Sunday, April 22, 2012

The OECD Model Tax Treaty: Permanent Establishment and Agents, Pt. II

Last week we looked at dependent agents and their ability on the treaty to create a permanent establishment for an enterprise.  Today I'll be looking at independent agents, which do not lead to the determination of a permanent establishment for tax purposes and hence do not create a tax presence.

The commentaries provide this general definition to begin the discussion:

37. A person will come within the scope of paragraph 6, i.e. he will not constitute a permanent establishment of the enterprise on whose behalf he acts only if

a) he is independent of the enterprise both legally and economically, and

b) he acts in the ordinary course of his business when acting on behalf of the enterprise.

The above definition is very similar to the definition of an independent agent under agency law.  In general, under common law rules, the following factors are used to determine whether or not an agent is independent or dependent, and thereby creating some kind of liability.

1.) The extent of control the agent
2.) Is the agent employed in a distinct line of business
3.) The kind of work done and whether or not the work is usually done by an agent
4.) The skill of the agent
5.) Does the agent supply the tools of the craft
6.) The length of time of employment
7.) The method of payment
8.) Is the work part of the regular business of the "employer."
9.) Do the parties of the relationship believe they are creating an independent or dependent agency status
The OECD commentary adds this clarification:
Whether a person is independent of the enterprise represented depends on the extent of the obligations which this person has vis-a-vis the enterprise. Where the person's com-mercial activities for the enterprise are subject to detailed instructions or to comprehensive control by it, such person cannot be regarded as independent of the enterprise. Another important criterion will be whether the entrepreneurial risk has to be borne by the person or by the enterprise the person represents.

You'll note that it is very similar to the 10 points made above, especially in relation to the control the principal has over the agent.  The more control, the more likely the agent is a permanent establishment for the client. 

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