OECD Model Duty Convention: Fixed Office: Analysis

Criteria of the "fixed place of business" under OECD Model Tax Convention on Income and on Capital 2005


The OECD Model Duty Convention on Income and Capital (The Convention) regulates the right for one Contracting Express to tax both the income and capital of the enterprise of another Contracting State. Chapter two of the Convention describes main conditions used throughout the written text of the Convention and this includes the idea of 'permanent establishment'. Under Article 7 of the Convention, a Contracting Status may not tax the profits associated with an venture of another Contracting Point out unless the organization keeps on its business from a everlasting establishment situated within the taxing Contracting State. Clearly the requirement of clear assistance of the ascertainment of the permanent establishment is vital. This paper therefore explores and examines the criterion of any 'fixed host to business', which, under Article 5 of the Convention forms the definition of your permanent establishment. Part One of this newspaper will therefore study the five assessments used to look for the existence of a set office in order to find out liability to taxes in the sponsor Contracting State and offer a critical evaluation of these criterion. Part two will question the presence of the harmonising concept in light of the politics variety o of duty policies throughout the world.

Part One: Research of the Criteria for the 'Fixed Host to Business' under Article 5 of the OECD Model Taxes Convention

A. Building the Fixed Office Test - key considerations

1. Heritage and Moveable Property - Will there be a differentiation for tax purposes?

Article 5(1) of the Convention expresses that:

"For the purposes of the Convention, the word "everlasting establishment" means a set place of business through which the business enterprise of an organization is completely or partly carried on. "

Rohatgi notes that the 'place of business' is one of five requirements to meet up with the definition of predetermined place of business or everlasting establishment. This essentially means that a office must exist in the jurisdiction of the Contracting, taxing Status. As a starting point, the area of business constitutes:

". . all the house and other tangible investments that are commercially used for business activities of the organization. [1]"

Reference to the place of business including tangible assets is also within paragraph 2 of the commentary to Article 5 of the Convention which identifies equipment and equipment. The idea that a office can for some reason include moveable property does initially seem strange considering that a fixed place of business would suggest the existence of history as the exclusive test. However, this increases two factors in the examination of Article 5 of the Convention. Firstly, this Convention can be an international harmonisation document that endeavours to apply a uniform set of regulations to business enterprises owned by Contracting state governments and the success of this regulation would depend upon obtaining a diverse program of 'place of business' to protect all possible business entities. Subsequently, not absolutely all business entities includes heritage as part of their procedure and cannot be rendered immune to tax liability on such a trifle. Market stall suppliers and outdoor performers whose procedures are managed by Contracting States other than their state in which they perform their business are evident illustrations and there are further illustrations under paragraph 4 of the OECD Commentary to Article 5:

"A location of business may thus be constituted with a pitch in a market place, or by the certain completely used area in a traditions depot (e. g. for the safe-keeping of dutiable goods). "

  1. Leased Equipment

(a) Will there be a differentiation between tangible and intangible property?

Paragraphs 8 of the OECD Commentary to Article 5 refers also to leased equipment constituting a everlasting establishment as long as the experience is entrepreneurial:

Where tangible property such as facilities, industrial, commercial or medical (ICS) equipment, properties, or intangible property such as patents, steps and similar property, are let or leased to third gatherings through a fixed office taken care of by an venture of an Contracting State in the other Point out, this activity will, in general, render the area of business a long term establishment Special Factor of the Leasing of Containers

Paragraph 9 of the OECD Commentary states that:

"The leasing of containers is one particular case of the leasing of industrial or commercial equipment which does, however, have specific features. "

Indeed, the Commentary goes on to convey that the awareness of the leasing of storage containers is mentioned in the statement entitled, "The Taxation of Income Produced from the Leasing of Pots. [2]"

3. Dependent Agents

In addition to history, moveable property and leased equipment Article 5(5) of the convention and areas that non-independent realtors concluding contracts in a single Contracting Point out, for and with respect to the venture of another Contracting State, will themselves meet the criterion of a fixed place of business for the business:

". . . According of any activities which that person undertakes for the venture. [3]"

Analysis of the issue shows three intriguing points on the matter of dedication of the based mostly agent. The foremost is the argument of Civil organization law versus the Common law counterpart. The next relates to the general success of harmonisation and the third is a critical evaluation of the appropriateness of harmonising 'fixed host to business' for the purpose of establishing a uniform guideline for taxation, the most politics topic in existence! Each of these points is evaluated in detail with regards to the appropriateness of a uniform requirements for a 'preset place of business'.

