The Resource Permanent establishments through related corporations under the OECD Model Treaty

Permanent establishments through related corporations under the OECD Model Treaty

Label
Permanent establishments through related corporations under the OECD Model Treaty
Title
Permanent establishments through related corporations under the OECD Model Treaty
Creator
Subject
Language
eng
Summary
This article deals with the increasingly common assertion by a country in which a multinational group member is resident that another, non-resident member of the group also has a taxable presence in the country - a "permanent establishment" (PE) where a tax treaty applies. Multinational parent companies generally expect that conducting business in a foreign country indirectly by means of a locally incorporated subsidiary, as opposed to a branch, will effectively shield the parent company's own commercial profits from the taxing jurisdiction of the foreign country. Supporting this expectation, bilateral income tax treaties generally provide that a non-resident corporation does not have a PE in a treaty state merely because it controls a corporation resident in that state. In recent years, however, there has been an increasing - some would say alarming - trend in certain net capital-importing countries to assert that activities of a foreign company conducted in coordination with or through a local affiliate result in a PE of the foreign company, in the form of an "affiliated corporation PE". The article examines the significance and justifiability of the affiliated corporation PE concept in a three-part discussion. The first part reviews the relevant provisions of article 5 (Permanent Establishment) of the OECD model tax treaty, particularly the "fixed place of business" and "dependent agent" bases for finding that a subsidiary can give rise to a PE for its corporate shareholder. The current rules are shown to have resulted from an extended debate, beginning at the League of Nations in the early 20th century and subsequently continued by the OECD, about whether more weight should be given to a parent company's preponderant influence over its subsidiaries' affairs or to the fact that the subsidiaries have distinct legal personality. In order to better grasp the legal terms of that debate, the second part of the article reviews early UK and Canadian cases in which it was claimed (often by a taxing authority or a taxpayer) that two related corporations should be regarded as, in effect, a legal unity (a single taxpayer for tax purposes). This case law provides guideposts that are relevant to this day, outside the treaty context, in determining when the income, property, or activities of a corporation may be attributed to its shareholder. In their wavering respect for corporate legal personality, these decisions partially anticipate recent developments regarding affiliated corporation PEs. Building on the history of the affiliated corporation PE concept, the third part of the article considers the role that legal form has played in recent foreign court decisions dealing with affiliated corporation PEs. These cases deal with business realities of multinational enterprises (MNEs) - for example, shared managerial services or valuable intangibles that benefit the MNE group as a whole - that pose a challenge to taxpayers seeking to link generators of profits exclusively with one specific legal entity or jurisdiction. From a review of these cases and the current OECD commentary, there emerge two conflicting trends in contemporary thinking about affiliated corporation PEs: the traditional approach continues to privilege legal form, while another, more factually intensive approach aims to factor in the shared roles of MNE members in profit-generating activities. The author observes that the stakes in the contest between the two trends involve both certainty in tax planning and the question of which countries will have a right to tax the high-profit sources of income of a particular MNE group
Citation source
In: Canadian tax journal = Revue fiscale canadienne. - Toronto. - Vol. 55 (2007),
http://library.link/vocab/creatorName
Milet, M
Geographic coverage
International
Language note
English
http://library.link/vocab/subjectName
  • OECD Model
  • PE
  • associated enterprises
  • tax treaty
  • MNE
  • agency
  • case law
Label
Permanent establishments through related corporations under the OECD Model Treaty
Instantiates
Publication
Label
Permanent establishments through related corporations under the OECD Model Treaty
Publication

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