See Also
AB LLC and BD Holdings LLC v. Commrs. of South African Revenue Services, Case No. 13276, 15 May 2015, South Africa Tax Court
The taxpayer (a U.S.-resident company, whose particulars and relevant transactions were treated as being representative of the second appellant) provided "strategic and financial advisory services" (para. 8) for a South African client during a three-phase engagement that went from February 2007 to May 2008. During this period it made 17 of its employees available, who came to South Africa as required – and three employees were each present in South Africa on a rotational basis (so that employees were present in South Africa for more than 183 days in 2007). The employees used the office premises of the client during normal business hours and "always had a presence" in (and the "exclusive use of" - para. 42) a particular boardroom (although other areas on the premises were also occupied from time to time) (para. 8). It did not file South African returns.
Art. 5(1) and 5(2)(a) to (f) of the South Africa-U.S. Double Taxation Agreement (the "DTA") were in the standard OECD Model form. However, subpara. 5(2)(k) also included:
the furnishing of services, including consultancy services, within a Contracting State by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only if activities of that nature continue (for the same or a connected project) within that State for a period or periods aggregating more than 183 days in any twelve-month period commencing or ending in the taxable year concerned.
After being referred by the taxpayer to a statement in the OECD Commentary that the listed examples in 5(2)(a) to (f) "constitute permanent establishments only if they meet the requirements of paragraph 1," Vally J stated (at para. 29) that the word "include" introducing the listed items in 5(2) expanded the meaning of permanent establishment so that "there is no need for a further…inquiry as to whether the requirements of article 5(1) are met", that the OECD comments on 5(2)(a) to (f) had no bearing on subpara. 5(2)(k) which "is very different …[as] it does not refer to a place of work, but rather to a form of work" (para. 31) and that the Technical Explanation indicated that the concept "that the place of business must be ‘fixed' in the sense that a particular building or physical location is used" did not apply respecting "the furnishing of services under subparagraph (k)" (para. 38).
Even if a 5(2)(k) permanent establishment were required to be a fixed place of business, this requirement was satisfied as the taxpayer "was, at all times, present in the boardroom during the tenure of the contract" (in contrast to Dudney, where "a sole individual providing services moved from one area to another" (para. 42). The taxpayer's submission that it was only permitted to use the boardroom to service the client flew in the face of the "permanent establishment" definition including a fixed place of business through which the enterprise's business is "partly" carried on (para. 43).
Although the taxpayer's employees were not present in South Africa for more than 183 days in the taxpayer's 2008 taxation year, it was permissible to tack on days from the previous year to form a 12 month period ending in the 2008 taxation year (during which the 183–day test was satisfied) as "the signatories to the treaty intended…to allow for double counting of the days" (para. 48).
See summary under Treaties – Art. 7.
DIT v. FC Bamford Excavators Ltd., ITA No. 540/Del/2011 (14 March 2014 ITAT Delhi)
The taxpayer, a UK company licensed technology to its wholly owned subsidiary, JCB India Ltd, and also seconded eight employees to JCB India. The tribunal held (at para. 63) that there remained "absolutely no doubt that these eight personnel deputed from JCB UK to JCB India on assignment basis remained employees of the assesse and never became the employees of JCB India" given that they continued to remain on the taxpayer's payroll and maintained their rights as employees against the taxpayer.
Centrica India Offshore Pvt. Ltd. v. CIT, W.P. (C) No. 6807/2012 (Delhi High Ct)
A UK and Canadian affiliate ("the overseas entities") of the Indian taxpayer ("CIOP") outsourced their back-office support functions to third-party Indian service providers, with CIOP being charged with monitoring the quality of such services. Employees of the overseas entities, who were seconded to CIOP, were under its direct control and supervision, but remained on the overseas entities' payrolls, with CIOP reimbursing them therefor.
The court held that the employees remained employees of the overseas entities and were delivering services to CIOP, rather than performing services for the overseas entities as CIOP's employees, given that their salaries and other benefits were payable by the overseas entities, and there was no purported employment relationship between CIOP and the seconded employees. As a result, the overseas entities were subject to withholding in India.
Assistant Director of Income Tax, International Taxation, Circle 2(2), Mumbai v. Valentine Maritime (Mauritius) Ltd. (2010), 38 DTR 117 (Mumbai ITAT)
The taxpayer ("Valentine") was a Mauritius company which carried on several construction projects in India, in connection with which it provided construction services in India for various customers. Under article 5(2)(i) of the India-Mauritius tax treaty a PE included "a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months." None of the taxpayer's Indian projects individually exceeded nine months, but collectively they did.
The Income Tax Appellate Tribunal held that in absence of abuse, each project had to be tested separately, stating at para. 17:
[E]ven if these projects are commercially coherent in the sense that these projects are for the same organization directly or through a sub contractor, and geographically coherent in the sense that these are on nearby locations, these two factors would not necessarily mean that these projects are to be necessarily seen as a coherent whole—geographically and commercially. The true test, as we have noted above, is in interconnection and independence—in addition to geographical proximity and commercial nexus. …[A]ll the three contracts are for three different purposes – for charter of accommodation barge, for use of barge in domestic are [sic] and for replacement decks. None of these contracts are such that these can be viewed as interconnected or interdependent.
Deputy Director of Income Tax v. Tekmark Global Solutions LLC (2010), 38 SOT 7 (Mumbai ITAT)
As a U.S. resident (" Tekmark") had provided personnel only to work under the control and supervision of a resident of India ("Lucent") and did not render any technical services to Lucent through these personnel, the deputation of such personnel did not create a services PE.
Knights of Columbus v. The Queen, 2008 DTC 3648, 2008 TCC 307
The taxpayer, a U.S.-resident life insurance corporation, was found not to have a permanent establishment in Canada for purposes of the Canada-U.S. Treaty notwithstanding that it provided life insurance to its Canadian members. The Canadian "general agents" (who oversaw the "field agents", i.e., the Canadian agents who solicited applications for sales of the taxpayer's insurance products) were found to be agents of an independent status; and the field agents, although perhaps dependent agents, did not conclude contracts in Canada given that applications were required to be approved in Connecticut (and such approvals were not routine as they entailed detailed medical enquiries, and 10% of applications ultimately were rejected). Although in the meantime, the field agents provided temporary insurance coverage to applicants, a temporary insurance agreement was part of one contract for permanent insurance and, even if the temporary insurance were separate, the field agents' role in the process surrounding the temporary insurance was minimal and, furthermore, the temporary insurance was provided solely as an incentive and the taxpayer was not in the business of selling temporary insurance.
With respect to the Crown's fall-back position that the taxpayer had fixed places of business in Canada, the general agents were not carrying on the taxpayer's business from their offices; and as for the home offices of the field agents, the taxpayer did not have any rights of disposition over those premises (as the field agents did not employ any staff of the taxpayer, had no signage of the taxpayer, the taxpayer made no operational decisions at the field agents' premises nor did any officers or employees of the taxpayer even visit the agents' home offices, let alone have any regular access). In any event, the activities of the field agents carried on at their homes were of an auxiliary agent as they consisted solely of storage, collection of information, supply of information and similar auxiliary or preparatory activities.
American Income Life Insurance Co. v. The Queen, 2008 DTC 3631, 2008 TCC 306
A U.S.-resident life insurance company was found not to have a permanent establishment in Canada. The offices of its Canadian agents were not at its disposal (it did not have freedom to enter the buildings or control over the manner in which the buildings were used and did not pay the expenses of the premises). Furthermore, the Canadian agents did not habitually exercise in Canada an authority to conclude contracts in the name of the taxpayer. Although the Canadian agents issued "conditional receipts" in Canada providing temporary insurance, the policies which the taxpayer ultimately issued in the United States following the completion of the underwriting process stated that the final contract and the application (in connection with which the conditional receipts were issued) were one entire contract, and it was clear that those contracts were concluded in the United States rather than in Canada. Furthermore, even if this conclusion were not correct, the Canadian agents had an independent status: it was not determinative of economic dependency that they dealt only in insurance products of the taxpayer.