For now, the remainder of this section of part one, discusses the Model Duty Convention guidelines on the ascertainment of an unbiased or dependent agent.

As regards impartial agencies, the first thought is that these individuals are companies in their own right and are as a result irrelevant to the taxes considerations of their clients. This aspect is altogether obvious and seems to be superfluously emphasised under Article 5(6). Paragraph 36 of the OECD Model Duty Convention Commentary on Article 5 claims that while this factor does 'stand to reason' it was nevertheless added into the Convention in order to supply quality:

It is however also well worth noting that the consideration of whether a realtor is dependent or not is, for taxes purposes, not exclusive to the paragraph 37 considerations of whether the agent is utilized or self-employed. Paragraph 37 state governments:

"A person will come within the range of paragraph 6, i. e. he'll not constitute a long lasting establishment of the venture on whose behalf he acts only when:

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

b) he operates in the normal course of his business when acting on behalf of the business. "

Indeed, further subjective considerations, which are lay out in paragraph 38 to the OECD Convention Commentary to Article 5, are used to supply the case-by-case conditions needed to ascertain if the agent is with the capacity of constituting a fixed office. As stated by Vogel:

"The characterization of an person acting on behalf of an company is normally predicated on the real facts and circumstances of the relationship between your company and the person. [4]"

The requirements that are lay out in paragraph 38 to the Article 5 Commentary are the following:

  1. The 'Control' test

The Control test essentially mirrors the general principles of firm law[5].

The OECD Model Tax Code presents a number of factors that are to be used when contemplating the extent of primary control over the agent. First of all, under paragraph 38. 3, the agent is only going to be in charge to the main for the portion of the work carried out on the behalf of the main and all the factors, such as employees, hours and do are in the hands of an independent agent.

Interestingly, any exerted specialist on the scale of the agent's business by the main will not, on its own, indicate dependence[6] but where agreement is sought for 'the manner in which the business is conducted[7]' dependence will be mentioned.

In addition, dependence is obvious where the economic control over the business of the agent is in the hands of the principal[8]

  1. The 'Quantity of Principals' test

A further test is to establish independence via the number of principals whereby 'several' would suggest more of a client/contractor relationship in which the immediate realization would be self-reliance. However, the OECD Model Tax Code Commentary to Article 5 also identify that the consorted activities of several principals to control the actions of the agent cannot be overlooked as this might clearly indicate dependence.

(c) Excluded Tests

There are, in addition, criteria that aren't used to determine independence. Article 5(7) excludes the discussion of parent or guardian companies and subsidiaries as binding one another to the jurisdictions of the State governments in which they may be situated. Again, this point seems obvious considering that mother or father companies and subsidiaries are linked exclusively by show ownership and are distinct business enterprises in their own right. This means that they can be therefore taxed independently of one another with the exception of provisions permitting the offsetting of deficits between the father or mother and subsidiary. Furthermore, while there could be ongoing contracts between your father or mother and subsidiary, this relationship does by no means create any cross boundary tax responsibility.

The principles set out in the OECD Commentary to Article 5 for the establishment of the reliant agent as a fixed place of business in its own right is distinctly discursive. Indeed, the concepts laid out in the Commentary are suggestive and this is actually a wholly appropriate style for the awareness of tax liability, which, for the intended purpose of protecting against gaping loopholes, must provide scope for a case by case examination.

  1. The 'Removal' Test

Rohagti asserts that it's a fundamental need that, for duty purposes, the predetermined place of business is one where there is a legal right useful for the business:

"The enterprise must have the right useful (de facto or legal), so that it cannot be taken off the area of business without its consent. [9]"

Interestingly this contrasts with paragraph 4. 1 of the OECD Model Duty Code Commentary to Article 5, which declares that:

". . . the mere simple fact that an organization has a degree of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal right to make use of that place is therefore required. Thus, for case, a long term establishment could can be found where an venture illegally occupied a certain location where it continued its business. . . "

The simple truth is that Rohagti has treated the terms 'removal' and 'right of use' as though they were interchangeable but, as illustrated in the OECD Model Duty Code Commentary, both terms are completely different. Disposal is actually a tightening of the mere requirement of there to be a business existence and paragraphs 4. 3-4. 5 provide instances to illustrate this is. The alternative term, 'right of use' is linked to legality and it could plainly be unthinkable to ascertain that illegal occupation of premises by the international enterprise would render it immune to tax liability by the taxing Talk about!

