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April 3, 2015
Countering BEPS: Preventing Abusive Commissionnaire Arrangements
by Hiroshi Oyama

Full Text Published by Tax Analysts®

This article first appeared in the September 29, 2014 edition ofTax Notes International.

In 2013 the OECD released two reports: "Addressing Base Erosion and Profit Shifting" (BEPS report)1 and "Action Plan on Base Erosion and Profit Shifting" (BEPS action plan).2 In the reports, the OECD expressed concern that BEPS would lead to shrinking national revenues, unfairness among taxpayers, and economic inefficiency.3 The OECD considers tax treaty abuse to be one of the most important BEPS concerns.4 To prevent artificial avoidance of permanent establishment status, action 7 of the BEPS action plan recommends: (1) updating the definition of PE, and (2) consideration of a profit attribution rule. Action 7 also points to commissionnaire arrangements as an example of artificial avoidance of PE status.5

This article presents proposals to prevent abuses of commissionnaire arrangements. As the OECD points out, there are two components of commissionnaire arrangements: the definition of agency PE,6 and a profit attribution rule. Based on the history of agency PE, this article proposes that:

  • agency PE be determined from the viewpoint of economic substance instead of legal forms; and
  • a formulary approach be partly introduced as a profit attribution rule.

Section I of this article addresses the general structure and tax implications of commissionnaire arrangements. Section II analyzes the definition of agency PE, and Section III focuses on a profit attribution rule. Section IV concludes.

I. Commissionnaire Arrangements

A. General Structure

In a commissionnaire arrangement, a local distributor subsidiary concludes contracts with local customers in its own name but on behalf of, and at the risk of, a foreign principal enterprise.7 Multinational enterprises use commissionnaire arrangements as a form of business restructuring -- that is, cross-border redeployment of functions, assets, and risks.8 The business rationale behind commissionnaire arrangements is that multinational businesses, regardless of their products or sectors, increasingly need to reorganize their structures in order to provide more centralized control and management of manufacturing, research, and distribution functions because of global competition.9 Without changing their supply chain system, multinational enterprises under commissionnaire arrangements are able to transfer the functions, assets, and risks of their business from a local subsidiary located in a source country to a foreign principal enterprise located in another country.10

Commissionnaire arrangements may be understood in comparison with buy-sell arrangements. Suppose that a local subsidiary purchases goods from its foreign parent enterprise and is then fully responsible for selling the goods to local customers in a source country.11 This structure is called a buy-sell arrangement and is described in Figure 1. The local subsidiary, under this buy-sell arrangement, could get substantial profit margins from selling goods as a seller because it holds title to the inventories, controls all business activity, and bears the risks of doing business, such as inventory risks, credit risks, and warranty risks.


Figure 1. Buy-Sell Arrangement



Under commissionnaire arrangements, the local subsidiary is converted from a local seller to a local distributor (commissionnaire) by transferring title to its inventories, the control of all business activity, and the risks of doing business to the foreign parent enterprise. After the conversion, the local subsidiary is not considered a seller but a service provider for the foreign parent enterprise. A typical commissionnaire arrangement is described in Figure 2. The local subsidiary generally provides services such as marketing, advertising, and technical support to the foreign parent enterprise and receives commissions for those services. Therefore, the local subsidiary is much less profitable at the arm's-length profit margin under the commissionnaire arrangements than it would otherwise be under the buy-sell arrangements.12

Figure 2. Commissionnaire Arrangement



It is relatively easy to change a buy-sell arrangement to a commissionnaire arrangement from both a legal and business perspective.13 All the parties need to do is replace a sales agreement with a commissionnaire agreement between the foreign parent enterprise and the local subsidiary. Moreover, the local subsidiary would not generally be required to give notice to and secure consent from local customers regarding the change in structure.

B. Tax Implications

Commissionnaire arrangements have been used in international tax planning since the 1990s.14 Multinational enterprises have been able to reduce their tax burden in high-tax source countries by using commissionnaire arrangements as a business restructuring. Commissionnaire arrangements can be used to shift most of the profits generated from a business carried on in a source country to foreign parent enterprises. In figures 1 and 2, if the tax rate of Country A is lower than that of Country B, the total tax cost of the multinational enterprise would be lower under the commissionnaire arrangement than under the buy-sell arrangement.