DIT v. Morgan Stanley (2007), 9 ITLR 1124 (India SC)
The taxpayer ("MSCo") sent its employees to its subsidiary in India ("MSAS") to oversee MSAS's staff in monitoring the outsourcing activities at MSAS and also sent employees on secondment (or "deputation") to MSAS. MS was assessed in India on the basis that both the stewardship and the secondment activities created a services permanent establishment under article 5(2)(1) of the India-US tax treaty, which included:
the furnishing of services…within [India] by an enterprise though employees or other personnel, but only if: (i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) the services are performed within that State for a related enterprise… .
The Court held that as MSCo was "merely protecting its own interest …by ensuring the quality and confidentiality of MSAS services" (para. 14), it could not be said that MS was rendering services to MSAS, so that such services did not give rise to a services PE. However, "as regards the question of deputation… an employee of MSCo when deputed to MSAS [did] not become an employee of MSAS," as the seconded employees continued to be on the MSCo payroll and "said company retains control over the deputationist's terms and employment" (para. 15). Accordingly, MSCo was "rendering services through its employees to MSAS" (para. 15), so that a services PE existed on this second basis.
Gulf Offshore N.S. Ltd. v. The Queen, 2006 DTC 2705, 2006 TCC 246
The taxpayer provided a fully-crewed vessel under a charter party to a Canadian resident company for the purpose of transporting pipe and other materials from Nova Scotia to two ships of the Canadian company laying pipe off the coast of Nova Scotia within the Sable Island offshore area. The taxpayer was found to have a permanent establishment in Canada by virtue of Article 27A of the Canada-U.K. Tax Treaty, which provided that a resident of a contracting state who carried on activities in the other state in connection with exploration or exploitation of the seabed and sub-soil and the natural resources situated in the other contracting state was deemed to be carrying on business in the other contracting state through a permanent establishment situated therein. In response to an argument that the taxpayer had entered into a single passive lease that did not represent the carrying on of activities, Miller J. noted that the ship was owned, manned and operated by the taxpayer, and there was no evidence that personnel of the Canadian company even ever stepped foot on the ship.
Fowler v. MNR, 90 DTC 1834 (TCC)
A U.S. resident, who every year sold knives and kitchen devices at the Vancouver Pacific National Exhibition for several weeks, was found to be carrying on business in Canada through a permanent establishment for purposes of the Canada-U.S. Convention.
Placrefid Ltd. v. MNR, 86 DTC 1327 (TCC)
Canadian counsel of the taxpayer did not constitute a permanent establishment because he could not commit himself on behalf of his client unless specifically authorized by a document to do so.
Donroy, Ltd. v. U.S., 301 F. 2d 200 (9th. Cir. 1962)
Canadian corporations, which were limited partners of a California limited partnership with a U.S. general partner and a business office in San Francisco, were found to have a permanent establishment in the U.S., in light of the Court's recognition (at p. 208):
"that the general partners are the general agents of the limited partners for the general purpose of conducting the business - subject only to the statutory exemption of limited partners from direct obligation to creditors beyond their stated financial commitment - and that all the partners have an interest in the partnership assets, including its office."
Shahmoon v. MNR, 75 DTC 275 (T.R.B.)
A U.S. individual resident who used an apartment in Montreal no more than one or two months a year and who used the facilities of a Canadian corporation of which he was president when he came to Canada to look after his real estate holdings, did not thereby have a permanent establishment in Canada. Mr. Flanigan stated (p. 277):
"There are literally hundreds of people who are employed by American corporations who come into Canada and do business, but these people are certainly not considered to be Canadian residents or to have a permanent establishment if they attend at an office in this country to transact their business".
Administrative Policy
25 February 2014 Memorandum 2013-0475161I7 - Whether USCo has a PE in Canada
USCo (a subsidiary of USParent), as part of its business of providing project planning and execution services to the world-wide affiliated group in planning and executing projects, sends engineers, advisors and coordinators to Canada (for more than 183 days in each year, but for less than 183 days for a particular site) to provide technological assistance and advice on strategy development, business controls, engineering, design and project execution with respect to multi-year development projects of Canadian affiliates, with most of the services being provided in the Canadian affiliates' offices, or at third party contractors' offices.
Can Art. V, para. 3 of the Canada-U.S. Convention apply when the services are not rendered at the building site or construction or installation project, and does it apply to "intellectual" services? After noting that that if USco's employees had been seconded to the Canadian affiliates, then their services could not be counted in determining whether USco had either a construction site PE or a services PE, CRA stated:
only the services rendered at the construction site can be considered. Services rendered offsite will not be taken into account. …[However] on-site planning and supervising activities are included when making a determination under paragraph 3, even where they constitute the sole activities of the enterprise.
Respecting the interrelationship with Art. V, para. 9, CRA concluded:
If a PE exists under paragraph 3...only the services provided offsite would be considered in determining whether a PE exists under paragraph 9. In no PE exists under paragraph 3, then all of the services in Canada can be considered in the determination of whether a PE exists under paragraph 9.
Respecting a submission of the taxpayer that different functions carried out by different divisions of USCo should be treated as separate enterprises for purposes of para. 9, CRA stated:
[E]ach of USCo's… functions would constitute separate enterprises if they can be considered as separate "lines of business". The… determination of whether USCo has one or more "lines of business" should be done using the same analysis as is used for determining whether the company carries on a separate business [then citing IT-206R and Du Pont, 2001 DTC 5269, 2001 FCA 114].
Before indicating that "USCo likely is carrying on only one line of business, which is the business of planning and executing XX projects," the Directorate noted the similarity of the services provided by USCo.
Respecting whether there were the "same or connected" projects for purposes of Art. V, para. 9, CRA stated that if there was more than one project:
then the days of service should be computed separately for each of these projects, keeping in mind that days at the construction site, if it is itself a PE under paragraph 3 of Article V, are not included. If the days for any particular project compute to less than 183 days, then we will examine whether the projects are connected so that they can be combined for purposes of paragraph 9 of Article V. …[T]he determination of whether projects are connected should be determined from the point of view of the enterprise (i.e. USCo)… . Paragraph 42.41 of the OECD Commentary explains that the reference to "connected projects" is intended to apply where separate projects have a "commercial coherence". … [G]eographic coherence [also] is required under the Treaty.
11 April 2014 Memorandum 2013-0474851I7 F - Permanent establishment in Canada
Franceco was engaged to install specialized equipment purchased by an arm's length Canadian company (Canco) for modernizing and expanding the capacity of its Canadian factory (the "Project"). Following such engagement and a kick-off meeting in France, there was a meeting between Canco and Franceco representatives in Canada to approve the detailed implementation plan. Franceco hired certain Canadian contractors whose work was subject to supervison of Franceco personnel.
Respecting whether the Project was an installation project for purposes of Art. 5, para. 3 of the Canada-France Convention, the Directorate stated (TaxInterpretations translation) that "Franceco undertook not only to supervise the tasks accomplished by the local sub-contractors, but also had the general responsibility to undertake the equipment installation" and that the "presence of the employees of Franceco in Canada was essential as their expertise was required to achieve the Project."
Respecting the duration of the Project as an installation project, the Directorate found that it commenced with the second meeting, when the preparatory work began on Canadian soil, namely, preparation of the plans and specifications; and found that it was not completed until production optimization and testing was finished. Accordingly, the Project lasted more than 12 months, and was a permanent establishment of Franceco under Art. 5 for its duration.
After noting that there were various other contracts (with individual duarations of under 12 months) between the parties for installation sevices, the Directorate stated that "the establishment of installation projects, as well as the commercial and geographic coherence of the different sites, is a question of fact," and listed various factual criteria to be applied.
10 January 2014 Memorandum 2013-0505911I7 - Meaning of "assembly project" in Brazil Convention
Art. V, subpara. 2(g) of the Canada-Brazil Treaty included an "assembly project" in the definition of permanent establishment, rather than using the term "installation project." After noting that this provision likely was based on Art. 5 of the 1963 OECD Model, which used "assembly project," before this was changed in 1977 without comment to "installation project," referring to dictionary definitions of "assemble" and "install," and noting that the French Treaty versions generally used "montage" for both terms, CRA stated:
[T]he better view would be to consider the terms "assembly" and "installation" as having a similar meaning. Accordingly…any position previously taken by the Directorate with respect to an "installation project" would generally be relevant in determining if an "assembly project" exists… .
Turning to the phrase's application, CRA stated:
[T]he OECD Commentaries have been expanded to make it clear that paragraph 5(3) of the OECD Model is not limited to construction or manufacturing-type activities. … Usually…installation is seen as being performed in relation to a tangible property, such as a machine or equipment, and…installation should be the main activity of the project to qualify as an "installation project". If significant other activities are also taking place, such as consulting, modification and testing, the project may not be viewed as an installation project.
