Wednesday, February 29, 2012

The OECD Model Treaty: Permanent Establishment, Pt. III

Continuing the look at the OECD Model Treaty's definition of permanent establishment, we find the treaty specifically stating the following are PEs in Article 5, Section 2:

2. The term “permanent establishment” includes especially

a)  a place of management;

b)  a branch;

c)  an office;

d)  a factory;

e)  a workshop, and

f)  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

The accompanying commentaries add the following

This paragraph contains a list, by no means exhaustive, of examples, each of which can be regarded, prima facie, as constituting a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret the terms listed, "a place of management", "a branch", "an office", etc. in such a way that such places of business constitute permanent establishments only if they meet the requirements of paragraph 1.
To practitioners, the list should hardly seem controversial.  These are all common terms used in regular parlance, all of which would denote some level of physical commitment to a jurisdiction such as to allow for a taxing nexus to arise.  

As I previously noted, the commentaries cast a very wide net to encompass most situations that would logically lead to a PE.  In addition, the commentaries add the following regarding the typical length of time necessary to establish a PE:

Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is sometimes difficult to determine whether this is the case. Whilst the practices followed by Member countries have not been consistent in so far as time requirements are concerned, experience has shown that permanent establishments normally have not been considered to exist in situations where a business had been car-ried on in a country through a place of business that was maintained for less than six months (conversely, practice shows that there were many cases where a permanent es-tablishment has been considered to exist where the place of business was maintained for a period longer than six months).
 Also of importance is that the activity conducted does not have to be "productive," meaning the PE does not have to add to the profits of the overall enterprise.  As the commentary notes:

It could perhaps be argued that in the general definition some mention should also be made of the other characteristic of a permanent establishment to which some importance has sometimes been attached in the past, namely that the establishment must have a pro-ductive character, i.e. contribute to the profits of the enterprise. In the present definition this course has not been taken. Within the framework of a well-run business organisation it is surely axiomatic to assume that each part contributes to the productivity of the whole. It does not, of course, follow in every case that because in the wider context of the whole organisation a particular establishment has a "productive character" it is consequently a permanent establishment to which profits can properly be attributed for the purpose of tax in a particular territory (cf. Commentary on paragraph 4).
In the next piece, I'll look at the exemptions to PE.

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