tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
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U.K.<br />
France<br />
Until 1995<br />
Distribution<br />
capacity<br />
intend to create a new notion <strong>of</strong> permanent establishment<br />
(the multiple PE <strong>of</strong> a group), but that it simply<br />
identified a common structure for the pursuit <strong>of</strong> a<br />
group strategy. 33<br />
Intentional or not, the repercussions <strong>of</strong> this case and<br />
the concern that other courts could follow the Supreme<br />
Court <strong>of</strong> Italy’s reasoning and adopt such principles in<br />
deviation from what is stated in the OECD model convention<br />
and its commentary led the OECD to amend<br />
the commentary on article 5 for clarification purposes.<br />
34<br />
Apart from the criticism that it may have been subjected<br />
to, the importance <strong>of</strong> this decision to this article<br />
is that the factual analysis <strong>of</strong> the activities performed<br />
by a company, as provided for by the audit carried out<br />
by the Italian <strong>tax</strong> authorities, might well lead to the<br />
constitution, by that company, <strong>of</strong> a PE <strong>of</strong> its affiliated<br />
companies.<br />
C. Zimmer<br />
As mentioned above, the main purpose <strong>of</strong> <strong>tax</strong> planning<br />
in an <strong>international</strong> setting is to achieve a lower<br />
worldwide effective <strong>tax</strong> rate. Therefore, the location <strong>of</strong><br />
the key business functions <strong>of</strong> a company (for example,<br />
manufacturing, distribution, sales, and research and<br />
development) should be, as much as possible, in a low<strong>tax</strong><br />
jurisdiction. Significant functions and risk, and<br />
therefore the associated pr<strong>of</strong>it, should be allocated in a<br />
low-<strong>tax</strong> jurisdiction to provide for a lower worldwide<br />
effective <strong>tax</strong> rate. Establishing core business functions<br />
in low-<strong>tax</strong> jurisdictions or shifting such functions or the<br />
risk associated with such functions to low-<strong>tax</strong> jurisdictions<br />
is likely to result in the migration <strong>of</strong> income to<br />
such locations. As a consequence, a reduction in the<br />
worldwide effective <strong>tax</strong> rate is achieved, provided the<br />
Figure 3. Zimmer<br />
Zimmer<br />
Ltd.<br />
Zimmer<br />
SAS<br />
shift in income and risk is supported by operational<br />
substance and arm’s-length transfer pricing principles. 35<br />
In this context, a typical example <strong>of</strong> functions and<br />
risk shifting that occurred in the past few years is the<br />
conversion <strong>of</strong> fully fledged distributors into commissionaires.<br />
36 This phenomenon is well illustrated in Zimmer,<br />
a recent decision <strong>of</strong> the Court <strong>of</strong> Appeals <strong>of</strong> Paris<br />
involving a U.K. company, Zimmer Ltd., and the<br />
French <strong>tax</strong> authorities. 37 Zimmer commercialized its<br />
orthopedic products in France until 1995 through a<br />
French distributor, Zimmer SAS. However, from March<br />
27, 1995, Zimmer SAS commercialized Zimmer Ltd.’s<br />
products in a commissionaire capacity under a commissionaire<br />
agreement. The French <strong>tax</strong> administration<br />
assessed corporate income <strong>tax</strong> (plus 10 percent surcharge)<br />
for the years 1995 and 1996 on the grounds<br />
that it had a PE. Zimmer Ltd. objected to the assessment<br />
and brought the case before the court. 38<br />
33 Id. at 83.<br />
SPECIAL REPORTS<br />
Zimmer Ltd.<br />
Main Functions/Risks<br />
• Manufacturing function<br />
Zimmer SAS<br />
Main Functions/Risks<br />
Distribution function<br />
Marketing function<br />
Market risk<br />
Inventory risk<br />
Credit risk<br />
34<br />
Most <strong>of</strong> the changes, first released as a public discussion<br />
draft (available at http://www.oecd.org/dataoecd/34/9/<br />
31483903.pdf), were later adopted in the 2005 commentary to<br />
the OECD model <strong>tax</strong> convention to avoid the repetition <strong>of</strong> the<br />
interpretation <strong>of</strong> the Supreme Court <strong>of</strong> Italy.<br />
35<br />
Raffaele Russo et al., Fundamentals <strong>of</strong> International Tax Planning<br />
(Amsterdam: IBFD Publications BV, 2007), p. 75.<br />
36<br />
As pointed out by Giuseppe Persico, ‘‘the commissionaire<br />
structure is particularly attractive and widely used since it provides<br />
the opportunity to centralize the entrepreneurial risks in the<br />
hands <strong>of</strong> the principal’’ (emphasis added); Persico, supra note 18,<br />
at 76.<br />
37<br />
Court <strong>of</strong> Appeals <strong>of</strong> Paris, Feb. 2, 2007, decision<br />
05PA02361.<br />
38<br />
Id.<br />
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 427<br />
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.