tax notes international - Tuck School of Business - Dartmouth College

SPECIAL REPORTS
agent would be as if the parties were associated enterprises,
an outcome similar to subjecting them to the
provisions of article 9.
However, no attribution of profits would be made to
the agency PE, which is a major contradiction to the
sole purpose of article 7.
There is no doubt that when dealing with the transactions
between associated enterprises (that is, the remuneration
of the dependent agent regarding the services
provided to the nonresident enterprise), article 9 is
the relevant article in determining whether the transactions
were carried out on an arm’s-length basis. 109
However, regarding the attribution of profits to the
agency PE in the host state, article 7 is clearly the relevant
provision. 110 In this context, as discussed above,
‘‘the assets and risks of the nonresident enterprise relating
to the functions performer on its behalf by the
dependent agent enterprise, together with sufficient free
capital to support those assets and risks,’’ should first
be attributed to the agency PE. 111 Under the authorized
OECD approach, this factor will be the measure
of the profits to be attributed to the agency PE. In this
scenario, the arm’s-length remuneration of the dependent
agent mentioned in the previous paragraph should
be deducted in the determination of the agency PE
profits.
As a consequence, a legal reasoning that has the
consequence of not attributing profits to a PE, as it is
the single taxpayer approach, should be rejected because
it does not comply with the traditional standards
of legal interpretations, which should not assume that
the law, for articles 5 and 7 of OECD model, is redundant.
E. Practical Difficulties Should Not Prevent
Adoption
Philip Baker and Richard S. Collier raise arguments
of a practical nature against the authorized OECD approach.
According to Baker and Collier, it is particularly
difficult to determine the profit, if any, to be attributed
to the agency PE in excess of the arm’s-length
reward to the dependent agent because there are many
implementation difficulties, namely the need to provide
documentation of an agency PE when the nonresident
enterprise is not aware of its existence. 112
Some tax authorities, especially in common-law
countries, adopt the single taxpayer approach because
of practical considerations and try to charge, to the
extent possible, the profit left from the dependent
109
Para. 276 of the ‘‘Report on the Attribution of Profits to
Permanent Establishments,’’ Part I (General Considerations),
(2006).
110
Id. at para. 277.
111 Id. at para. 278.
112 Baker and Collier, supra note 7, at 33.
agent. 113 It would be much easier for the tax authorities
of the host state to challenge the arm’s-length remuneration
paid to the dependent agent, rather than
seek to tax the agency PE. 114
A higher difficulty in determining the profit to be
attributed to an agency PE in excess of the arm’slength
reward paid to the dependent agent should not
be an obstacle to the implementation of the authorized
OECD approach. Simplicity in the field of taxation is
always welcome, but not if the price to pay is ignoring
one of the basics of the taxation of business profits.
Although recognizing the positive aspects of the
single taxpayer approach as being a simple system from
an administrative perspective, there is no need for complicated
functional and factual analysis, and this approach
has no theoretical support. 115
Therefore, an interpretation that entails an adequate
allocation of the risks within the enterprise and that is
in line with the rationale underlying article 7 precedes
any considerations of a practical nature. The need for
simplicity in the field of taxation should never overcome
a legal interpretation that is harmonious with the
wording of the legal text.
VI. Conclusion
It seems safe to conclude that the authorized OECD
approach is indeed the most appropriate approach to
attribute profits to PEs.
The authorized OECD approach is the only one
that entails an adequate allocation of the risks within
the enterprise because the single taxpayer approach
ignores the possibility of other functions being performed
or risks being assumed in the host state, which
may not reflect the entire activities of the enterprise in
that state. Therefore, the single taxpayer approach
might lead to a hidden profit escaping from taxation of
the host state, while the authorized OECD approach
allows the host state to ‘‘see’’ and be able to tax eventual
other functions or risks that are being performed
or assumed within its territory.
Moreover, it is undisputable that the rationale of the
authorized OECD approach is in line with the underlying
principle codified in article 7. This provision upholds
the primacy of the arm’s-length principle in attributing
profits to PEs as a natural consequence of the
adoption of the separate entity fiction. By adopting the
arm’s-length principle to dealings between the general
enterprise and its PE, the only result that is harmonious
is that the PE profits must be determined in accordance
with the assets and risks of the nonresident enterprise
relating to the functions performed by the
113 Pijl, supra note 9, at 33.
114 Baker and Collier, supra note 7, at 33.
115 Pijl, supra note 9, at 33.
444 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.