tax notes international - Tuck School of Business - Dartmouth College

Different Methods of Attributing Profits to Agency
PEs
by Carlos Eduardo Costa M.A. Toro
Carlos Eduardo Costa M.A. Toro is a partner with Zilveti e Sanden Advogados in São Paulo.
This article is based on the advanced LL.M. paper the author submitted in fulfillment of the requirements
of the advanced LL.M. in international tax law at the International Tax Center Leiden (Leiden University).
I. Introduction
It has been said that article 7 is the heart of the
OECD model convention. 1 Indeed, article 7 of the
OECD model2 deals with the most important category
of income — business profits, which comprise most of
the income that arises in international transactions. 3 It
therefore covers a wide extent of activities carried out
by an enterprise, either by forbidding the host state to
tax when the permanent establishment threshold is not
met or by allowing taxation when such requirement is
fulfilled.
Its acknowledged importance aside, article 7 still
presents some debatable issues regarding its interpretation,
such as the attribution of profits to agency PEs.
This issue becomes even more controversial when the
PE is a separate enterprise associated with its principal,
in most cases a subsidiary constituting a PE of its foreign
parent company. In this context, despite being one
of the most important concepts of international taxation
and being extensively dealt with in the OECD
model convention and its commentary, PE characterization
is still a controversial issue around the world,
1
Alberto Xavier, Direito Tributário Internacional do Brasil, 6th ed.
(Rio de Janeiro: Forense, 2004), p. 695.
2
Unless otherwise indicated, all references are to the 2005
OECD model convention.
3
Klaus Vogel, Klaus Vogel on Double Taxation Conventions, 3rd
ed. (London: Kluwer Law International, 1997), p. 399.
since it involves a factual analysis that can only be
made on a case-by-case basis. 4
As pointed out by the OECD in the introduction to
its model convention, member countries have long recognized
the need to ‘‘clarify, standardize, and confirm
the fiscal situation of taxpayers who are engaged in
economic activities in other countries through the application
by all countries of common solutions to identical
cases of double taxation.’’ 5 However, this aim of
the OECD is not always met in practice, as the interpretation
of relevant provisions of the OECD model
convention often diverges between states. The OECD
itself recognizes that the practices of the countries
around the world regarding the attribution of profits to
PEs and the interpretation of article 7 differ significantly.
6
The OECD’s findings were confirmed by a study
carried out by the International Fiscal Association on
the occasion of its 60th Congress held in Amsterdam
in 2006. The general report of this congress indicated a
wide divergence among the branch reporters regarding
the interpretation of article 7. According to the general
report, the only point on which most of the branch
4 Massimiliano Gazzo, ‘‘Permanent Establishment Through
Related Corporations: New Case Law in Italy and Its Impact on
Multinational Flows,’’ Bulletin (June 2003), pp. 257-264.
5 Para. 2 of the introduction to the 2005 OECD model.
6 Para. 1 of the update of the status of the OECD project on
the attribution of profits to PEs (2006), available at http://
www.oecd.org/dataoecd/55/14/37861293.pdf.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 421
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