The use of cases in paragraphs 4. 3-4. 5 of the OECD Model Duty Code is a clear try to steer away from an abstract theory that, as mentioned above with regards to dependent brokers, would increase the risk of damaging loopholes in the law[10]. Indeed, in order to illustrate the potency of the use of good examples, it is wholly appropriate to simply attract from assessment of, for example, the going to salesman and the employee of one business, using any office of another. Within the former there's a clear host/guest romance whereby the discussion of the sales deal is actually conducted in person but could quite easily have been completed from a distance. Alternatively, the last mentioned is a permitted use of office facilities whereby the going to employee is absolve to open up drawers, use the IT and other office facilities and even store files throughout the business of his employer's business but through the premises of the other company. The facilities are therefore, 'at the removal' of the employee.

There seems to be an extremely fine line attracted between your two cases and with such large effects it is advisable to ask if the test is fair. At this point it is however essential to realise that this is one of five checks which must all be satisfied to be able to determine tax responsibility of the enterprise to the taxing Contracting Talk about.

C. The 'Location' Test

Article 5(2) of the Convention places out a list of establishments that are regarded to be long lasting for duty purposes but after secondary inspection, there is equally a definite indicator of 'fixed' location within the jurisdiction of the taxing Contracting Express:

"The term "permanent establishment" includes especially:

a) a place of management;

b) a branch;

c) an office;

d) a stock;

e) a workshop, and

f) a mine, an petrol or gas well, a quarry or any other place of removal of natural resources. "

This is recognized by paragraph 2 of the Commentary to Article 5 of the OECD Model Taxes Code, which suggests that:

"this office must be "fixed", i. e. it must be set up at a definite place. . . "

Further to the, paragraph 2 continues on to convey that:

"the hauling on of the business of the enterprise (is) through this predetermined office. This means usually that people who, in one way or another, are reliant on the enterprise (staff) conduct the business enterprise of the venture in the State where the fixed place is situated. "

It is clear from the easy analysis of this provision of the OECD Model Tax Code that there is no interpretative ambiguity upon this matter. One question to create however is whether a exploring place of business within the geographic area of the taxing Contract State ought to gratify certain requirements for a 'permanent place of business. ' Rohagti feedback on this issue by directing out that the list is not exhaustive[11] but another more persuasive argument in favour of the travelling office concept is the fact that the overall concept of the Model Taxes Code is to establish variables for the preset office in order to determine tax responsibility and it would seem absurd that mobile supervision should form a convenient loophole.

D. The 'Permanence' Test

Article 5(3) of the Convention state governments that:

"A building site or construction or installation project constitutes a permanent establishment only when it will last more than a year. "

The Commentary refers to the notion of 'a certain amount of permanence. '

In Consolidated Premium Flat iron Ores Ltd[12], Van Fossen, J explained that:

"The descriptive term 'permanent' in the characterization 'permanent establishment' is essential in analyzing the treaty provisions. It is the antithesis of short-term or tentative. This implies permanence and stability. [13]"

E. The 'Business Activity' Test

The requirement for there to be business activity can be an essential requirement which is deeply rooted in the basic ethos surrounding income and tax on capital. That is that tax can only just ever be attributable to income and chargeable increases and duty is therefore strictly a fiscal contribution following realisation of a financial gain. Without business activity within the jurisdiction of the duty power there would be no financial gain to talk about and, hence no taxes liability.

In regards to Article 5(2) and the 'location' and 'permanence' exams, the set of establishments give surge not and then a sense of geographic putting and durability but also to business activity. This is due to the fact that the list under Article 5(2) is of apparent commercial premises. This is further illustrated by the fact that the equivalent list of types of premises that are regarded not to be permanent clearly shows that organizations devoid of business activity will not fall within the definition of fixed office. This list is found in Article 5(4) and includes such items as, the utilization of facilities only for the purpose of storage, display or delivery of goods owned by the enterprise[14]; processing[15] collecting information[16], some other activity of a preparatory or auxiliary nature[17].

This concept is also obvious from the early circumstance of Consolidated High quality Iron Ores Ltd[18] where the Canadian company in question got a postal address within the US but no office, phone listing, no staff, bank or investment company accounts or audited accounts. The Court docket held that this postal address therefore cannot constitute a permanent establishment as the word implied the life of an office that was staffed and with the capacity of carrying out day-to-day business. Truck Fossen J Stated:

"The term 'long term establishment' normally interpreted suggests something bigger when compared to a licence, a letterhead and isolated activities. It indicates the life of an office staffed and with the capacity of taking on the day-to-day business of the corporation and its own use for such purpose, or it advises the presence of a seed or facilities equipped to carry on the normal regime of such business activity. [19]"

Part Two: Harmonisation and the Politics of Taxation!

