tax notes international - Tuck School of Business - Dartmouth College

SPECIAL REPORTS
Figure 6. Single Taxpayer Approach to Agency PEs — Agent Is PE
Home State
Host State
Agent P&L
Gross income 200
Cost of services (150)
Profit 50
arm’s-length remuneration paid to the dependent agent.
In other words, the $200 ‘‘paid’’ by the general enterprise
to its dependent agent, which is assumed to be an
arm’s-length reward, does not eliminate the need to
attribute a separate profit to the agency PE in accordance
with the assets, risks, capital, and rights and obligations
referring to that PE.
As shown below (referring to the single taxpayer
approach), the arm’s-length remuneration of $200 is
sufficient to comply with the tax liabilities that arose in
the host state.
D. The Single Taxpayer Approach to Agency PEs
The single taxpayer approach is based on the axiom
that the agency PE profit is zero by definition. Under
this approach, an arm’s-length remuneration paid to
the dependent agent extinguishes any PE tax liability
in the host state. The rationale behind this approach is
that if the dependent agent is fully rewarded at arm’s
length for all functions performed, assets used, and
risks assumed, then there can be no additional profit to
be attributed to the agency PE. 69
Differently from the authorized OECD approach
(which leads to the treatment of the dependent agent
and the agency PE as two different taxable entities),
under the single taxpayer approach the ‘‘individual or
entity whose activities create the PE is considered to be
the PE himself/itself,’’ 70 that is, one single taxpayer.
69 Baker and Collier, supra note 7, at 33.
70 Annika Deitmer, Ingmar Dörr, and Alexander Rust, ‘‘Invitational
Seminar on Tax Treaty Rules Applicable to Permanent
Establishments — in Memoriam of Prof. Dr. Berndt Runge,’’
Bulletin — Tax Treaty Monitor (May 2004), p. 187.
General Enterprise P&L
Permanent Establishment
Agent
This particular feature of the single taxpayer approach
— that the agent is the PE — can be described
on the basis of the example illustrated in Figure 6. 71
By comparing the two hypothetical figures, it is
clear that the single taxpayer approach leads to a lesser
portion of profit to be attributable to the host state,
that is, $50 instead of $850. This is an inherent consequence
of the assumption that the dependent agent
and the agency PE are one and the same thing.
Now that the main features of both the authorized
OECD approach and the single taxpayer approach
have been outlined, it is time to analyze the interpretation
of this controversial issue by the courts. Sadly,
there are only a few decisions dealing with the attribution
of profits to agency PEs. The lack of a significant
amount of case law highlights the importance of the
Morgan Stanley and SET Satellite cases. Both cases were
judged in Indian courts, but many scholars felt the
cases had opposite outcomes, demonstrating that the
controversy of this issue remains, even within the
boundaries of a single state.
E. Morgan Stanley
The Morgan Stanley case involves the taxation on
activities carried out between entities of the Morgan
Stanley group. 72 Morgan Stanley and Co. (MSCo), an
investment bank located in the United States, entered
into a services agreement with Morgan Stanley Advantages
Services Pvt. Ltd. (MSAS), a service company
71 See supra note 68.
GE P&L
Gross income 2,000
Cost of goods (500)
Agent fee (200)
Profit 1,300
PE P&L
Gross income 200
Agent fee (200)
Profit 0
72
Supreme Court of India, July 9, 2007, decision 2114/07
and 2415/07.
434 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
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