and, furthermore, the temporary insurance was provided solely as an incentive and the taxpayer was not in the business of selling temporary insurance.
With respect to the Crown's fall-back position that the taxpayer had fixed places of business in Canada, the general agents were not carrying on the taxpayer's business from their offices; and as for the home offices of the field agents, the taxpayer did not have any rights of disposition over those premises (as the field agents did not employ any staff of the taxpayer, had no signage of the taxpayer, the taxpayer made no operational decisions at the field agents' premises nor did any officers or employees of the taxpayer even visit the agents' home offices, let alone have any regular access). In any event, the activities of the field agents carried on at their homes were of an auxiliary agent as they consisted solely of storage, collection of information, supply of information and similar auxiliary or preparatory activities.
American Income Life Insurance Company v. The Queen, 2008 DTC 3631, 2008 TCC 306
A U.S.-resident life insurance company was found not to have a permanent establishment in Canada. The offices of its Canadian agents were not at its disposal (it did not have freedom to enter the buildings or control over the manner in which the buildings were used and did not pay the expenses of the premises). Furthermore, the Canadian agents did not habitually exercise in Canada an authority to conclude contracts in the name of the taxpayer. Although the Canadian agents issued "conditional receipts" in Canada providing temporary insurance, the policies which the taxpayer ultimately issued in the United States following the completion of the underwriting process stated that the final contract and the application (in connection with which the conditional receipts were issued) were one entire contract, and it was clear that those contracts were concluded in the United States rather than in Canada. Furthermore, even if this conclusion were not correct, the Canadian agents had an independent status: it was not determinative of economic dependency that they dealt only in insurance products of the taxpayer.
DIT v. Morgan Stanley (2007), 9 ITLR 1124 (India SC)
The taxpayer ("MSCo") sent its employees to its subsidiary in India ("MSAS") to oversee MSAS's staff in monitoring the outsourcing activities at MSAS and also sent employees on secondment (or "deputation") to MSAS. MS was assessed in India on the basis that both the stewardship and the secondment activities created a services permanent establishment under article 5(2)(1) of the India-US tax treaty, which included:
the furnishing of services…within [India] by an enterprise though employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise… .
The Court held that as MSCo was "merely protecting its own interest …by ensuring the quality and confidentiality of MSAS services" (para. 14), it could not be said that MS was rendering services to MSAS, so that such services did not give rise to a services PE. However, "as regards the question of deputation… an employee of MSCo when deputed to MSAS [did] not become an employee of MSAS," as the seconded employees continued to be on the MSCo payroll and "said company retains control over the deputationist's terms and employment" (para. 15). Accordingly, MSCo was "rendering services through its employees to MSAS" (para. 15), so that a services PE existed on this second basis.
Gulf Offshore N.S. Limited v. The Queen, 2006 DTC 2705, 2006 TCC 246
The taxpayer provided a fully-crewed vessel under a charter party to a Canadian resident company for the purpose of transporting pipe and other materials from Nova Scotia to two ships of the Canadian company laying pipe off the coast of Nova Scotia within the Sable Island offshore area. The taxpayer was found to have a permanent establishment in Canada by virtue of Article 27A of the Canada-U.K. Tax Treaty, which provided that a resident of a contracting state who carried on activities in the other state in connection with exploration or exploitation of the seabed and sub-soil and the natural resources situated in the other contracting state was deemed to be carrying on business in the other contracting state through a permanent establishment situated therein. In response to an argument that the taxpayer had entered into a single passive lease that did not represent the carrying on of activities, Miller J. noted that the ship was owned, manned and operated by the taxpayer, and there was no evidence that personnel of the Canadian company even ever stepped foot on the ship.
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Fowler v. MNR, 90 DTC 1834 (TCC)
A U.S. resident, who every year sold knives and kitchen devices at a stand at the Vancouver Pacific National Exhibition for several weeks, was found to be carrying on business in Canada through a permanent establishment for purposes of the Canada-U.S. Convention.
Placrefid Ltd. v. MNR, 86 DTC 1327 (TCC)
Canadian counsel of the taxpayer did not constitute a permanent establishment because he could not commit himself on behalf of his client unless specifically authorized by a document to do so.
Donroy, Ltd. v. U.S., 301 F. 2d 200 (9th. Cir. 1962)
Canadian corporations, which were limited partners of a California limited partnership with a U.S. general partner and a business office in San Francisco, were found to have a permanent establishment in the U.S., in light of the Court's recognition (at p. 208):
"that the general partners are the general agents of the limited partners for the general purpose of conducting the business - subject only to the statutory exemption of limited partners from direct obligation to creditors beyond their stated financial commitment - and that all the partners have an interest in the partnership assets, including its office."
Shahmoon v. MNR, 75 DTC 275 (T.R.B.)
A U.S. individual resident who used an apartment in Montreal no more than one or two months a year and who used the facilities of a Canadian corporation of which he was president when he came to Canada to look after his real estate holdings, did not thereby have a permanent establishment in Canada. Mr. Flanigan stated (p. 277):
"There are literally hundreds of people who are employed by American corporations who come into Canada and do business, but these people are certainly not considered to be Canadian residents or to have a permanent establishment if they attend at an office in this country to transact their business".