The high-tax source country could have taxing rights on the profits attributed to the agency PE under article 7 of the OECD model if the local subsidiary constitutes an agency PE of the foreign parent enterprise. Nevertheless, multinational enterprises easily avoid having an agency PE in source countries through agreements between the foreign parent enterprise and the local subsidiary. Even if the local subsidiary constitutes an agency PE, the foreign parent enterprise might not be taxed in the source countries because the foreign parent's profits would amount to zero when taking arm's-length commission paid to the local subsidiary into account.15

For these reasons, multinational enterprises take advantage of commissionnaire arrangements to shift profits from high-tax jurisdictions to low-tax jurisdictions,16 raising concerns among tax authorities about the abuse of commissionnaire arrangements.17


II. Agency PE

A. Why Is Artificial Avoidance Possible?

Paragraphs 5 and 6 of article 5 of the OECD model define an agency PE as follows:

    5. Notwithstanding the provisions of paragraphs 1 and 2, where a person -- other than an agent of an independent status to whom paragraph 6 applies -- is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise

    6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. [Emphasis added.]


Moreover, the OECD commentaries on paragraph 32.1 of article 5 of the OECD model clarify the meaning of "in the name of" as follows:

    Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. [Emphasis added.]

Thus, even if a local subsidiary concludes contracts with local customers in its own name, the subsidiary could not constitute an agency PE unless the contracts are binding on the foreign parent enterprise. However, civil law countries generally provide that contracts concluded by an agency are not legally binding on a principal under commissionnaire arrangements. This results in a situation in which local subsidiaries in civil law countries would not constitute an agency PE. Multinational enterprises therefore are able to artificially avoid an agency PE status by manipulating the terms of a commissionnaire agreement between a principal and a local agent.18

Thus, the requirement that the contracts are binding on the foreign parent enterprise must be revised to counter this artificial avoidance of an agency PE status. In doing so, it would be instructive to revisit the history of the agency PE provisions.

B. Historical Perspective of an Agency PE

In 1925 technical tax experts who studied a model tax convention proposed to the Financial Committee of the League of Nations19 that if the enterprise has its head office in one of the states and has a branch or agency in another, each one of the contracting states shall tax that portion of the net income produced in its own territory.20 Though this proposal was adopted in the first model tax convention of the League of Nations in 1927 (1927 model convention), the definition of an agency was not included.21 In 1929 the Fiscal Committee came up with three essential elements of an agency:

  • the authorization given the agent to act for the foreign enterprise;
  • the fact of his carrying out these transactions regularly; and
  • the fact of his carrying them out in an establishment.22

The Fiscal Committee avoided the term "in his own name" as an essential element of an agency because only civil law countries are familiar enough with the concept of that phrase under the commissionnaire. At that time, the Fiscal Committee thought that a commissionnaire who acts in his own name for any number of undertakings and receives a normal rate of commission does not constitute a PE because he acts for any number of parties. The draft convention adopted in 1933 by the League of Nations (1933 draft convention) followed this 1927 model convention regarding PE.23 The protocol to the 1933 draft convention also did not indicate that the language of "in his own name" ought to be a requirement of an agency.24 When the Mexico and London model conventions were adopted in 1946 by the Fiscal Committee, they did not include the language of "in his own name."25

Both the Organization for European Economic Cooperation (OEEC) and OECD model conventions adopted the agency concept developed by the Fiscal Committee of the League of Nations.26 The Fiscal Committee of the OEEC, however, used the language "in his own name" in the model convention draft in 1958 for the first time. The Fiscal Committee explained the definition of agency PE under paragraph 4 of article 11 on PE this way:


    A person acting in a Contracting State on behalf of an enterprise of the other Contracting State -- other than an agent of an independent status to whom paragraph 5 applies -- shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise.27 [Emphasis added.]

Since the committee did not explain why this wording was included in this draft, the rationale behind its decision to adopt that exact language is unclear.28 The wording "in the name of the enterprise" nevertheless has remained substantially unchanged in paragraph 5 of article 5 of the OECD model published in 1977.29

After the OECD model was published in 1977, the wording "an authority to conclude contracts in the name of the enterprise" caused controversies over the interpretation of paragraphs 5 and 6. The issue arises from the difference in interpretation of the concept of agency under civil law, as opposed to its interpretation under common law. Civil law generally distinguishes direct representation from indirect representation. The former means that the agent concludes contracts in the name of the principal, and that the contracts are binding on its principal. The latter means that the agent concludes contracts in his or her own name and that the contracts are not binding on the principal. People in civil law countries would thus understand that paragraph 5 applies to direct representation and paragraph 6 applies to indirect representation. From a civil law perspective, because a "broker" and a "general commission agent" in paragraph 6 are considered to conclude contracts in their own names, they should still be excluded from an agency PE, even if paragraph 6 does not list them. However, common law has no distinction between direct and indirect representation. The principal is bound by the agent's action, regardless of whether the agent concludes contracts in the name of the principal. The wording "in the name of the enterprise" in paragraph 5 is unnecessary from the viewpoint of common law. People in common law countries would understand that even if the agency satisfies the requirements of paragraph 5, an independent agency would be excluded from an agency PE under paragraph 6.