18 June 2013 Memorandum 2011-0393451I7 - Treaty Exemption - Fixed Base available in Canada
A non-resident of Canada who was resident in Ireland for purposes of the Canada-Ireland Treaty, worked as an independent contractor, under a short-term contract for service, for a provincial authority at facilities maintained and operated by it. After noting that under the OECD commentaries there was no intended difference between the fixed base and permanent establishment concepts, and referring to its statement in Income Tax Technical News No. 22 that, after Dudney, it did not propose to litigate another case based on the taxpayer's use of space within the premises of another person unless the taxpayer had more physical control of the space, CRA stated:
In the absence of facts that could otherwise be significantly distinguished from those considered in the Dudney case, we are unable to support a conclusion that a permanent establishment in Canada existed to the non-resident taxpayer in the case presented.
23 May 2013 IFA Round Table, Q. 10
Are there any new issues with respect to the services PE provision in the Article V of the US treaty?
Response
:
The Directorate recently ruled on the applicability of Art. V of the Treaty to a US resident corporation ("USco") carrying on a web-based business, which entailed the sale of advertising space on its websites to Canadian-resident businesses, and the sale of digital content by Canadian resident software developers. A Canadian resident subsidiary of USco ("Canco") was to build and operate a data centre consisting of numerous servers in Canada, and use that data centre to provide website and data hosting services to USco. USco would pay Canco an arm's length fee for these services. Canco would not have the authority to legally bind USco, and would not provide any services to Canadian resident users, advertisers or software developers. Employees of USco would not have unsupervised access to the servers, although they would be able to manage the software and data on the servers through remote access.
CRA considered the fixed base PE provision in para. (1) of Art. V, the agency PE provision in para. (5), and the services PE provision in subpara. (9)(b), and ruled that USco would not carry on a business through a PE in Canada. CRA noted that USco also had another Canadian subsidiary providing services to USco in connection with marketing and sales support activities for USco's development and expansion of its user, advertiser and software developer base in Canada, but was not asked to and did not address how this might affect the PE issue.
28 November 2011 November CTF Roundtable Q. , 2011-0426591C6
Where a US company (USCo) subcontracts part of its contract, to perform consulting services to an arm's length Canadian customer (Canco) to related US corporation (USCo 2), whose employees will spend over 183 days in Canada on the project in a 12 month period, then s. 9(b) of Art. V of the Canada-US Convention will deem the services to have been provided by USCo through a permanent establishment in Canada. (and USCo 2 will be deemed to have provided its services to USCo through a permanent establishment of USCo 2 in Canada). Furthermore:
as the discussion in paragraph 42.43 of the [OECD] Commentary pertains to the interpretation of wording that is materially unlike the wording of subparagraph 9(b) or Article V of the Convention…. it is not of assistance in interpreting the latter provision.
However, where after entering into the contract with Canco, USCoinstead subcontracts a portion of the work to a Canadian subsidiary of USCo or an arm's length Canadian company, USCo will not be considered to have a PE in Canada provided such Canadian company is paid an arm's length fee – and similarly, if a US professional firm subcontracts part of its consulting contract with Canco to an arm's length Canadian professional partnership.
2012 Ruling 2012-0432141R3 - Server as a permanent establishment
The taxpayers (USCo and its indirect subsidiary, NRCo) run various websites and related mobile services in order to gain advertising revenue, and to enable third parties to sell digital content, with one of the taxpayers receiving a percentage of the proceeds. Canadian marketing and sales support is carried out through a Canadian subsidiary (Cansub). An indirect Canadian subsidary of USCo will build and staff a Canadian data centre, which will completely mirror all the taxpayers' websites, principally for the purpose of improving their performance.
A small group of individuals employed by USCo or a related U.S. entity who run the site operations organization for USCo will be authorized by Canco to visit the Data Centre from time to time for the purposes of inspection, maintenance or similar purposes. ...
Applications and data hosted in the Data Centre will be managed remotely by employees of the Taxpayers located outside of Canada.
CRA rules that the taxpayers will not be considered to carry on business through a permanent establishment in Canada as a result of these activities for the purposes of the Canada-U.S. Treaty (in the case of USCo) and for purposes of the "Convention" (in the case of NRCo).
29 August 2012 T.I. 2012-0433791E5
A Canadian-resident employee (Mr A) of a Canadian resident corporation (Canco) provides services in the US to US businesses for 150 days in any 12-month period, with such services being Canco's only source of gross active business revenue. CRA was asked whether Mr A would be considered to be present in the US for more than 183 days for purposes of para. 9(a) of Article V of the Canada-US Convention, on the basis that Mr A was present in the US for a further 50 days in a 12-month period for personal reasons, such as shopping, vacationing and attending sporting events.
After noting that it generally would be the responsibility of the IRS to determine whether Canco had a permanent establishment in the US, CRA went on to state that "physical presence during a day is sufficient to be included in determining whether the 183 day test is met."
27 April 2012 T.I. 2011-0429361E5
A corporation resident in India which engages in residential development in India and does not have an office in Canada would likely not have a permanent establishment in Canada by virtue of engaging an unrelated Canadian corporation ("Canco") to advertise in Canada for the sale of Indian condos and provide interested parties with information, with Canco (which does not have authority to conclude contracts) directing parties who are still interested to contact the Indian corporation directly.
18 October 2011 T.I. 2010-038195 -
CRA indicated that a website cannot be a permanent establishment under Article V of the Canada-U.S. Convention because a website is intangible - however, the server that provides the website can be a physical location if it is fixed in place and business is carried on through that server. CRA stated:
In summary, a non-resident who presents a web site to its Canadian customers may be considered to carry on business in Canada through a [permanent establishment] where all of the following conditions are met:
- the host server is located in Canada,
- the business is being carried on, wholly or in part, through the operation of the web site on that server,
- the host server is at the non-resident's disposal,
- the host server is more or less permanently linked to a geographical location in Canada, and
- the web site is hosted by the particular computer server on more than merely a temporary or tentative basis.
CRA also noted that if a location is solely dedicated to advertising, then pursuant to Art. 5(6)(e) it is not a physical location.
30 August 2011 T.I. 2011-040247
Where self-employed US-resident individual provides services in Canada January 1-January 31 and October 1-December 31 in one year, and January 1-April 30 in the next year, the fact that the services in the October-April period (being more than 183 days) are deemed to be performed through a permanent establishment in Canada does not influence the tax treatment of the January period. "[Art. V(9)(a) of the Canada-U.S. Convention] does not deem a [permanent establishment] to exist in Canada to which income from services provided at another time could be attributed."
27 January 2011 T.I. 2010-038490
Pursuant to Art. V(6)(a) of the Canada-U.S. Income Tax Convention, a facility in Canada is generally not deemed to be a permanent facility if it is used only to hold and deliver merchandise. However, the conditions of art. V(6) must be strictly met; for example, an enterprise's facility that stores spare parts for customers' machines will not fall within art. V(6) if the enterprise, rather than just delivering the parts, also uses those parts to maintain the customers' machines.
24 February 2011 Memorandum 2010-038790 -
Paragraph 3 of the OECD Model Convention (providing that "a building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months") represents a stand alone test for determining whether a site or project qualifies as a permanent establishment, so that once the requirements of that paragraph have been satisfied, a permanent establishment will be found to exist and it is not necessary to consider whether the "basic rule" in paragraph 1 has been satisfied.
28 November 2010 CTF Roundtable Q. , 2010-0387091C6
Suppose a US-resident taxpayer provides services in Canada for 130 days between 1 October to 28 February, does not anticipate providing further services in Canada, and obtains regulation 105 waivers for services provided in that period. Nevertheless, the taxpayer returns to Canada to provide services for 60 days between 1 July to 31 August the same year. This would trigger Art. V(9)(a) of the Canada-US Convention retroactively to impute a permanent establishment. The taxpayer would thus be late in filing a T1 in respect of income from Canada for 1 October-31 December.
CRA stated that it "may" apply relief provisions on the penalties and accumulated interest for 1 October-31 December - "Taxpayers will have to advise the CRA of their circumstances, and the CRA will review each request on the basis of the information provided."