Where the conditions in Art. V, 9(b) of the Canada-U.S. Convention (respecting a services PE) are satisfied during a taxation year respecting a particular project, which continues for several months longer in the following taxation year, but with the 183-day criteria not met in that subsequent year, will CRA consider that the enterprise nonetheless is deemed to have a permanent establishment in Canada during the subsequent year?
CRA responded that “since paragraph 9(b) of Article V of the Convention specifies that the 183-day test applies to ‘any twelve-month period,’ that period need not correspond to the fiscal year of the taxpayer,”and then provided the following example:
Pursuant to Article V, paragraph 9(b) of the Convention, a United States enterprise, whose fiscal year-end is December 31, which provides services on an ongoing basis from January 15, 20_1, to January 25 20_2 shall be deemed to provide such services through a permanent establishment in Canada for the entire period. … [T]he 183-day test is met for the twelve-month period commencing on January 15, 20_1 and ending on January 14, 20_2. The 183-day criterion is also met for the remainder of the work performed in January 20_2 since the threshold of 183 days is reached for the twelve-month period beginning on February 26, 20_1 and ending on January 25, 20_2.
A Canadian resident company (“Customer”), which is awarded a decommissioning contract for a number of offshore oil/gas platforms (the “Main Contract”), subcontracts some of the required work to an affiliate (“Non-Resident”), which is resident in a country whose treaty uses Art. 5(3) of the OECD model. After Non-Resident performs the “First Segment” for four months in year 1, it takes the equipment and personnel to another jurisdiction outside Canada to work on a non-connected project for a different customer and then, in year 2, returns to the same Canadian location for another four months (the “Second Segment”), under a second contract with Customer, to perform further elements of the Main Contract. Does such decommissioning work come within Art. 5(3) and would the 12-month test therein apply?
As indicated by Klaus Vogel, “[t]he term ‘building site or construction project’ also covers demolition and clearing operations. Those operations need not be materially connected with subsequent building or construction work.”
…[T]he decommissioning work described above…would likely be considered to fall under the scope of [Art. 5(3)].
A longer period of time between [Segments 1 and 2] could suggest that the projects are separate and should not be viewed as a single unit. However…that both the First Segment and the Second Segment are performed under the scope of the Main Contract… could be a strong indication that the work is only temporarily discontinued.
…[If] the First Segment and Second Segment should be viewed as a single unit…then…Non-Resident would be considered to carry on business in Canada through a permanent establishment in Canada if the time from the beginning of the First Segment to the completion of the Second Segment exceeds 12 months.
Mr. A and Mr. B, both U.S. resident individuals, are partners of a U.S. partnership (which is fiscally transparent in the U.S.) that provides consulting services in Canada to customers resident in Canada.
A and B are present in Canada only throughout the January to May (151 days) and August to December periods (153 days), respectively, representing 216 days in aggregate.
A is present in Canada only throughout the January to July period (212 days, including 152 work days), whereas Mr. B does not provide services in Canada. A’s services in Canada generate $200,000 of income, and the partnership’s gross active business revenue during those 212 days is $350,000.
In finding that in both examples, A and B are considered to carry on business in Canada through a permanent establishment as defined in Art. V(9) of the Canada-U.S. Treaty (assuming under Example 2 that the work relates to connected projects), Headquarters stated (footnotes omitted):
“[E]nterprise”… refers to a business carried on by each partner through the partnership. …[T] he determination whether such business is carried on through a permanent establishment is made at the partnership level. If a partnership is found to have a permanent establishment in Canada, each partner will also be found to have a permanent establishment in Canada.
The OECD takes the same approach to applying the duration test involving partnerships under paragraph 3 of Article 5….
Subparagraph 9(a) of Article V would not deem the partnership to provide services through a permanent establishment in Canada because no one individual is present in Canada for 183 days or more in any twelve-month period.
Since the partnership has provided services in Canada for 216 days in a twelve-month period, subparagraph 9(b) of Article V will deem the partnership to provide services through a permanent establishment in Canada if they are provided with respect to the same or connected projects. In that case, both Mr. A and Mr. B would be taxable in Canada on the profit attributable to the partnership’s permanent establishment and allocated to them in accordance with the terms of the partnership agreement. …
… Mr. A is present in Canada for 212 days in 2015, and the income of the partnership derived from his services is more than 50% of the gross active business revenue of the partnership ($200,000 / $350,000 = 57.14%) during those 212 days.
Subparagraph 9(b) of Article V will not deem the partnership to provide services through a permanent establishment in Canada since the partnership has provided services in Canada for only 152 days in a twelve-month period.
Since the thresholds in subparagraph 9(a) of Article V have been met, the partnership has a permanent establishment in Canada and the profit attributable to the permanent establishment will be allocated to the partners.
ForCo’s Canadian business
ForCo is a wholly-owned U.S. subsidiary of Foreign Parent, which is a U.S. non-profit organization. ForCo is resident of the U.S. for purposes of the Canada- U.S. Treaty and is entitled to benefits under Art. XXIX-A thereof. Its business is to assist Foreign Parent in selling memberships in Foreign Parent. ForCo will be carrying on its business in Canada by virtue of providing marketing and support services to Foreign Parent pursuant to a Service Contract.