(a) Civil versus Common Rules principles of agency law!

The basic principle of distinguishing the based mostly from the independent agent, for tax purposes is related the work status of the agent. The dependent agent is only an associate of the enterprise's workers and therefore sorts a remote expansion of the business enterprise activity of that enterprise in to the fiscal territory of another Contracting State. The overall civil law is used throughout the OECD Convention which departs from the normal law principles on one key point; namely, that under Civil Laws, where the main is undisclosed, his agent cannot bind him to a transfer with one third party[20]. This directly contrasts with the opposite common law point[21].

The problem however is the fact that common rules jurisdictions are free to interpret their own guidelines of agency rules into the OECD Model Duty Code when identifying a case dropping within their own jurisdiction. Where this occurs, there's a clear departure from the harmonising target of the OECD Model Taxes Code and, as a result, tax repercussions will fluctuate between Contracting Claims. This is the finding of the legal department of the International Monetary Finance in 2004[22].

An additional finding of the IMF was the several treatment of taking care of partners under both types of jurisdiction. In Civil jurisdictions, controlling partners are not realtors whereas, under the Common Law, the contrary holds true. This causes yet another important flaw in the harmonising goal of the Model Taxes Code. The IMF failed in their observations to publish any critique on the matter but two tips are increased by the issue.

(i) Increasing the Success of Harmonisation

The first is the large implication of the success of harmonisation of laws and regulations which this Convention is only an example. Plainly one solution to the issue of whether to look at the Civil or Common legislation procedure is to simply opt for one and announce its application. A good example of this is found under Article 25 of the 1980 Vienna Convention for the International Sales of Goods (CISG), which has adopted the extremely onerous, Civil test of 'important breach' as opposed to the Common Legislation theory of 'materials breach' of your term of the contract. By virtue of UK dominance in the history of international carriage of goods, the last mentioned is widely used in deals of carriage by sea.

Therefore, the adoption of the Civil way in the harmonising Convention is one of the reasons why the UK is not a party to the CISG and indeed why many claims expressly deal out of the convention and opt instead for English law as the regulating law of the agreements. This therefore shows that harmonisation should not aim for an individual principle of law throughout the world but should shoot for the less challenging objective of fabricating international certainty with limited bilateral deviances.

This less intrusive option would be easily carried out in today's Model Tax Code into which the Contracting Expresses are free, of their bilateral conversations, to fill in the blanks in the course of their own discussions.

  1. Tax and Politics

It can't be rejected that taxation insurance policy is one of the most politically entrenched topics considering that the public persuasions of the federal government of your day will have a deep impact on rates of duty. In simple terms, capitalist States such as the USA will invoke low taxation as a way to encourage investment and increased entrepreneurial risk taking. By contrast, socialist ideologies of State governments such as Germany incur higher rates of taxes due to the ethos that businesses are obligated to contribute seriously to the infrastructure of the jurisdiction where they operate. In addition, taxation of overseas companies is highly sensitive given the implications of the Contracting State governments in regards to their Foreign Direct Investment (FDI) plans and this in turn has huge implications for the complete economy.

Taken as a whole it is clear that any move to harmonise international duty guidelines is a mammoth executing in its right and legal interpretative variations under regulations of agency can be an inevitable compromise to the wider goal of creating global certainty in bi-lateral duty agreements.



[2] See Level II of the loose-leaf version of the OECD Model Duty Convention, at web page R(3)-1.

[3] The Convention, Article 5(5)

[4] K. Vogel, January 2003, Increase Taxation Conventions, 3rd Release, Kluwer Legislation International, OECD, at p 342


[6] Commentary, paragraph 38. 4

[7] ibid

[8] ibid, paragraph 38. 7



[11] at p 76 add

[12] (1959) US 28 TC 127 (US)

[13] ibid at p 152

[14] The Convention, Article 5(4)(a)

[15] The Convention, Article 5(4)(c)

[16] The Convention, Article 5(4)(d)

[17] The Convention, Article 5(4)(e)

[18] (1959) US 28 TC 127 (US)

[19] ibid at pa 152

[20]For further understanding see, J. F. Avery Jones and D. A. Ward, 1993, Agents as Permanent Institutions Under OECD Model Duty Convention, British Taxes Review 341


[22] December 2004, Tax Laws Note: What is meant by the Concept of 'Agent' in Duty Legislation? [Available Online] At: http://www. imf. org/external/np/leg/tlaw/2004/notes/eng/agent. htm

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