tax notes international - Tuck School of Business - Dartmouth College

that must be satisfied before a country can tax residents
of other treaty countries on their profits derived
from the other country.’’ 12
At this stage, it is worthwhile to remember what
Kees van Raad cited as one of the fundamental rules
in applying tax treaties, that ‘‘tax treaties restrict the
application of internal tax law.’’ 13 Stated differently, a
tax treaty might restrict taxation, but not impose a tax
that does not otherwise exist under domestic law. The
main purpose of tax treaties is to establish a mechanism
to avoid double taxation by restricting tax claims
in areas where overlapping tax claims are expected to
occur. 14
In this sense, the PE threshold must be met to allow
the host state to tax the items of income arising within
its territory, if its domestic law so provides. Broadly
speaking, the rationale behind the PE provision is that
as the enterprise is deriving profits in the host state by
having a presence thereof, that is, by being economically
connected with that state and using its infrastructure,
the host state should be entitled to tax such
profits.
The characterization of a PE is governed by article
5, provided that the relevant states concluded an
OECD-patterned treaty. For the present analysis, what
is relevant is the characterization of an agency PE,
which is governed by the provisions of article 5, paragraph
5 of the OECD model tax convention.
The first use of article 5, paragraph 5 in a model
dates back to the 1935 League of Nations draft. 15 The
underlying principle of this provision is that a person
acting on behalf of the enterprise in the host state
leads to a taxable presence thereof, that is, a PE, even
though the enterprise may not have a fixed place of
business in that state in the sense of paragraphs 1 and
2 of article 5. 16 This particular feature of the agency
PE — irrelevance of a fixed place of business — illustrates
the difficulty in characterizing such a PE in practice,
as opposed to the physical PE set forth in article
5, paragraphs 1 and 2. While the characterization of
the latter type is rather obvious, tax authorities face a
more difficult task in identifying agency PEs because of
12
Brian J. Arnold, ‘‘Threshold Requirements for Taxing Business
Profits Under Tax Treaties,’’ Bulletin — Tax Treaty Monitor
(Oct. 2003), pp. 476-492.
13
Kees van Raad, ‘‘Five Fundamental Rules in Applying Tax
Treaties,’’ Liber Amicorum Luc Hinnekens (Bruxelles: Bruylant,
2002), pp. 587-597.
14
Vogel, supra note 3, at 27.
15 John F. Avery Jones et al., ‘‘The Origins of Concepts and
Expressions Used in the OECD Model and Their Adoption by
States,’’ Bulletin — Tax Treaty Monitor (June 2006), p. 237.
16 Vogel, supra note 3, at 329.
the need to focus on the activities of the enterprise as
carried out by the dependent agent. 17
Under article 5, paragraph 5 of the OECD model
tax convention, an agency PE is found to exist when
the following characteristics are met: (i) a person (individual
or company) is acting on behalf of the enterprise,
(ii) other than an agent of independent status,
(iii) with authority to conclude contracts, (iv) in the
name of the enterprise, (v) on a regular basis. In the
OECD language, as long as these requirements are
met, the agency PE is characterized a dependent agent
(DA) and a dependent agent PE (DAPE). There are
countless debatable questions in connection with each
of these requirements, all of which, however, fall outside
the scope of this article. 18 For the purposes of this
article, it is assumed that every time an agency PE is
mentioned, the requirements at stake were met.
In this context, though this is not the core issue of
this article, the scope of article 5, paragraphs 5 and 6
of the OECD model convention is quite disputable
among scholars, especially when it comes to the difference
between common-law and civil-law practitioners.
From a common-law perspective, it is often argued that
article 5, paragraphs 5 and 6 cover only agents concluding
contracts binding on their principal. 19 However,
a different view based on civil law is that article 5(5) of
the OECD model convention refers to direct representatives,
while article 5(6) relates to indirect representatives.
20 These diverse views reflect the essential difference
between common and civil law:
When an agent makes a contract in his own
name, but on behalf of an undisclosed principal,
as a general rule under common law, the principal
is bound by the contract, whereas under civil
law, again as a general rule, only the agent, and
not the principal, is bound by such a contract. 21
This difference between common and civil law is
often viewed as a tax planning opportunity. Multinational
enterprises will take into account all the abovementioned
factors that characterize an agency PE
when setting up a business abroad. Under their supply
chain management and international tax planning strategy,
multinational enterprises will often seek to structure
their activities in a foreign country in a manner
17 Arnold, supra note 12, at 479.
18 For reference to the controversial issues involving the
agency PE notion, see Giuseppe Persico, ‘‘Agency Permanent
Establishment Under Article 5 of the OECD Model Convention,’’
Intertax, Vol. 28, No. 2 (2000), pp. 66-82.
19 John F. Avery Jones and David A. Ward, ‘‘Agents as Permanent
Establishments Under the OECD Model Tax Convention,’’
Eur. Tax’n (May 1993), pp. 154-181.
20 Sidney I. Roberts, ‘‘The Agency Element of Permanent Establishment:
The OECD Commentaries From the Civil Law
View,’’ Eur. Tax’n (Mar. 2008), pp. 107-113.
21 Avery Jones and Ward, supra note 19, at 156.
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