Employee’s home office
To fulfill ForCo’s obligations under the Service Contract, ForCo hired Employee on a full-time basis, as its first and only Canadian resident employee to work under an “Employment Agreement” from a Canadian home office. Employee’s functions will include communicating with Foreign Parent’s existing Canadian Members and identifying potential new Canadian Members to Foreign Parent. Employee will have no authority to conclude contracts on behalf of ForCo or Foreign Parent. Employee’s home office is not associated or identified with the business of ForCo or Foreign Parent in any manner nor does ForCo have access to, or control over, the home office at any time. ForCo will not assume any costs or risks associated with Employee`s home office.
ForCo will not be considered to carry on business through a permanent establishment, as defined in Article V of the Treaty, situated in Canada, solely as a consequence of the [described] activities of Employee performed in Canada… .
Key role of ForCo in Projects
CanCo (an indirect CBCA subsidiary of a foreign public company), which had knowledge of the Canadian markets and whose Canadian customers preferred local suppliers, entered into contracts to perform two Canadian projects (the “Projects”). Various important tasks were subcontracted to its sister company which is resident in the “Treaty” county for purposes of that Ttreaty (“ForCo”), none of which will include physical construction or installation activities, or on-site planning or supervision of the Projects (nor will there be any “physical indications that would create any degree of identification of a location in Canada as ForCo’s business location.”) The Project performance will be highly dependent on the subcontracted tasks to be executed by ForCo. This allocation of Project risks “may result in ForCo effectively assuming most of the [Project] risks… consistent with the economic reality of ForCo having the financial capacity to bear risk.”
Secondments of ForCo employees to CanCo
CanCo will require the assistance, in Canada, of some of ForCo’s employees, who will be seconded to CanCo. The obligations of ForCo respecting them will be limited to their provision to CanCo under the “Secondment Agreement.” ForCo and CanCo intend an employer/employee relationship between CanCo and the seconded employees, so that the seconded employees will be under the control and direction of CanCo. However, they will continue to be paid by ForCo. All costs relating to their remuneration will be reimbursed by CanCo, with no mark-up. “Transfer prices for transactions between CanCo and ForCo will be determined in accordance with the arm’s length principle reflecting the functions and risks of both parties and will be supported by proper documentation.”
Meetings of non-seconded ForCo employees in Canada
Meetings will be held at CanCo’s office (located outside of the construction/installation site) or at the XX premises. The non-seconded employees of ForCo coming to Canada for the meetings will not have any presence at the construction/installation site or involvement in the construction/installation activities or on-site planning or supervision of the Projects. “These meetings will typically last for a few days only and, exceptionally, up to a few weeks…[and,] in any event, will never exceed an aggregate of 90 days over any 12 month period. As a result, the total amount of time to be spent by the non-seconded employees of ForCo in Canada in the course of ForCo’s work for the Projects will be insignificant relative to the total amount of time spent by ForCo for the Projects.”
No Reg. 105 withholding re payroll reimbursements to ForCo.
ForCo will not be considered to carry on business through a permanent establishment, as defined in Article 5 of the Treaty, situated in Canada solely as a consequence of the secondment under the Secondment Agreement of certain employees of ForCo to work for CanCo in Canada in respect of the Projects, as described in paragraphs 12 and 13 above [describing the secondment arrangements], or the Projects’ tasks subcontracted to, and executed by, ForCo, as described in paragraphs 14 to 18 above [which include descriptions of the meetings and the task division].
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|Tax Topics - Income Tax Regulations - Regulation 102||payroll reimbursement payments under employee secondment arrangement not subject to Reg. 105||199|
|Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)||seconded employees respected as employees notwithstanding their payroll is paid by (and reimbursed to) ForCo||57|
|Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2)||no mark-up on cross-border payroll reimbursement represented to accord with s. 247||101|
USCo (a subsidiary of USParent), as part of its business of providing project planning and execution services to the world-wide affiliated group in planning and executing projects, sends engineers, advisors and coordinators to Canada (for more than 183 days in each year, but for less than 183 days for a particular site) to provide technological assistance and advice on strategy development, business controls, engineering, design and project execution with respect to multi-year development projects of Canadian affiliates, with most of the services being provided in the Canadian affiliates' offices, or at third party contractors' offices.
Can Art. V, para. 3 of the Canada-U.S. Convention apply when the services are not rendered at the building site or construction or installation project, and does it apply to "intellectual" services? After noting that 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, CRA stated:
only the services rendered at the construction site can be considered. Services rendered offsite will not be taken into account. …[However] on-site planning and supervising activities are included when making a determination under paragraph 3, even where they constitute the sole activities of the enterprise.
Respecting the interrelationship with Art. V, para. 9, CRA concluded:
If a PE exists under paragraph 3...only the services provided offsite would be considered in determining whether a PE exists under paragraph 9. In no PE exists under paragraph 3, then all of the services in Canada can be considered in the determination of whether a PE exists under paragraph 9.