CRA does not expect retroactive remittances for the period where the waivers were valid, but withholdings must commence starting 1 July. The taxpayer is obligated to file T1 forms and pay the resulting Canadian income tax liability from the 1 October-28 February period.
2007 Ruling 2006-021199 -
The foreign owners of a ship that was being leased under a bare boat charter for use, in part, in Canadian waters would not have a permanent establishment in Canada solely by reason of entering into the charter.
2006 Ruling 2006-017360
A representative office of a foreign bank whose activities were restricted to the general promotion in Canada of the foreign bank's products and services, and acting as a liaison between Canadian customers (or potential customers) and the foreign bank, would be considered to be engaged in activities of a preparatory or auxiliary nature and, therefore, would not be considered to be a permanent establishment under the applicable Treaty.
Income Tax Technical News, No. 34, 27 April 2006 under "Permanent Establishments"
Discussion of Toronto Blue Jays Baseball Club v. Ontario Minister of Finance, case.
Income Tax Technical News No. 33, 16 September 16 2005
There are numerous factors to be considered in making a determination as to whether a permanent establishment exists, one of which is the legal right to exercise control over a place of business.
"Which factors are most relevant in any particular case will be largely dependent on the nature of the taxpayer's business. Under a different set of facts, other factors could supersede those listed by the Judge in the Dudney decision."
9 September 2004 T.I. 2004-007035
A U.S. "S" corporation ("USCo") intends to sell goods to customers resident in Canada, with the goods being shipped to a warehouse in Canada owned by an arm's length corporation resident in Canada ("Canco") that will store USCo goods until they are shipped to USCos Canadian customers. The Directorate stated that "in order for Canco to be an independent agent acting in the ordinary course of its business, Canco must be independent both legally and economically and acting in the ordinary course of its business when acting on behalf of USCo."
Income Tax Technical News No. 22, 11 January 2002
After referring to Dudney, CRA stated:
"We do not propose to litigate another case based on the taxpayer's use of space within the premises of another person unless we can reasonably maintain, based on the particular facts, that the taxpayer in fact had sufficient physical control of the space to carry on those aspects of his or her business that are appropriate to the space.
Income Tax Technical News, No. 18, 16 June 2000
Discussion of TCC decision in Dudney.
14 January 1999 No. 981253
In commenting on Article 5 para. 3 of the Netherlands and German Conventions, which stated that "a building site or a construction or installation project constitutes a permanent establishment only if it lasts more than twelve months", the Directorate stated:
"The placing of equipment in a building for use would meet the definition of installation for the purposes of paragraphs 3 of Article 5 of the Convention. Placing of equipment for use would include all the activities of assembling, commissioning and test runs until the equipment is fully functional."
30 November 1999 T.I. 982693
In response to an inquiry as to whether a ship of a Norwegian corporation that was outfitted for the purpose of undertaking underwater seismic surveys and that would be operated in Canadian territorial waters under a time charter agreement for approximately three years, RC stated:
"In general, a ship will constitute a fixed place of business under the Convention if it is linked to a specific geographical location (i.e., by virtue of being anchored in a particular place) or if the ship operates in a geographically limited area for an extended period of time."
7 August 1998 Discussion Paper on Proposed Changes to Revenue Canada's Guidelines for Treaty-Based Waivers of Regulation 105 Withholding (Draft)
28 December 1994 T.I. 5-940793
Respecting an inquiry as to whether a software implementation project, including installation services, would result in a permanent establishment in Canada, RC noted that a project should be regarded as an installation project for purposes of Article V, paragraph 3, of the Canada-US Convention if installation is the primary and most important activity; that the fact that an implementation project may encompass some installation activities does not necessarily mean the project is an installation project; and that if it is determined that a project is an installation project, it will give rise to a permanent establishment if the duration of the project is more than 12 months, even if the installation portion of the project is less than 12 months.
27 July 1994 T.I. 940932 C.T.O "Permanent Establishment")
"In a situation where a corporation has wholly-owned subsidiaries in Canada and the United States ... with 'specialized employees' employed by the Canadian subsidiary which are required to visit work sites in the U.S. to review projects, gather data, and carry out certain tests and then return to their office in Canada to interpret lab reports, design solutions to problems, conduct discussions with regulatory and environmental agencies of the U.S. and finally prepare engineering reports, we believe that such employees may be carrying on the business of the U.S. subsidiary in Canada at a fixed place of business, that being the offices of the Canadian subsidiary and therefore the U.S. subsidiary may have a permanent establishment in Canada."
5 July 1994 T.I. 5-933522 -
Discussion of whether Article V, paragraph 3 of the Canada-U.S. Convention would apply where a U.S. software company that had sold software to an unrelated Canadian corporation is required under the terms of the sales contract to send employees to Canada to provide installation and maintenance services at the offices of the Canadian corporation.
1994 A.P.F.F. Round Table, Q. 44
"The Department usually considers that, where the Canadian activities of a foreign business are carried on through an organized and structured sales force, the sales force may represent for the non-resident sufficient substantial presence in Canada to be considered a permanent place of business and thus a permanent establishment."
93 C.M.TC - Q. 15
RC will use the OECD commentary as an aid in considering whether a wholly-owned subsidiary is an independent agent of its non-resident parent.
28 June 1993 T.I. (Tax Window, No. 32, p. 6, ¶2598)
A sales force in Canada could be regarded as stable or permanent activities of a U.S. corporation in Canada.
31 May 1993 Memorandum (Tax Window, No. 32, p. 15, ¶2613)
RC refers to the 1992 OECD Commentary in considering whether there is a permanent establishment in Canada.
1 December 1992 Memorandum (Tax Window, No. 27, p. 11, ¶2352; October 1993 Access Letter, p. 475)
A list of nine criteria for determining whether a Canadian corporation is an independent agent of a U.S. corporation for purposes of Article V(7) of the Canada-U.S. Convention.
14 May 1991 T.I. (Tax Window, No. 3, p. 10, ¶1237)
A U.S. corporation may be considered to be carrying on business in Canada where it supplies to its Canadian subsidiary employees that are under its direct control and supervision, in which case the provision of space to the employees at the Canadian subsidiary may constitute a place of business for purposes of Article V of the Canada-U.S. Convention.
25 March 1991 T.I. (Tax Window, No. 1, p. 9, ¶1166)
Because the taxpayer's activities in Canada must be considered in relation to its business activities elsewhere, a U.S. resident will not be precluded from being considered to have a permanent establishment in Canada by virtue only of the Canadian activities having no expectation of profit.
22 March 1990 Memorandum (August 1990 Access Letter, ¶1397)
Finance supports the principle set out in the OECD Commentaries respecting the determination of permanent establishment on the basis of available space.
IC 75-6R "Required Withholding from Amounts Paid to Non-Resident Persons Performing Services in Canada"
Where an individual is present in Canada for a period not exceeding 60 days and is not entering Canada on a recurring basis, RC will not consider the individual to have a fixed base in Canada for purposes of administering the various treaties.
Articles
Mateusz M. Krauze, "Impact of Cloud Computing on Permanent Establishments Under the OECD Model Tax Convention", Tax Management International Journal, Vol. 44, No. 3, March 13, 2015, p. 131.
Categories of Cloud-based services (p.132)
The models for providing cloud-based services have traditionally been divided into three categories: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (laaS). SaaS offers ready-made applications for end-users. PaaS is more like an operating system, such as Microsoft Windows Azure, which allows the client to design applications with appropriate programming tools. laaS is the most open-ended solution, where the end-user has the largest degree of control over the technology in which an organization outsources the equipment used to support operations, including storage, hardware, servers and networking components.
[I]ntegration Platform as a Service (iPaaS)… is a cloud integration platform, enabling connectivity to SaaS and other cloud services, and it offers a platform for SaaS users and cloud vendors to build and host packaged integration solutions which ensure that the data provided is available in a synchronized fashion across mobile, social and online mechanisms….
Use of Cloud reduces incidence of a server in source jurisdiction (pp.138-9)
In the pre-cloud era, this erosion of tax base could to some extent be mitigated by the "server as PE" rule whereby the maintenance of a server in the source jurisdiction would allow its tax authorities to contend that the server constituted a permanent establishment for tax treaty purposes. But with the widespread shift of e-commerce to the cloud it is no longer plausible to count on this rule to effectively deal with the problem because the server need not be located in the source jurisdiction….
