Interpretation and application of article 5 (permanent establishment) of the OECD Model Tax Convention - revised public discussion draft.

• Position: Organisation for Economic Co-operation and Development, Tax Executives Institute

On January 30, 2013, Tax Executives Institute submitted comments to the OECD on its revised discussion draft regarding the official commentary on the definition of a permanent establishment in the OECD Model Tax Convention. The comments were prepared under the aegis of the Institute's European Direct Tax Committee, whose chair is Anna Theeuwes of Shell International B.V. TEI Tax Counsel Benjamin R. Shreck, who serves as liaison to the committee, coordinated the preparation of the comments.

TEI Background

Tax Executives Institute, Inc. (TEI) was founded in 1944 to serve the needs of business tax professionals. Today, the Institute has 55 chapters in North America, Europe, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting sound tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent 3,000 of the largest companies in North America, Europe, and Asia.

Revised Draft Background

The Revised Draft addresses the same 25 issues that were the subject of the Original Draft and provides additional proposed revisions to the Commentary that, in certain respects, reflect comments from interested parties, including TEI. (1) The Revised Draft requests additional comments on the proposed changes to the Commentary, but asks that such comments "focus on the drafting of the recommendations rather on their substance.... "(2) The Revised Draft notes that these comments will be examined at a meeting of Working Party No. 1 in February of this year. (3)

General Comments on the Revised Draft

TEI welcomes the opportunity to provide additional comments on the proposed changes to the Commentary and commends the OECD for incorporating a number of comments from the business community, including TEI, in the Revised Draft. Regrettably, the request to focus further comments on the "drafting" of the changes to the Commentary, rather than matters of substance, limits the utility of additional comments from interested parties. In this regard, we ask the OECD to revisit some of the issues in the Revised Draft and consider further input on substantive matters as well as the specific wording of the draft.

Of general concern is language in the Revised Draft that would permit Member States to assert taxing jurisdiction based upon services performed in a state--that is, to assert a "services PE"--when such a concept is not embraced by the Convention itself and only introduced under the alternative provisions of Paragraphs 42.11 to 42.48. The Revised Draft introduces such a concept again in its proposed changes to Paragraph 4.2 and the consultant example. TEI submits that the general definition of a PE as a "fixed place of business" in the Convention leaves little room for the creation of a PE through the mere provision of services. If the OECD believes that services may constitute a "fixed place of business" under the Convention, TEI submits that the Convention itself should be amended because such a concept should not be introduced through the Commentary when addressing the phrase "at the disposal of"--particularly when that phrase does not appear in the Convention.

Moreover, recent discussions indicate that Member States may push to substantially broaden the definition of a PE in respect of services through revisions to the Commentary. For example, we understand that certain tax authorities believe it proper to assert the existence of a PE where (i) the services relate to a business transaction in the relevant jurisdiction, and (ii) the payment for such services is sourced from that jurisdiction. TEI submits that such a concept would go beyond even a deemed services PE and render the PE concept a nullity, contravening the purpose of the PE concept as a means of promoting cross-border commerce by clarifying the allocation of taxing rights. Again, if this is the OECD's intention, we recommend that it address the issue in a straightforward manner and propose changes to the definition of a PE in the Convention itself and invite public consultations on its revisions.

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