Respecting a submission of the taxpayer that different functions carried out by different divisions of USCo should be treated as separate enterprises for purposes of para. 9, CRA stated:
[E]ach of USCo's… functions would constitute separate enterprises if they can be considered as separate "lines of business". The… determination of whether USCo has one or more "lines of business" should be done using the same analysis as is used for determining whether the company carries on a separate business [then citing IT-206R and Du Pont, 2001 DTC 5269, 2001 FCA 114].
Before indicating that "USCo likely is carrying on only one line of business, which is the business of planning and executing XX projects," the Directorate noted the similarity of the services provided by USCo.
Respecting whether there were the "same or connected" projects for purposes of Art. V, para. 9, CRA stated that if there was more than one project:
then the days of service should be computed separately for each of these projects, keeping in mind that days at the construction site, if it is itself a PE under paragraph 3 of Article V, are not included. If the days for any particular project compute to less than 183 days, then we will examine whether the projects are connected so that they can be combined for purposes of paragraph 9 of Article V. …[T]he determination of whether projects are connected should be determined from the point of view of the enterprise (i.e. USCo)… . Paragraph 42.41 of the OECD Commentary explains that the reference to "connected projects" is intended to apply where separate projects have a "commercial coherence". … [G]eographic coherence [also] is required under the Treaty.
Franceco was engaged to install specialized equipment purchased by an arm's length Canadian company (Canco) for modernizing and expanding the capacity of its Canadian factory (the "Project"). Following such engagement and a kick-off meeting in France, there was a meeting between Canco and Franceco representatives in Canada to approve the detailed implementation plan. Franceco hired certain Canadian contractors whose work was subject to supervision of Franceco personnel.
Respecting whether the Project was an installation project for purposes of Art. 5, para. 3 of the Canada-France Convention, the Directorate stated (TaxInterpretations translation) that "Franceco undertook not only to supervise the tasks accomplished by the local sub-contractors, but also had the general responsibility to undertake the equipment installation" and that the "presence of the employees of Franceco in Canada was essential as their expertise was required to achieve the Project."
Respecting the duration of the Project as an installation project, the Directorate found that it commenced with the second meeting, when the preparatory work began on Canadian soil, namely, preparation of the plans and specifications; and found that it was not completed until production optimization and testing was finished. Accordingly, the Project lasted more than 12 months, and was a permanent establishment of Franceco under Art. 5 for its duration.
After noting that there were various other contracts (with individual durations of under 12 months) between the parties for installation services, the Directorate stated that "the establishment of installation projects, as well as the commercial and geographic coherence of the different sites, is a question of fact," and listed various factual criteria to be applied.
Art. V, subpara. 2(g) of the Canada-Brazil Treaty included an "assembly project" in the definition of permanent establishment, rather than using the term "installation project." After noting that this provision likely was based on Art. 5 of the 1963 OECD Model, which used "assembly project," before this was changed in 1977 without comment to "installation project," referring to dictionary definitions of "assemble" and "install," and noting that the French Treaty versions generally used "montage" for both terms, CRA stated:
[T]he better view would be to consider the terms "assembly" and "installation" as having a similar meaning. Accordingly…any position previously taken by the Directorate with respect to an "installation project" would generally be relevant in determining if an "assembly project" exists… .
Turning to the phrase's application, CRA stated:
[T]he OECD Commentaries have been expanded to make it clear that paragraph 5(3) of the OECD Model is not limited to construction or manufacturing-type activities. … Usually…installation is seen as being performed in relation to a tangible property, such as a machine or equipment, and…installation should be the main activity of the project to qualify as an "installation project". If significant other activities are also taking place, such as consulting, modification and testing, the project may not be viewed as an installation project.
A non-resident of Canada who was resident in Ireland for purposes of the Canada-Ireland Treaty, worked as an independent contractor, under a short-term contract for service, for a provincial authority at facilities maintained and operated by it. After noting that under the OECD commentaries there was no intended difference between the fixed base and permanent establishment concepts, and referring to its statement in Income Tax Technical News No. 22 that, after Dudney, it did not propose to litigate another case based on the taxpayer's use of space within the premises of another person unless the taxpayer had more physical control of the space, CRA stated:
In the absence of facts that could otherwise be significantly distinguished from those considered in the Dudney case, we are unable to support a conclusion that a permanent establishment in Canada existed to the non-resident taxpayer in the case presented.
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|Tax Topics - Treaties - Income Tax Conventions - Article 14||144|
Are there any new issues with respect to the services PE provision in the Article V of the US treaty?
The Directorate recently ruled on the applicability of Art. V of the Treaty to a US resident corporation ("USco") carrying on a web-based business, which entailed the sale of advertising space on its websites to Canadian-resident businesses, and the sale of digital content by Canadian resident software developers. A Canadian resident subsidiary of USco ("Canco") was to build and operate a data centre consisting of numerous servers in Canada, and use that data centre to provide website and data hosting services to USco. USco would pay Canco an arm's length fee for these services. Canco would not have the authority to legally bind USco, and would not provide any services to Canadian resident users, advertisers or software developers. Employees of USco would not have unsupervised access to the servers, although they would be able to manage the software and data on the servers through remote access.