[T]here is widespread consensus that using another entity's server will rarely, if ever, lead to the creation of a PE….
See also summary under Treaties – Art. 9.
Joel A. Nitikman, "More on Services PEs – What is a Connected Project?", Canadian Tax Journal, (2014) 62:2, 317-82.
Art. 5(3)(b) of UN model treaty (pp. 319-20)
[T]he United Nations…in 1980 published a model income tax treaty that contained a provision—article 5(3)(b)—that was designed to create a PE (a "services PE")… .[under which] an enterprise of the residence state will be deemed to have a PE in the source state if it provides services in the source state through a single employee who is present in the source state for more than 183 days in any 12-month period, or if two or more employees are present collectively in the source state for more than 183 days in that period and provide services on the same project or on two or more "connected" projects….
Scope of V(9) of Canada-US Treaty (326-7)
[H]owever, the foreign relations committee report [of the US Senate Joint Committee staff on the 2008 protocol] notes that article V(9) is somewhat narrower than the OECD provisions:…
- [I]f you are not providing services in one place, our rule doesn't apply. The OECD rule is broader in that extent. [fn 24: S exec. rep. no. 110-15, 110th Cong., 2d sess. (September 11, 2008), at 123.] …
[T]he report of the US Senate's foreign relations committee confirms that article V(9) was inserted to overrule (or perhaps more accurately, to render irrelevant) the decision in the Dudney case….
- [I]t appears that physical presence of an employee in the source state is required, but days of preparation in the residence state do not count….
Construction site services excluded from V(9) of Canada-US Treaty (p. 341)
The meaning of the words "Subject to paragraph 3" is not perfectly clear…Others suggest that it means that if the services are performed in connection with a construction site, then one must ignore article V(9) altogether and focus only on article V(3). [fn 67: Di Maio and Hutchinson, supra note 21, at 3:3-4; and Loma Sinclair, "The Services PE Provision of the Canada-US Income Tax Treaty," in…2009 Conference Report ([CTF], 2010), 22:1-29, at 22:2.] The second explanation appears to be correct. … [T]he joint committee explanation states:
- …[P]aragraph 9 does not apply to construction services that do not meet the requirements of paragraph 3 for permanent establishment….
Limitation-on-source-state purpose of Services PE (p. 345)
If the services PE rule provided that any provision of services for more than 183 days would create a PE, then that would merely create situations where a foreign enterprise might be saddled with a P E despite having relatively little connection to the source state in respect of any one project. To avoid this possibility, the UN drafted the provision to require that the 183 days be spent on a single project or on two or more connected projects.
In other words, the connected project rule was inserted as a limitation, to ensure that the services PE provision did not capture service income from unrelated projects….
Anti-abuse purpose of Services PE (p. 350)
[I]n 1980,…[t]he [ad hoc UN ]committee suggested that the connected project concept was really an anti-abuse rule, designed to prevent "contract splitting," which would allow non-residents to perform services in the source state while avoiding the 183-day rule. [fn 98: See United Nations, Economic and Social Council, Committee of Experts on International Cooperation in Tax Matters, Proposal for Amendments to Article 5 of the United Nations Model Double Taxation Convention Between Developed and Developing Countries, U N publication no. E/C.18/2006/4 (New York: United Nations, 2006), at paragraph 20.]…
Both geographical and commercial coherence required for Services PE (p. 362)
It is clear from the case law and administrative material that both commercial and geographical coherence are required for two or more construction projects to form a coherently whole project for the purposes of the 12-month test in article 5(3) of the OECD model treaty. It is difficult to see why geographical coherence is not also required when determining whether two or more projects are connected for the purposes of the 183-day test in the services PE rule.
Discussion of
25 February 2014 Memo 2013-0475161I7 (p. 377-8)
The memo first noted that if USco's employees had been seconded to the Canadian affiliates, then their services could not be counted in determining whether USco had either a construction site PE or a services PE. As noted above [including discussion of Morgan Stanley, Centrica and Bamford], the case law suggests that a true secondment is difficult to achieve. …
[T]he memo then stated:
- However, if USCo does not have a PE under paragraph 3 of Article V, then all of the services rendered in Canada, including those rendered at the construction site, can be considered when making a determination under paragraph 9…
I disagree with this interpretation. As explained earlier in this article, my view is that the words "Subject to paragraph 3" in article V(9) mean that construction site days count only toward the 12-month rule….
Pierre-Marie Hourdin, "Is the Construction PE Clause in the OECD Model Treaty Satisfactory?", Tax Notes International, July 21, 2014, p. 229.
EPCI contract described (p. 229)
[I]t is a great time to test article 5(3) [of the OECD model convention], which is specific to construction sites, through the example of engineering, procurement, construction, and installation (EPCI) contracts involving a French company.
In an EPCI contract, the full responsibility of the project lies with the contractor…
Art. 5(3) applies on project-by project basis (pp. 241-2)
Article 5(3) sets a criterion applicable project by project, and it is therefore possible for an enterprise resident in a state to operate in another country on a significant scale, in terms of cumulative time and total volume of business, without having a PE in this country. [fn 37: Arvid S. Skaar, Permanent Establishment - Erosion of a Tax Treaty Principle, Series on International Taxation, Kluwer Law and Taxation Publishers (1991).]…
For example, a contractor performs a first project in country A, from March 1 n to January 31 n +1 (11 months), and then a second project from January 1 to July 31 n +1 (seven months). Though his business is carried out over a total period of 17 months, the contractor will not have a PE in country A, since none of the sites has a duration exceeding 12 months. This result is not satisfactory. However, it is difficult to find a realistic alternative. Indeed, until the end of year n, the company cannot know precisely what its future activity will be in country A…
Meaning of "coherent whole" in para. 18 of OECD commentary (p. 242)
Paragraph 18 …also state that:
- a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically. …
According to some, [fn 38: E.g., Vogel, and Skaar, supra note [37]] to constitute a coherent whole, the work must be made in the same place and for the same client. For others [fn 39: Skaar…], such a position assumes that the drafters of the commentary have reached an agreement on specific criteria, although they have used ambiguous criteria in the text of the commentary…
[I]f relatively specific criteria ("same customer" and "same place") had been the intention of the parties, they would have used a less ambiguous expression than "coherent whole commercially and geographically"…
Example of coherent installation project:country-side radar system (p. 242)
[I]f a foreign company has an extended presence in the source state because of an underlying identity of activities carried out there, the taxing right of this state should not be affected by the division of this activity in multiple contracts.
For example: A contractor has an EPCI contract with a customer for the design, delivery, and installation of a radar system to cover the airspace of a country. Ten antennas are to be installed in different parts of the country, each installation site lasts 15 days, and the period between the first day of work on the first site and the last day on the last site is greater than 12 months. An interpretation consistent with the benefit and participation principles of "coherent whole commercially and geographically" would imply that the company has a PE, although the sites are far apart from each other. In another contractual scheme, for example if the same single sky coverage system for the use of the air traffic control organization is subject to 10 separate contracts with 10 airport companies, the company should also have a PE.
Suspension of running of 12-month period when work suspended for external reasons (p. 243)
[P]aragraph 19 of the commentary states since 1977:
- A site should not be regarded as ceasing to exist when work is temporarily discontinued…Temporary interruptions should be included in determining the life of-a-site…
[W]hen a site is completely stopped, the intensity of the presence of the company in the source state of source is (almost) zero. Legal certainty and administrative considerations also imply that the company should be able to anticipate its PE situation before the work begins. For example, a business that initially has a 10-month site will not have a PE. If weather conditions oblige the company to completely stop construction for more than two months, there will be a PE. Consequences in terms of complexity and administrative costs for the company, and to a lesser extent for the states concerned, will be important [sic]. Accordingly, this rule should allow for a suspension of the 12-month period if the taxpayer provides sufficient evidence of total interruption of work because of external reasons.
Leopoldo Parada, "Agents vs. Commissionnaires: A Comparison In Light of the OECD Model Convention", Tax Notes International, October 7, 2013, p. 59
What is a commissionaire arrangement? (pp. 63-63)
The commissionnaire arrangement is a civil law concept that has no direct counterpart in common law. A commissionnaire is an intermediary that acts toward customers in its own name, but for the account of a principal. Consequently, a commissionnaire arrangement always involves the following three parties:
- the principal, which calls on the services of an intermediary;
- the commissionnaire, which acts for the account of the principal in exchange for remuneration; and
- a third-party customer, which conducts business with the commissionnaire.