Several commentators have attempted to reconcile this gap between civil law countries and common law countries. John F. Avery Jones and David A. Ward, for example, proposed that the reference in paragraph 5 to a person having an authority to conclude contracts in the name of an enterprise would mean that the agent has the authority to conclude contracts binding on his principal.30 These discussions influenced the 1994 amendment to the OECD commentaries. To clarify the elements of agency PE under common law, the OECD revised commentaries on paragraph 32.1 of article 5 as follows:


    Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; the paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise.31 [Emphasis added.]

Even after the 1994 amendment to the OECD commentaries, several different views regarding interpretations of paragraphs 5 and 6 have been presented by various commentators.32 Recently, several courts have addressed the issue as to whether an agent constituted an agency PE. In 2010 the French Supreme Administrative Court decided that an agency PE should be legally binding on the principal.33 Though the court followed the interpretation of French civil law, it clearly gave priority to the legal analysis over the more economical approach of examining the relationship between a commissionnaire and a principal.34 In 2011 the Norwegian Supreme Court also stated that according to the interpretation of the wording of paragraph 5, any contracts entered into by an agent must be legally binding on its principal.35

These discussions and cases had a substantial impact on the OECD's recent discussions regarding amendments to the OECD commentaries. Subject to the French and Norwegian decisions, the joint working group on business restructurings of the OECD discussed the term "authority to conclude contracts in the name of the enterprise." However, it did not reach a consensus on the elements of an agency PE and merely added an example of an agency PE in the end.36 This addition to the OECD commentaries would not deny the French and Norwegian decisions or the previous OECD commentaries, nor would it result in any progress on the agency question.37

C. Analysis and Proposal

The OECD commentaries, cases, and commentators confirm the interpretation that an agency PE should be legally binding on the principal. Because the essential characteristic of the commissionnaire arrangement is that contracts concluded by a local subsidiary would not be legally binding on the foreign parent enterprise, the local subsidiary would not constitute an agency PE, as the French and Norwegian cases showed. Thus, the requirement should be revised to prevent artificial avoidance of an agency PE status by taking advantage of commissionnaire arrangements.38

The wording "in the name of the enterprise" should be removed from the OECD model and being binding on the principal should not be required for three reasons, based on the historical perspective of agency PE and the analysis above. The first reason stems from the discussion of an agency PE in the League of Nations Fiscal Committee. The wording "in the name of" was not used in the 1927 model convention and the 1933 model convention because the phrase was not familiar to common law countries. Rather, economic substance was originally a much more decisive factor than legal form. Though the language was included in the model convention of 1958, there was no reasonable explanation as to why the phrase should be included in the agency PE provision. This inclusion resulted in the interpretation that an agency PE should be legally binding on the principal. It is not necessary to require the legal form to reconcile the gap between common law countries and civil law countries. The phrase and its interpretation are not an essential component of an agency PE from the historical perspective.

The second reason deals with the spirit of agency PE. The original spirit of agency PE must be revisited to update the requirements of agency PE. A local agent in a source country is a separate legal entity from its foreign enterprise, unlike the physical PE in paragraph 1 of article 5. However, if the local agent is integrated with the foreign enterprise's business, the foreign enterprise should be treated in a source country as if it carries on its business in the country.39 Thus, all model conventions have provided that an agent could constitute a PE and a source country could levy tax on the foreign enterprise's business profits attributed to an agency PE. Therefore, whether an agent constitutes an agency PE should be decided by questioning whether the agent's activity is economically integrated with the activity of its principal parent enterprise.40 Considering this underlying spirit of agency PE, it is most important to determine whether the local subsidiary is integrated with its foreign principal enterprise's business, while it is irrelevant to ask whether the agency PE is legally binding on the principal.

The third reason is that private laws in different countries are so different from one another that it is not appropriate to apply a tax convention based on each private law. There are differences in the interpretation of agency between the common law countries and the civil law countries. The differences lead to uncertain treatments and tax arbitrage opportunities.

In conclusion, the wording "in the name of the enterprise" should be removed from the OECD model and being binding on the principal should not be required.