CRA considered the fixed base PE provision in para. (1) of Art. V, the agency PE provision in para. (5), and the services PE provision in subpara. (9)(b), and ruled that USco would not carry on a business through a PE in Canada. CRA noted that USco also had another Canadian subsidiary providing services to USco in connection with marketing and sales support activities for USco's development and expansion of its user, advertiser and software developer base in Canada, but was not asked to and did not address how this might affect the PE issue.
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|Tax Topics - Treaties - Income Tax Conventions - Article 4||interposition of third-country entities not viewed favourably||175|
Where a US company (USCo) subcontracts part of its contract, to perform consulting services to an arm's length Canadian customer (Canco) to related US corporation (USCo 2), whose employees will spend over 183 days in Canada on the project in a 12 month period, then s. 9(b) of Art. V of the Canada-US Convention will deem the services to have been provided by USCo through a permanent establishment in Canada. (and USCo 2 will be deemed to have provided its services to USCo through a permanent establishment of USCo 2 in Canada). Furthermore:
as the discussion in paragraph 42.43 of the [OECD] Commentary pertains to the interpretation of wording that is materially unlike the wording of subparagraph 9(b) or Article V of the Convention…. it is not of assistance in interpreting the latter provision.
However, where after entering into the contract with Canco, USCoinstead subcontracts a portion of the work to a Canadian subsidiary of USCo or an arm's length Canadian company, USCo will not be considered to have a PE in Canada provided such Canadian company is paid an arm's length fee – and similarly, if a US professional firm subcontracts part of its consulting contract with Canco to an arm's length Canadian professional partnership.
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|Tax Topics - Income Tax Act - Section 150 - Subsection 150(1) - Paragraph 150(1)(a)||206|
|Tax Topics - Income Tax Regulations - Regulation 105 - Subsection 105(1)||partnership subject to Reg. 105 withholding||206|
The taxpayers (USCo and its indirect subsidiary, NRCo) run various websites and related mobile services in order to gain advertising revenue, and to enable third parties to sell digital content, with one of the taxpayers receiving a percentage of the proceeds. Canadian marketing and sales support is carried out through a Canadian subsidiary (Cansub). An indirect Canadian subsidary of USCo will build and staff a Canadian data centre, which will completely mirror all the taxpayers' websites, principally for the purpose of improving their performance.
A small group of individuals employed by USCo or a related U.S. entity who run the site operations organization for USCo will be authorized by Canco to visit the Data Centre from time to time for the purposes of inspection, maintenance or similar purposes. ...
Applications and data hosted in the Data Centre will be managed remotely by employees of the Taxpayers located outside of Canada.
CRA rules that the taxpayers will not be considered to carry on business through a permanent establishment in Canada as a result of these activities for the purposes of the Canada-U.S. Treaty (in the case of USCo) and for purposes of the "Convention" (in the case of NRCo).
A Canadian-resident employee (Mr A) of a Canadian resident corporation (Canco) provides services in the US to US businesses for 150 days in any 12-month period, with such services being Canco's only source of gross active business revenue. CRA was asked whether Mr A would be considered to be present in the US for more than 183 days for purposes of para. 9(a) of Article V of the Canada-US Convention, on the basis that Mr A was present in the US for a further 50 days in a 12-month period for personal reasons, such as shopping, vacationing and attending sporting events.
After noting that it generally would be the responsibility of the IRS to determine whether Canco had a permanent establishment in the US, CRA went on to state that "physical presence during a day is sufficient to be included in determining whether the 183 day test is met."
A corporation resident in India which engages in residential development in India and does not have an office in Canada would likely not have a permanent establishment in Canada by virtue of engaging an unrelated Canadian corporation ("Canco") to advertise in Canada for the sale of Indian condos and provide interested parties with information, with Canco (which does not have authority to conclude contracts) directing parties who are still interested to contact the Indian corporation directly.
CRA indicated that a website cannot be a permanent establishment under Article V of the Canada-U.S. Convention because a website is intangible - however, the server that provides the website can be a physical location if it is fixed in place and business is carried on through that server. CRA stated:
In summary, a non-resident who presents a web site to its Canadian customers may be considered to carry on business in Canada through a [permanent establishment] where all of the following conditions are met:
- the host server is located in Canada,
- the business is being carried on, wholly or in part, through the operation of the web site on that server,
- the host server is at the non-resident's disposal,
- the host server is more or less permanently linked to a geographical location in Canada, and
- the web site is hosted by the particular computer server on more than merely a temporary or tentative basis.
CRA also noted that if a location is solely dedicated to advertising, then pursuant to Art. 5(6)(e) it is not a physical location.
Where self-employed US-resident individual provides services in Canada January 1-January 31 and October 1-December 31 in one year, and January 1-April 30 in the next year, the fact that the services in the October-April period (being more than 183 days) are deemed to be performed through a permanent establishment in Canada does not influence the tax treatment of the January period. "[Art. V(9)(a) of the Canada-U.S. Convention] does not deem a [permanent establishment] to exist in Canada to which income from services provided at another time could be attributed."