Under the law of contracts, there are two separate contractual relationships:
- one between the principal and the commissionnaire (that is, the commissionnaire agreement); and
- one between the commissionnaire and the third-party customer.
A commissionnaire arrangement, therefore, entails an "indirect representation." Since the commissionnaire acts in its own name, it is the only one that is personally liable toward the third-party customer (and vice-versa). [fn 36: Michael F. Swanick, Mark Mudrick, and Erik Bouwman, "Tax and Practical Issues in Commissionaire Structures," Tax Notes, Jan. 27, 1997, p. 499]
Agent pe definition (p.63)
Under article 5(5) of the OECD model treaty, a PE exists if the commissionnaire has authority to conclude contracts in the name of the principal, and therefore has authority to bind the principal….
Different treatment at civil and common law (p. 63)
The tax treatment of a principal under a commissionnaire arrangement will vary depending on whether it is located in a common law or a civil law country. Common law countries generally treat the undisclosed agent as binding the principal, whereas in civil law countries the principal is not bound unless the commissionnaire is acting in the name of the principal and not in its own name. Therefore, a commissionnaire arrangement almost always will be deemed to give rise to a PE in common law countries. In civil law countries, the risk of having a taxable presence only would arise when domestic law treats the commissionnaire as binding the principal.
Zimmer and Dell (p. 64)
The issue in both the Zimmer and Dell cases was whether Zimmer SAS and Dell AS, acting in the commercial capacity as commissionnaire for their respective principals, exercised an authority to conclude contracts "in the name of" their principal….
Para. 32 "not actually in [its] name" (p. 64)
Paragraph 32.1 of the OECD commentary on article 5 provides that:
The authority to conclude contracts in the name of the enterprise does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise.
Zimmer decision (p. 65)
The Supreme Administrative Court stated that the legal definition of a commissionnaire is a person who can act in its own name on behalf of its principal without binding the latter to its co-contracting parties. Therefore, as long as the commissionnaire arrangement does not create a direct link between the foreign principal and its domestic contracting parties, the commissionnaire cannot be treated as a dependent agent of the foreign principal.
Dell decision (p. 65)
In Dell, the Borgarting High Court concluded that paragraph 32.1 means that the treaty "cannot be interpreted literally." It then proceeded to rely on factors such as the following as justifications for concluding that a dependent agency PE existed:
- the fact that the products were sold under the Dell trademark;
- that the sales terms were standard; and
- that Dell Products Ltd. shipped products against all orders forwarded by Dell AS.
Jan de Goede, Ruxandra Vlasceanu, "Permanent Establishment Implications for Coordination Centres in the Oil and Gas Industry", Bulletin for International Taxation, September 2013, p. 466.
Issue: pe status of oil and gas coordination centres (p. 466)
This article analyses what seems to be a more general issue in the oil and gas industry, i.e. the PE implications arising from the establishment of an unincorporated coordination centre that provides support to various exploration and production blocks within the same jurisdiction….
What is a coordination centre? (p. 466)
It is assumed that the activities within each exploration and production block constitutes a distinct PE of the company in that jurisdiction. This is because each exploration and production block is separated geographically and the related activities are carried out with different commercial partners.
Where the company acts as the operator of one or more exploration and production blocks, it establishes within that jurisdiction an unincorporated coordination centre, generally, in the form of a registered branch, to provide support to the various exploration and production blocks. Typically, the main functions to be undertaken by the coordination centre include corporate functions, i.e. accounting, administration, finance, human resources, treasury, information and communication, technical support, and supervision activities.
…In general, the coordination centre is located in a main city of the country, while the exploration and production blocks are either onshore or offshore. The coordination centre carries on its activities in a designated office that is often rented by the Company which acts as the operator of the joint venture. The costs incurred by the coordination centre in relation to the activities performed for the exploration and production blocks are attributed by way of a direct charge to the blocks.
Preparatory/auxiliary issue (p. 468)
For a fixed place of business to qualify as a basic rule PE, the business activities carried on through it must not qualify as preparatory or auxiliary activities….
…If the coordination centre is established with the purpose of supervising and coordinating functions of other departments of the company located within that specific jurisdiction, i.e. the activities carried out at the level of the exploration and production blocks, it has a core role within the company, going beyond what might be considered to be activities of a preparatory or auxiliary nature. The coordination centre also carries out financing and engineering services, which represent an essential part of a business.
Single or multiple pe's? (p. 469)
Assuming that the coordination centre constitutes a PE of the company and each of the exploration and production blocks located within the same country also constitutes a different PE, this section analyses whether, in the country where the coordination centre is established, the company would have several PEs, i.e. each of the exploration and production blocks located within that country and the coordination centre, or whether the coordination centre and the exploration and production blocks could constitute a single place of business.
Test in OECD Commentary on Art. 5 (p. 469)
…Put simply, multiple places of business may be aggregated and treated as one PE if these places of business form a geographical and commercial coherent whole.
Non-Satisfaction of geographic coherence test (p. 470)
…While the exploration and production blocks are located in specific areas both onshore and offshore, being defined by the concession contracts signed for each of them, the coordination centre carries on its activities through an office in one of the major cities within the respective country. In this situation, it would be very difficult to argue that the exploration and production blocks and the coordination centre are one geographically coherent whole….
Non-Satisfaction of commercial coherence test (p. 470)
The exploration and production blocks are performing exploration and production activities under distinct concession contracts assigned to joint ventures with different partners, while the coordination centre provides administrative and technical support, and supervisory activities to them. Therefore, the exploration and production blocks and the coordination centre carry on different activities, which cannot be regarded as one single project. These activities are also not covered by a single master contract or by contracts concluded with the same persons. The nature of the work that the exploration and production blocks and the coordination centre perform is also different, as different functions are undertaken by each….
Considering this, it is difficult to argue that the coordination centre and the exploration and production blocks are commercially coherent.
Lee A. Sheppard, "The Brave New World of the Dependent Agent PE", Tax Notes International, Vol. 71, No. 1, 1 July 2013, p. 10
A June 14, 2013 conference sponsored by the Vienna University of Economics and Business discussed the dependent agent permanent establishment concept in Article 5(5) of the OECD Model treaty, which provides:
Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.
Lee Sheppard provided an excellent summary of comments by various speakers, only some of which are extracted below:
Derivation of "habitually exercises … an authority to conclude contracts in the name of the enterprise" (pp. 10-11)
The original article 5 appears to have been drafted in English, translated into French, then partially mistranslated back into English. The key phrase in article 5(5) is ‘‘habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise . . . .'' [Philip] Baker [delivering a paper on behalf of John Avery Jones] explained that this phrase originally appeared in treaties between the United Kingdom and Germany because the British were thinking in terms of the common law concept of agency. Avery Jones concluded that the drafters were talking past each other because they failed to focus on who was being bound by the agent's actions. ‘‘What mattered from the U.K. point of view was merely whether there was a contract at all,'' he wrote. Civil law drafters fussed about whether the person was acting for himself or another, and who was bound….
In 1954 the words ‘‘on behalf of '' were added. This phrase was changed to ‘‘in the name of '' — the literal wording of the French version — in 1958 for no discernible reason. ...
[T]he German view is that these troublesome phrases might not have been intentional changes. (See Hans Pijl, ‘‘Agency Permanent Establishments: In the Name of and the Relationship Between Article 5(5) and 5(6),'' Bulletin for International Taxation, January 2013 (Part 1) and February 2013 (Part 2).)
Katharina Daxkobler of the Vienna University of Economics and Business mused that the French version— which contained the mischievous words ‘‘in the name of '' — might have been re-translated too literally because article 5(5) really asks whether the agent can bind the principal. Citing Pijl, she concluded that the seemingly differing French and English versions should be seen as mutually interchangeable and should all be construed to mean that the agent can bind the principal.
Determination of authority to conclude contracts (p.11)
[I]f the principal merely ratifies every contract the agent brings to it without further analysis or investigation, the agent can be said to possess implied authority. Or if the agent exceeds its authority and the principal nonetheless ratifies it, the agent has implied authority, according to Daxkobler. Paragraph 33 of the OECD model commentary on article 5 confirms this view.
