tax notes international - Tuck School of Business - Dartmouth College

existing case law and guidance, the adoption of the
authorized OECD approach will be very hard in several
jurisdictions without an explicit change in the
wording of article 7. 104
In this sense, it is argued that the current wording of
article 7(3) only allows actual expenses to be taken into
account and not notional expenses, in a way that the
fiction of independence of the PE, on the basis of the
current wording of article 7(2), is not complete.
An analysis of the history of article 7 demonstrates
that the underlying rationale of this provision has always
been the separate entity fiction. In this sense, the
outcome resulting from the adoption of the single taxpayer
approach is clearly against this rationale, leading
to an unreasonable reduction of the host state taxing
rights.
Despite this, it is worth remembering that the
OECD Committee on Fiscal Affairs recently adopted
the revised commentary on the current article 7 of the
OECD model tax convention and included it in the
2008 update to the model tax convention, which will
be soon published. 105
Also, as mentioned above, the OECD Committee on
Fiscal Affairs intends to implement the conclusions of
the report not only through a new version of the commentary
on the current text of article 7, but also
through a new version of article 7 itself with accompanying
commentary to be used in the negotiation of future
treaties and amendments to existing treaties.
Therefore, although it seems that the most proper
interpretation of article 7, on the basis of the current
OECD model convention and commentary, requires
the adoption of the authorized OECD approach irrespective
of any modification in its wording, the necessary
changes to improve certainty on this interpretation
are being made by the OECD.
C. The Need for Consistency
Another argument against the single taxpayer approach
is that its acceptance would result in applying
the OECD approach in different manners depending
on what type of PE is involved.
In this sense, regarding other types of PEs, assets
and risks would be attributed to the PE in accordance
with the functions carried on by it, with the consequent
attribution of profits. No one would dispute that
these assets and risks legally belong to the nonresident
enterprise, but are attributable to the PE under the
OECD approach because of the functions performed
by that PE. However, once the single taxpayer approach
is adopted, no profits would be attributed to an
104 Id. at 57.
105 See http://www.oecd.org/document/52/
0,3343,en_2649_33747_38376628_1_1_1_1,00.html.
agency PE regarding the risks and assets of the nonresident
enterprise, even if they arise from activities
carried out through the agency PE. 106
There is no relevant difference between the fixed PE
and the agency PE to justify a different methodology
in attributing profits to them.
As analyzed above, the single taxpayer approach is
based on the axiom that the agency PE profit is zero
by definition. However, there is no empirical, theoretical,
or legal basis for achieving this conclusion. First,
there is no significant difference between the characteristics
of a fixed PE and an agency PE that may justify
a difference in treatment regarding the attribution of
profits. Second, no convincing theoretical support has
been provided in favor of the single taxpayer approach.
107 Third, nothing in the wording of articles 5
and 7 of the OECD model seems to support a difference
in treatment. Quite the opposite, the basis for attributing
profits to all types of PEs is precisely the
same provision of article 7 and the arm’s-length principle.
Therefore, there is no reason why the attribution of
profits to an agency PE should be treated differently
from the attribution of profits to other types of PE.
D. Do Not Assume the Law Is Redundant
One of the principles that guides the legal interpretation
process is that the law does not have useless
words.
Adopting the single taxpayer approach would make
article 5(5) of the OECD model superfluous and this
outcome is against the principle of the effective interpretation
of conventions incorporated into the concept
of good faith in article 31(1) of the Vienna Convention
on the Law of Treaties. 108
Indeed, it must be recognized that the adoption of
the single taxpayer approach leads to the concept of
agency PE becoming meaningless, because the profits
of the agency PE will be taxed anyway by its state of
residence. Therefore, if there is no additional profit to
be attributed to the agency PE over and above the
arm’s-length reward of the dependent agent, there is no
need to have article 5(5).
The characterization of an agency PE would have
the sole consequence of ensuring that the dependent
agent receives an arm’s-length remuneration. Basically,
once an agency PE is found to exist, the consideration
paid by the nonresident enterprise to its dependent
106
Para. 273 of the ‘‘Report on the Attribution of Profits to
Permanent Establishment,’’ Part I (General Considerations),
(2006).
107
Pijl, supra note 9, at 35.
108 Id. at 32.
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TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 443
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