Pursuant to Art. V(6)(a) of the Canada-U.S. Income Tax Convention, a facility in Canada is generally not deemed to be a permanent facility if it is used only to hold and deliver merchandise. However, the conditions of art. V(6) must be strictly met; for example, an enterprise's facility that stores spare parts for customers' machines will not fall within art. V(6) if the enterprise, rather than just delivering the parts, also uses those parts to maintain the customers' machines.
Paragraph 3 of the OECD Model Convention (providing that "a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months") represents a stand alone test for determining whether a site or project qualifies as a permanent establishment, so that once the requirements of that paragraph have been satisfied, a permanent establishment will be found to exist and it is not necessary to consider whether the "basic rule" in paragraph 1 has been satisfied.
Suppose a US-resident taxpayer provides services in Canada for 130 days between 1 October to 28 February, does not anticipate providing further services in Canada, and obtains regulation 105 waivers for services provided in that period. Nevertheless, the taxpayer returns to Canada to provide services for 60 days between 1 July to 31 August the same year. This would trigger Art. V(9)(a) of the Canada-US Convention retroactively to impute a permanent establishment. The taxpayer would thus be late in filing a T1 in respect of income from Canada for 1 October-31 December.
CRA stated that it "may" apply relief provisions on the penalties and accumulated interest for 1 October-31 December - "Taxpayers will have to advise the CRA of their circumstances, and the CRA will review each request on the basis of the information provided."
CRA does not expect retroactive remittances for the period where the waivers were valid, but withholdings must commence starting 1 July. The taxpayer is obligated to file T1 forms and pay the resulting Canadian income tax liability from the 1 October-28 February period.
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|Tax Topics - Income Tax Regulations - Regulation 105 - Subsection 105(1)||penalty relief following breach of waiver||168|
Is there a discrepancy between the CRA's position that subpara. 9(b) of Article V of the Canada-U.S. Treaty could apply where services are rendered between related parties and the US Joint Committee on Taxation's statement in. JCX-57-08 that: "paragraph 9 only applies to services provided by the enterprise to third parties and not to services provided to that enterprise (i.e. inter-company services)." CRA responded:
The CRA continues to be of the view that a related party may be a "third party" and therefore paragraph 9 of Article V can give rise to a permanent establishment where the services in question are rendered to a related party. The CRA agrees with the comment in the TE to the effect that paragraph 9 of Article V cannot give rise to a PE for an enterprise when services are rendered to that enterprise. It is not clear to the CRA that its views are contrary to the views of the U.S. Joint Committee.
Foreign Co, a Norwegian limited liability company, entered into the Agreement for the bareboat charter to it of the Ship from a Norwegian partnership (Partnership IX), and entered into the Contract for the time charter of the Ship to Canadian resident companies (the “Cancos”) for use of the Ship in relation to a facilities located in Canada and owned by the Cancos. Foreign Co's made payments to Partnership IX as, on account of, or in lieu of, or in satisfaction of, Foreign Co's use of, or the right to use, the Ship to transport XX to locations inside and outside of Canada.
That Partnership IX and its two Norwegian corporate partners will not have a permanent establishment situated in Canada for purposes of Article 5 of the Canada-Norway Treaty, solely by reason of Partnership IX having entered into the Agreement with Foreign Co.
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|Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Paragraph 212(1)(d) - Subparagraph 212(1)(d)(ix)||46|
A representative office of a foreign bank whose activities were restricted to the general promotion in Canada of the foreign bank's products and services, and acting as a liaison between Canadian customers (or potential customers) and the foreign bank, would be considered to be engaged in activities of a preparatory or auxiliary nature and, therefore, would not be considered to be a permanent establishment under the applicable Treaty.
Income Tax Technical News, No. 34, 27 April 2006 under "Permanent Establishments"
Discussion of Toronto Blue Jays Baseball Club v. Ontario Minister of Finance, case.
Income Tax Technical News No. 33, 16 September 16 2005
There are numerous factors to be considered in making a determination as to whether a permanent establishment exists, one of which is the legal right to exercise control over a place of business.
"Which factors are most relevant in any particular case will be largely dependent on the nature of the taxpayer's business. Under a different set of facts, other factors could supersede those listed by the Judge in the Dudney decision."
9 September 2004 External T.I. 2004-007035 -
A U.S. "S" corporation ("USCo") intends to sell goods to customers resident in Canada, with the goods being shipped to a warehouse in Canada owned by an arm's length corporation resident in Canada ("Canco") that will store USCo goods until they are shipped to USCos Canadian customers. The Directorate stated that "in order for Canco to be an independent agent acting in the ordinary course of its business, Canco must be independent both legally and economically and acting in the ordinary course of its business when acting on behalf of USCo."
Income Tax Technical News No. 22, 11 January 2002
After referring to Dudney, CRA stated:
"We do not propose to litigate another case based on the taxpayer's use of space within the premises of another person unless we can reasonably maintain, based on the particular facts, that the taxpayer in fact had sufficient physical control of the space to carry on those aspects of his or her business that are appropriate to the space.