Interhome – business linkage (p. 12)
[Sabine] Schmidjell-Dommes [of BMF] argued that a linkage between the parent's business and the subsidiary's business is required for article 5(5) to create a PE. In Interhome AG (Conseil d'Etat, No. 224407 (June 20, 2003)), the Conseil d'Etat held that no dependent agent PE existed because the French subsidiary was engaged in a different activity than its parent.
Boston Scientific - "independent' commissionaire" (p.12)
Boston Scientific
(Corte Suprema di Cassazione, No. 3769/2012) emphasized factual independence over legal relationships, Schmidjell-Dommes explained. In that case, the Italian Supreme Court held that an Italian commissionnaire was not a PE. It was a subsidiary of the Dutch principal company established by their mutual U.S. parent, a medical equipment maker. The Italian Supreme Court stated that the issue was whether the commissionnaire had the power to execute contracts on behalf of its Dutch parent. The Court dismissed the government's appeal for failure to state a case, effectively affirming the lower court decisions that the commissionnaire was independent. ...
Customer complaints went to the commissionnaire, which engaged in an impressive level of non-sales activity in the name of the parent. As the Court noted, the lower courts paradoxically thought that these actions demonstrated independence. The Court concurred, stating that there would be a PE if the Dutch parent bossed the Italian commissionnaire as if it were an employee.
"Habitually" (p. 12)
Raffaele Petruzzi of the Vienna University of Economics and Business argued that because permanence is required, a time threshold should be read into the word ‘‘habitually.'' If the agent is in the country less than six months, it should mean that there is no PE. ...
Pasquale Pistone of the Vienna University of Economics and Business noted that the word ‘‘habitually'' previously read ‘‘regularly.'' He and Alejandro Ruiz Jiménez, also of the Vienna University of Economics and Business, debated whether either concept was satisfied when the taxpayer's agent negotiated a single contract. Jiménez argued that habitually required a specific number of contracts negotiated over a given time frame.
Italian case/ Unisys on "habitually" (pp. 12-13)
What if the agent gets lucky and successfully negotiates a billion-dollar contract during a month spent in the host country? The Italian Supreme Court faced this question (Corte Suprema di Cassazione, No. 9776/2003). The decision was that the habitual exercise of contractual authority exists if a contract is complicated, large, and sufficiently important to the company's business. There were two contracts in the Italian case. Baker noted that two contracts did not establish habitual exercise of contractual authority in Unisys Corp. v. Federal Commissioner of Taxation, [2002] NSW SC 1115 (December4, 2002). But the circumstances were unusual. ...
Commissionaire/synthetic commissionaire (p. 13)
In a bog-standard restructuring, a buy-sell distribution subsidiary is reorganized so that income is stripped out of its host country, where it is necessary for the group to operate….The distribution subsidiary's contract is restated to make it a commissionnaire….
In civil law, a commissionnaire is an entity that sells in its own name for the account of another. Theoretically, the customer cannot sue the principal. It enters into contracts with customers, usually with set prices or pricing guidelines, and then enters into an identical contract with the principal. Commissionnaire is a different legal relationship than agency or distributorship, because commercial risks are in the hands of the principal. ...
What if the host country is a common-law country that would find an undisclosed agent? The planners draft the contract in an attempt to limit agency by creating a synthetic commissionnaire. The contract states that the parent is not bound. ...
Baker opined that synthetic commissionnaire planning might prevail in a British court, unless it was badly implemented, because companies have legal opinions from corporate lawyers that agency can be constrained. ... HM Revenue & Customs begs to differ. An HMRC participant said the synthetic commissionnaire could be a loser in court….HMRC's manual for examiners states that under British law, a commissionnaire could be an undisclosed agent and therefore bind the foreign principal.
Zimmer – commissionaire not a dependent agent (p. 14)
Zimmer Ltd.'s restructured subsidiary had the power to accept orders, negotiate price discounts, and set payment methods without prior approval from the parent. It did not own inventory or take inventory risk. It had no clients or activity other than selling Zimmer products. (Société Zimmer Ltd., Conseil d'Etat, Nos. 304715 and 308525 (March 31, 2010).) The Conseil d'Etat relied heavily on established French law and practice governing commissionnaires for its holding that a commissionnaire with no power to legally bind its principal was not a dependent agent.
Dell – commissionaire did not act for principal (p. 14)
In Dell Products (NUF) v. Tax East, HR-2-11-2245-a (December 2, 2011), Dell had accepted all of the contracts entered into by its Norwegian commissionnaire, which had only Dell's Irish principal company as a client. Standard form contracts were used and not altered. The principal and the commissionnaire had integrated accounting systems and shared board members.
The parties agreed that the commissionnaire was a dependent agent. But they disagreed about whether it had the authority to conclude contracts under the treaty. Norwegian law states that a commissionaire acts only for itself, not for its principal. The Norwegian Supreme Court held that Dell's Irish principal company had no Norwegian PE.
Allocation of profits to a dependent agent PE (pp. 14-15)
[T]he OECD authorized approach to the allocation of profits to a PE ... creates a dependent agent PE standing alongside the subsidiary. (The deemed PE has to file a separate tax return, and some countries assess penalties for failure to file.). ... The authorized approach first asks where the people are. It then attributes assets to the people functions. ...
Even after all that rigamarole, the PE would not have been allocated all of the income that the parent stripped out when it restructured the subsidiary. Alfred Storck of the Vienna University of Economics and Business noted that the number of people on the ground in the host country effectively limits the amount of attribution of profits to the PE. In real life, the parent bears all the risks. But in the never-never land of the authorized approach, risk follows function, which follows people, so some risk could be attributed to the PE.
Independent agent article of OECD Model Convention (pp. 15-16)
Article 5(6) states:
An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
Meaning of "independent" agent/"ordinary course" (p. 16)
Daniel Fuentes of the Vienna University of Economics and Business explained that article 5(6) had a general commission agent in mind. According to Fuentes, the relevant factors in determining the independence of an agent are control of its own actions, lack of entrepreneurial risk, and the number of principals it acts for. Fuentes argued that the presence of a single principal should be irrelevant. ....
[Claus] Staringer [an Austrian tax lawyer and professor for tax law at Vienna University of Economics and Business] fretted about the use of the phrase ‘‘the ordinary course of business,'' which does not appear in the German translation….Usually when the question is whether the agent has acted in the ordinary course of its business, the real question is whether it is independent, Staringer explained. In German thinking, that means not acting according to the instructions of a principal. In Boston Scientific, the government unsuccessfully argued that the commissionnaire was acting outside the ordinary course of its business because it had entered equipment leases, factoring, and insurance transactions on behalf of its Dutch parent.
Is an "agent" who lacks the ability to bind its principal exempted under Art. 5(6)?/Roche (pp. 16-17)
Staringer argued that article 5(6) is so narrowly drafted that an arguably independent agent that does not have a traditional agency deal with its principal could be excluded from protection.
Relying on a 1993 Intertax article by Sidney Roberts of Roberts & Holland LLP, multinationals [instead] have taken the position that an independent agent is merely an agent that cannot sign contracts. After all, a broker can't sign contracts. That is, the differentiating factor between the two agency clauses is the ability to bind the principal. (Roberts, ‘‘The Agency Element of Permanent Establishment: The OECD Commentaries from the Civil Law View,'' 21 Intertax issue 9, p. 396 (1993) (Part One) and 21 Intertax, issue 10, p. 488 (1993) (Part Two).)….
Avery Jones disagreed with Roberts's view, arguing that an apparent agent that lacks the power to bind its principal is covered by neither article 5(5) nor article 5(6). But the Roche decision implies that there is no third category of non-PE agents (Roche Vitamins Europe Ltd., No. 1626/2008 (Jan. 11, 2012)).
Roche
considered whether the subsidiary did the parent's business in Spain. The Swiss parent's Spanish subsidiary, Roche Spain, was an importer, manufacturer, and distributor of Roche products. After it was restructured, Roche Spain's activities were limited to contract manufacturing and sales promotion. It lacked the legal authority to negotiate the terms of sale or to conclude contracts. ...
The Spanish Supreme Court believed that the combination of Roche Spain's manufacturing activity and lack of legal and economic risks produced dependent agency. In the Court's view, the treaty permitted a finding of dependent agency even in the absence of authority to contract.
