tax notes international - Tuck School of Business - Dartmouth College

OECD model convention are not met and therefore no
agency PE is found to exist. 43 It is up to dispute
among scholars whether commissionaires fall under the
scope of article 5(5) of the OECD model convention,
especially because of the diverse views arising from the
common-law and civil-law notions of agents.
One might argue that economically the commissionaire
performs basically the same activities as a conventional
agent under article 5(5) of the OECD model
convention, but legally there is no contractual relationship
between the customer and the principal. The customers
only have a contractual relationship and therefore
can only sue the commissionaire, not the
principal, which is why the characterization of a typical
commissionaire as an agent within the meaning of
article 5(5) of the OECD model convention is, in my
view, unreasonable.
That was not the interpretation of the Court of Appeals
of Paris in concluding that Zimmer SAS could
de facto bind its parent company, Zimmer Ltd. Phrased
differently, the court clearly adopted an economic substance
approach to conclude that the principal was actually
bound by the commissionaire.
This should not be considered a good decision because
it ignored the particular features of a commissionaire
arrangement, a typical concept of civil-law
jurisdictions. It is therefore expected that tax authorities,
especially in France, will feel encouraged to challenge
commissionaire structures on the basis of an economic
approach.
Despite this controversial issue of the substanceover-form
approach adopted by the Court of Appeals
of Paris, the question of what portion of profits should
be attributed to that PE remained unanswered. This
question is addressed in the following section.
A. Introduction
IV. Different Approaches
The origins of article 7 of the current OECD model
convention dates back to the 1920s and to the work of
the League of Nations, predecessor of the OECD. At
that time, under the 1927 League of Nations draft convention,
article 5 governed the taxation of what was
then called ‘‘income from a trade or profession’’; there
was little guidance on how to determine the income
taxable in each contracting state. 44
43 See Stéphane Gelin and David Sorel, ‘‘French Commissionnaire:
A PE for Its Foreign Principal?’’ Tax Notes Int’l, Aug.6,
2007, p. 581, Doc 2007-16318, or2007 WTD 154-6.
44 Raffaele Russo, ‘‘Tax Treatment of ‘Dealings’ Between Different
Parts of the Same Enterprise Under Article 7 of the
OECD Model: Almost a Century of Uncertainty,’’ Bulletin — Tax
Treaty Monitor (Oct. 2004), pp. 472-485.
SPECIAL REPORTS
The current wording of article 7(2) establishing the
separate enterprise concept — that the profits of a PE
will be ‘‘the profits which it might be expected to make
if it were a distinct and separate enterprise engaged in
the same or similar activities under the same or similar
conditions and dealing wholly independently with the
enterprise of which it is a PE’’ — has its origins in
article 3 of the 1933 League of Nations draft convention
and was generally followed by the subsequent
Mexico and London model conventions of 1943 and
1946, respectively. 45
There are two main
interpretations of article 7
regarding the attribution of
profits to PEs.
Since then, the study of the issue of attribution of
profits to PEs has evolved greatly, but despite the efforts
of the OECD no consensus has been achieved
among states until the recent adoption of the revised
commentary on the current article 7 to be included in
the 2008 update to the model tax convention. This revised
commentary is a great achievement and will provide
more guidance on this issue.
There are two main interpretations of article 7 regarding
the attribution of profits to PEs: the functionally
separate entity approach, also known as the authorized
OECD approach; and the relevant business
activity approach.
Generally, the authorized OECD approach provides
that the profits to be attributed to a PE must be the
profits that it ‘‘would have earned at arm’s length if it
were a legally distinct and separate enterprise performing
the same or similar functions under the same or
similar conditions.’’ 46 The relevant business activity
approach provides that the expression ‘‘profits of an
enterprise’’ in article 7(1) of the OECD model convention
refers to the profits of business activities in which
the PE has participated. The main feature of this approach
is that ‘‘profits are earned only from transactions
with third parties (or with associated enterprises):
no profit is earned from a transaction between the PE
and the enterprise of which it is part.’’ 47 Under the
relevant business activity approach, article 7(1) limits
45
Id. at 474; see also para. 81 of the OECD ‘‘Report on the
Attribution of Profits to Permanent Establishments,’’ Part I
(General Considerations), (2006).
46
Para. 10 of the ‘‘Report on the Attribution of Profits to Permanent
Establishments,’’ Part I (General Considerations), (2006).
47
Baker and Collier, supra note 7, at 30.
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 429
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