Income Tax Technical News, No. 18, 16 June 2000
Discussion of TCC decision in Dudney.
14 January 1999 No. 981253
In commenting on Article 5 para. 3 of the Netherlands and German Conventions, which stated that "a building site or a construction or installation project constitutes a permanent establishment only if it lasts more than twelve months", the Directorate stated:
"The placing of equipment in a building for use would meet the definition of installation for the purposes of paragraphs 3 of Article 5 of the Convention. Placing of equipment for use would include all the activities of assembling, commissioning and test runs until the equipment is fully functional."
30 November 1999 T.I. 982693
In response to an inquiry as to whether a ship of a Norwegian corporation that was outfitted for the purpose of undertaking underwater seismic surveys and that would be operated in Canadian territorial waters under a time charter agreement for approximately three years, RC stated:
"In general, a ship will constitute a fixed place of business under the Convention if it is linked to a specific geographical location (i.e., by virtue of being anchored in a particular place) or if the ship operates in a geographically limited area for an extended period of time."
7 August 1998 Discussion Paper on Proposed Changes to Revenue Canada's Guidelines for Treaty-Based Waivers of Regulation 105 Withholding (Draft)
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|Tax Topics - Income Tax Regulations - Regulation 105 - Subsection 105(1)||0|
28 December 1994 External T.I. 5-940793
Respecting an inquiry as to whether a software implementation project, including installation services, would result in a permanent establishment in Canada, RC noted that a project should be regarded as an installation project for purposes of Article V, paragraph 3, of the Canada-US Convention if installation is the primary and most important activity; that the fact that an implementation project may encompass some installation activities does not necessarily mean the project is an installation project; and that if it is determined that a project is an installation project, it will give rise to a permanent establishment if the duration of the project is more than 12 months, even if the installation portion of the project is less than 12 months.
27 July 1994 T.I. 940932 C.T.O "Permanent Establishment")
"In a situation where a corporation has wholly-owned subsidiaries in Canada and the United States ... with 'specialized employees' employed by the Canadian subsidiary which are required to visit work sites in the U.S. to review projects, gather data, and carry out certain tests and then return to their office in Canada to interpret lab reports, design solutions to problems, conduct discussions with regulatory and environmental agencies of the U.S. and finally prepare engineering reports, we believe that such employees may be carrying on the business of the U.S. subsidiary in Canada at a fixed place of business, that being the offices of the Canadian subsidiary and therefore the U.S. subsidiary may have a permanent establishment in Canada."
5 July 1994 External T.I. 5-933522 -
Discussion of whether Article V, paragraph 3 of the Canada-U.S. Convention would apply where a U.S. software company that had sold software to an unrelated Canadian corporation is required under the terms of the sales contract to send employees to Canada to provide installation and maintenance services at the offices of the Canadian corporation.
1994 A.P.F.F. Round Table, Q. 44
"The Department usually considers that, where the Canadian activities of a foreign business are carried on through an organized and structured sales force, the sales force may represent for the non-resident sufficient substantial presence in Canada to be considered a permanent place of business and thus a permanent establishment."
93 C.M.TC - Q. 15
RC will use the OECD commentary as an aid in considering whether a wholly-owned subsidiary is an independent agent of its non-resident parent.
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|Tax Topics - Treaties - Income Tax Conventions - Article 11||77|
28 June 1993 T.I. (Tax Window, No. 32, p. 6, ¶2598)
A sales force in Canada could be regarded as stable or permanent activities of a U.S. corporation in Canada.
31 May 1993 Memorandum (Tax Window, No. 32, p. 15, ¶2613)
RC refers to the 1992 OECD Commentary in considering whether there is a permanent establishment in Canada.
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|Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b)||17|
1 December 1992 Memorandum (Tax Window, No. 27, p. 11, ¶2352; October 1993 Access Letter, p. 475)
A list of nine criteria for determining whether a Canadian corporation is an independent agent of a U.S. corporation for purposes of Article V(7) of the Canada-U.S. Convention.
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|Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii)||139|
14 May 1991 T.I. (Tax Window, No. 3, p. 10, ¶1237)
A U.S. corporation may be considered to be carrying on business in Canada where it supplies to its Canadian subsidiary employees that are under its direct control and supervision, in which case the provision of space to the employees at the Canadian subsidiary may constitute a place of business for purposes of Article V of the Canada-U.S. Convention.
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|Tax Topics - Income Tax Regulations - Regulation 100 - Subsection 100(4)||52|
25 March 1991 T.I. (Tax Window, No. 1, p. 9, ¶1166)
Because the taxpayer's activities in Canada must be considered in relation to its business activities elsewhere, a U.S. resident will not be precluded from being considered to have a permanent establishment in Canada by virtue only of the Canadian activities having no expectation of profit.
22 March 1990 Memorandum (August 1990 Access Letter, ¶1397)
Finance supports the principle set out in the OECD Commentaries respecting the determination of permanent establishment on the basis of available space.
IC 75-6R "Required Withholding from Amounts Paid to Non-Resident Persons Performing Services in Canada"
Where an individual is present in Canada for a period not exceeding 60 days and is not entering Canada on a recurring basis, RC will not consider the individual to have a fixed base in Canada for purposes of administering the various treaties.