Barbara M. Angus, "Chipping Away at the Permanent Establishment Concept", Tax Management International Journal, Vol. 42, No. 5 May 10, 2013, p. 259.
Effect of extensive subcontracting
After noting that the OECD Working Party 1 had prepared a Revised PE Discussion Draft which inter alia considered whether an enterprise (the contractor) that has undertaken performance of a comprehensive project would have a permanent establishment if it subcontracts all aspects of that contract to other enterprises (the subcontractors), Barbara Angus discussed (at pp. 266-267) the Offshore Accommodation Service case:
A situation involving the subcontracting of all of the activities with respect to a given project in a context outside the construction setting was the subject of litigation in Norway. The fact pattern under consideration here seems to have been inspired in part by the 2001 decision of the Norwegian Supreme Court in Offshore Accommodation Service AB v. Government of Norway. At issue in that case was a special provision in the Nordic treaty that deems a permanent establishment to exist if a non-resident enterprise carries on activities related to exploration for or exploitation of hydrocarbon deposits for a minimum of 30 days. However, in reaching its decision finding a permanent establishment, the Norwegian court cited language from paragraph 19 of the OECD Commentary on the Article 5(3) special rule for building sites and construction projects.
The case involved a Swedish company (the contractor) that entered into an agreement under which it would provide catering services on a housing rig for an oil well site in Norwegian territorial waters in exchange for a fixed fee. It subcontracted with a Norwegian company (the subcontractor) to provide the catering services in exchange for a cost-plus fee. However, the contractor remained responsible for such services. According to the contractual agreements and the compensation schemes, the contractor bore the real economic risk of the services provided in the oil rig.
The Norwegian tax authorities argued that the contractor was subject to tax in Norway on the basis that it was carrying on an activity in Norway for more than 30 days and therefore under the special Nordic treaty provision it had a deemed permanent establishment. The contractor challenged the tax authorities' argument on the grounds that it did not have nexus with Norway because it did not physically perform any services on the rig.
The Norwegian court ruled in favor of the tax authorities, citing the OECD Commentary to Article 5(3) as establishing that physical presence is not required because time spent by a subcontractor is considered as time spent by the general contractor on the project. The Norwegian court used this interpretation to rule that the contractor had performed the catering services on the rig that were performed by its subcontractor….
Requirement for principal to be legally bound?
The Working Party had also addressed the issue:
Does the phrase "to conclude contracts in the name of the enterprise" only refer to cases where the principal is legally bound vis-à-vis the third party, under agency law, by reason of the contract concluded by the agent, or is it sufficient that the foreign principal is economically bound by the contracts concluded by the person acting for it in order for a permanent establishment to exist (provided the other conditions are met)? [fn 35: PE Discussion Draft, ¶106]
She stated (at pp. 269-270):
The PE Discussion Draft indicates that the Working Party's discussion of this issue focused extensively on the recent court decisions in the Zimmer case in France (Supreme Administrative Court 2010) and the Dell case in Norway (Supreme Court 2011) addressing the treatment of commissionaire arrangements under the this treaty language. [fn 36: PE Discussion Draft, ¶110] There also have been two subsequent cases involving commissionaire arrangements: the DSM/Roche case in Spain (Supreme Court 2012 ) and the Boston Scientific case in Italy (Supreme Court 2012).
These cases involved the issue of whether a local commissionaire could create a permanent establishment for the foreign principal. In finding no permanent establishment, the French and Norwegian courts looked to the fact that the commissionaire concluded contracts in its own name and not on behalf of the principal and that such contracts were not binding on the principal. The Norwegian court specifically distinguished "legally binding" from "economically binding", concluding that the principal would have to be legally bound, which was not the fact in the case before it, in order to support a finding of a permanent establishment. The Italian court found no permanent establishment in the case before it as well, citing the facts that the commissionaire concluded contracts in its own name and on its own behalf and that it had operational autonomy that would not exist in a dependent agent relationship. In contrast, the Spanish court found a permanent establishment in a situation where the local entity involved in sales did not have the authority to conclude contracts on behalf of the principal; however, in that case, the court looked to other manufacturing activities performed by the local entity at issue for the principal and the larger relationship between such entity and the principal.
Hans Pijl, "Agency Permanent Establishments: in the name of and the Relationship between Article 5(5) and (6) – Part 1", Bulletin for International Taxation, January 2013, p. 3:
In the course of a detailed review of the law and history of permanent establishments and agency as it relates to the OECD Model Tax Convention, Hans Pijl argues that the history of the OECD Model suggests that, in common law jurisdictions, "in the name of" merely refers to an agency relationship rather than anything stricter:
The rise of the "exclusively literal" interpretation of "in the name of"
[T]his article revisits the two aspects of the agency PE that are central to the classical articles of Avery Jones and David A. Ward (1993) and Roberts (1993) [see end of quote], i.e. the phrase "to conclude contracts in the name of the enterprise" (emphasis added) and the relationship between article 5(5) and (6). As far as "in the name of" is concerned, this article demonstrates that there is no tension between a civil law based article 5(5) and a common law inspired article 5(6). "[I]n the name of", in the view of the 1950s OEEC/OECD drafters of the articles, was to reflect the substantial juridical bindingness between client and principal. By no means did they intend to stress the formal aspect of the conclusion of contracts literally "in the name of" the principal. Then, decades later, an [unreported] exclusively literal interpretation of "in the name of" by a UK court resulted in the United Kingdom making its 1992 observation (see Part 2, section 13.), which stimulated the thoughts developed in the two articles noted previously. With only a little exaggeration, this UK court decision, with its strict focus on a literal interpretation, is the cause of the continuing discussion.
[J.F. Avery Jones & David A. Ward, Agents as Permanent Establishments under the OECD Model Tax Convention, 33 Eur. Taxn. 5 (1993), Journals IBFD.]
[S.I. Roberts, "The Agency Element of Permanent Establishment: The OECD Commentaries from the Civil Law View" (Part One), Intertax 9, pp. 369-420 (1993) and (Part Two), Intertax 10 pp. 488-508 (1993).]
"In the name of" does not reflect a deliberate policy choice
The OECD records demonstrate that the phrase "on behalf of" (binding) was meant to be the PE-constituent criterion, rather than "in the name of", which was introduced by an obvious unfortunate combination of circumstances. (The UN records reveal that "in the name of" had a "binding" meaning from the beginning.) The Reports of Working Party 1 were always drafted in English as the original language... . The Reports consistently used to conclude contracts "on behalf of" and not "in the name of". ... The French translations at first correctly translated "on behalf of" as " ", but then, as a less adequate translation, started using "au nom de", where the English original continued with "on behalf of". When the French version became the original language in the report to the Council, "au nom de" became the leading term and English followed with "in the name of". Although the Chairman of the Fiscal Committee pointed out that the French text erroneously referred to "au nom de", this term, and the resulting "in the name of", was eventually approved... .
... Most likely, the terms appeared in an environment where they were traditionally understood as meaning the same, i.e. "binding".
"Binding" exclusively means "legally binding"
"[B]inding" is meant in the legal way. This meaning is confirmed by the language used in the OECD documents in the 1990s and is also how the Group of Experts of the United Nations explicitly qualified the term (see Part 2, section 11.1.) ... There is, therefore, nothing that convinces in the criticism of Arnold (2012) [see end of quote] of the Norwegian Supreme Court that ... [the] Court was "without any motivation" when interpreting "binding" as "legally binding".
...The anecdotal reference of Arnold (2012) that "to bind" has 16 meanings, only one of which means "to oblige by covenant", does not provide support for his view that "binding" has the unspecified "commercial meaning" of being "effectively bound", whatever that means in his view.
[B.J. Arnold, "Tax Treaty Case Law News", 66 Bull. Intl. Taxn. 4/5, sec. 1, (2012), Journals IBFD.]
Jan de Goed, "Interpretation and Application of Article 5 (Permanent Establishment) of the OECD Model Tax Convention: Response from the IBFD Research Staff", Bulletin for International Taxation, Vol 66, No. 6, 2012, p.313
Commentary on the 2011 OECD discussion draft.
J. Scott Wilkie, "Services Permanent Establsihments and the Canada-United States Income Tax Treaty", International Transfer Pricing Journal, Vol. 19, No. 3, 2012, p. 179
Discussion of para. 9 of Art. V of the Canada-US Convention.