Tuesday, May 16, 2006

Attribution of Profits to an Agency PE: finding a middle ground

Before going for a short vacation, I take the opportunity to share with you a draft version of my forthcoming article “Attribution of Profits to an Agency PE: finding a middle ground

The definition of Permanent Establishment (PE), embodied in Article 5 of the OECD Model1 and the attribution of business profits to a PE, included in Art. 7 of the OECD Model are two essential provisions in the framework of international tax. This article deals with specific issues arising from the attribution of profits to an Agency PE. Before embarking in the discussion of the “quantum of taxation”, this article looks briefly into the concept of Agency PE and its recent developments with impact on Agency PE.

The concept of PE includes the situation of a dependent agent who has and habitually exercises an authority to conclude contracts in the name of a non-resident enterprise. This clause has proven over the years to be complex, ambiguous and empty of any guidance regarding the second step of the exercise, i.e. the attribution of profits.

In the last decade there have been certain developments that lead to consider that there is a push towards the expansion of the Agency PE concept. Various jurisdictions have been increasingly active challenging business operations that are structured in a cost effective manner, by asserting that local affiliates constitute an Agency PE of either their parent or other affiliated company. In the end, the consequences of such thrust mainly rest on the issue of correct attribution of profits to the Agency PE, created by the activities of the dependent agent.

Differing country practices may create not only volatility on the concept of Agency PE but also double taxation, requiring complex and enduring mutual agreement procedures, rulings or advanced pricing agreements in order to clarify such problem. In fact, even if jurisdictions would agree on the existence of a PE, they may be far from agreeing on the level of profits attributable to it.

In this context, the article starts by shortly examining the conditions necessary to decide upon whether a PE exists under Art. 5 (5) and (6) of the OECD Model. The second part discuses, in terms of attribution of profits, the consequences of finding that an Agency PE exists. The issue of attribution of profits to an Agency PE is discussed through examples, with special attention given to the new OECD approach towards the attribution of profits to PE’s.


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