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|Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary or Wages||20|
|Tax Topics - Treaties - Income Tax Conventions - Article 14||35|
Richard Tremblay, Ilana Ludwin, "Indian Supreme Court Diverges from OECD Guidelines, Relies on Questionable Canadian Precedent, in Deciding PE Issue in Formula One", Tax Management International Journal, 2018, p. 125
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.
Gary D. Sprague, "Observations on Treaty Interpretation – Spanish Supreme Court Addresses Commissionaires", Tax Management International Journal, 2016, p 55
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.
Christian Ehlermann, Marla Castelon, "When Does a Dependent Agent Act Habitually?", Tax Notes International, 26 September 2016, p. 1141
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... .
Maja Stubbe Gelineck, "Permanent Establishments and the Offshore Oil and Gas Industry – Part 1", Bulletin for International Taxation, April 2016, p. 208.
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.
Abraham Leitner, Peter Glicklich, "Uncertainty Remains Under the Services PE Provision in the U.S.-Canada Income Tax Treaty", Tax Management International Journal, 2015, p. 784
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… .
Mateusz M. Krauze, "Impact of Cloud Computing on Permanent Establishments Under the OECD Model Tax Convention", Tax Management International Journal, Vol. 44, No. 3, March 13, 2015, p. 131.
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.
|Locations of other summaries||Wordcount|
|Tax Topics - Treaties - Income Tax Conventions - Article 9||259|
Joel A. Nitikman, "More on Services PEs – What is a Connected Project?", Canadian Tax Journal, (2014) 62:2, 317-82.
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, 110th 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.
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….
Pierre-Marie Hourdin, "Is the Construction PE Clause in the OECD Model Treaty Satisfactory?", Tax Notes International, July 21, 2014, p. 229.
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 ] 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.
Leopoldo Parada, "Agents vs. Commissionnaires: A Comparison In Light of the OECD Model Convention", Tax Notes International, October 7, 2013, p. 59
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.
Jan de Goede, Ruxandra Vlasceanu, "Permanent Establishment Implications for Coordination Centres in the Oil and Gas Industry", Bulletin for International Taxation, September 2013, p. 466.
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.
Lee A. Sheppard, "The Brave New World of the Dependent Agent PE", Tax Notes International, Vol. 71, No. 1, 1 July 2013, p. 10
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)
(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,  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)).
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.
Barbara M. Angus, "Chipping Away at the Permanent Establishment Concept", Tax Management International Journal, Vol. 42, No. 5 May 10, 2013, p. 259.
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.
Hans Pijl, "Agency Permanent Establishments: in the name of and the Relationship between Article 5(5) and (6) – Part 1", Bulletin for International Taxation, January 2013, p. 3:
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.]
Jan de Goed, "Interpretation and Application of Article 5 (Permanent Establishment) of the OECD Model Tax Convention: Response from the IBFD Research Staff", Bulletin for International Taxation, Vol 66, No. 6, 2012, p.313
Commentary on the 2011 OECD discussion draft.
J. Scott Wilkie, "Services Permanent Establsihments and the Canada-United States Income Tax Treaty", International Transfer Pricing Journal, Vol. 19, No. 3, 2012, p. 179
Discussion of para. 9 of Art. V of the Canada-US Convention.
Jacques Sasseville, "Agency Relationship: When Is There a Permanent Establishment?", International Bureau of Fiscal Documentation Bulletin, Vol. 58, No. 5, May 2004, p. 194.
Keith Evans, "Leased Equipment: When Does a Permanent Establishment Exist?", 2002 Canadian Tax Journal, Vol. 50, No. 2, p. 489.
Ronit Florence, "Draft 2002 Update To The OECD Model Tax Convention - Dudney Revisited", Taxation of Executive Compensation and Retirement, Vol. 13, No. 8, April 2002, p. 115.
Howard Levine, David Weintraub, "OECD Updates Commentary on PE/Income Concepts", International Tax Report, May 2001, p. 2.
J. Scott Wilkie, "Transfer Pricing Aspects of Electronic Commerce", International Transfer Pricing Journal, Vol. 8, No. 1, 2001, p.6.
Arthur Cockfield, "Should we Really Tax Profits from Computer Servers?", Tax Notes International, Vol. 21, No. 21, 20 November, 2000, p. 2407.
Howard Levine, David Weintraub, "When Does E-Commerce Result in a Permanent Establishment? The OECD's Initial Response", Tax Management International Journal, Vol. 29, No. 4, 14 April 2000, p. 220.
Glicklich, "International Taxation of Internet Transactions", International Tax Report, May 1996, p. 1.
Roberts, "The Agency Element of Permanent Establishment: The OECD Commentaries from the Civil Law View", International Tax Review, September 1993, p. 396, and October 1993, p. 488.
Jones, David A. Ward, "Agents as Permanent Establishments under the OECD Model Tax Convention", European Taxation, May 1993, p. 154.
Tremblay, "Permanent Establishments in Canada", 1989 Conference Report, c. 38.
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