tax notes international - Tuck School of Business - Dartmouth College

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