III. Attribution of Profits to Agency PE

A. Allocation of Profits

When a local agency constitutes an agency PE, attribution of profits to an agency PE should be discussed. A source country has rights to tax on profits attributable to an agency PE when a foreign enterprise has the agency PE in the source country.41 Though paragraph 2 of article 7 of the OECD model provides the arm's-length rule as the profit attribution rule, it is not enough for practical implementation.

This has been a difficult problem since the 1920s. Two main views have been suggested: the authorized OECD approach (AOA), and the single taxpayer approach (STA). However, neither view is able to counter commissionnaire arrangements because there would be little or no profits attributed to an agency PE. From both theoretical and practical perspectives, it is necessary to split according to the formulary apportionment method a part of the profits between a foreign principal and an agency PE on the destination basis. To understand the essence of this issue, it would be useful to revisit early discussions regarding the profit attribution rule.

B. Historical Perspective

The Fiscal Committee of the League of Nations recognized in the 1920s that deciding a profit attribution rule was complex and difficult.42 In 1931 the committee and subcommittee entrusted this inquiry to Mitchell B. Carroll, a former legal adviser to the U.S. Treasury Department.43 Carroll had conducted studies in many countries and reported his findings to the committee.44 He proposed a profit attribution rule whereby, after the due commission was allocated to a local agent, the residual profits or losses would be attributed to the foreign principal enterprise.45 The reason for this was that the "real centre of management," which would be the vital source of business profits, rested with the foreign principal enterprise.46 According to Carroll's view, if business activities in a source country were carried on through an agency PE, then there would be no further profit to attribute to the agency PE and no point in treating the agent as an agency PE.47

Carroll's view made its way into the draft of the League of Nations,48 and it was adopted by Article VI of the protocol to the London and Mexico model conventions.49 However, the OEEC did not substantially adopt Carroll's view -- that is, it thought that the profit allocation should be decided by the same standard as the transfer pricing rules.50 Carroll focused on the real center of management as the source of profits, while the OEEC focused on each contribution to total profits.51 Paragraph 2 of article 7 of the OECD model adopted the OEEC's view.

Even after the OECD model was established in 1977, the profit attribution issue was left open for a long time. To resolve it, the two main approaches are the AOA and the STA. The OECD published a discussion draft regarding the AOA titled "The Attribution of Profits to Permanent Establishment" in 2001, finalized it in 2006, and revised it in 2010. The AOA theorizes that (1) there would be profits attributed to an agency PE even if a foreign enterprise were to pay arm's-length commissions, and (2) the profits attributed to an agency PE should be decided by the same standard as the transfer pricing rule.52 Since the AOA considers an agency PE a separate entity from a foreign principal enterprise, transfer pricing rules could be applied to this situation. Carroll thought that all profits after the deduction of due commissions should be attributed to the principal enterprise because the profits are generated from the real center of management, while the AOA says the profits should be split on the assets, functions, and risks basis.53 Some commentators agree with the AOA.54 Others believe the AOA would not work in determining profits attributable to an agency PE. Their main argument is that it is extremely difficult to calculate what profit should be attributed to a dependent agency PE in excess of the arm's-length reward to the dependent agent PE.55 Opponents of the AOA instead advocate for the STA, under which the arm's-length commission payment to a local agent extinguishes profits of a foreign enterprise.56 Because of less serious implementation difficulties under the STA, the STA had been accepted among tax practitioners in some countries even after the AOA was published.57 The OECD, however, argues that the STA contains several fundamental flaws, including:

  • the STA will result in an unfair allocation of taxing rights between source and residence countries;
  • unified treatment between physical and agency PE will not be accomplished under the STA; and
  • paragraph 5 of article 5 will be meaningless under the STA.

Also, there are two conflicting court decisions from India regarding the profit attribution rule58: SET Satellite59 and Morgan Stanley.60 In SET Satellite, the core issue was whether once a local agent is paid an arm's-length price for the rendered services to the foreign company, any further income, other than the income so earned by the agent, could be attributed to the agency PE under the India-Singapore tax treaty. The Income Tax Appellate Tribunal of India adopted the AOA based on the OECD's report on the attribution of profits to PEs in 2006. However, immediately after the SET Satellite decision, the Supreme Court of India held in Morgan Stanley that once an arm's-length commission is paid by a foreign principal enterprise to its local agent, nothing more could be attributed to the agency PE. That is, the Supreme Court adopted the STA instead of the AOA. That was the first time the court adopted the STA worldwide.61

C. Analysis and Proposal

From the theoretical and practical viewpoints, neither the STA nor the AOA is correct. First, the OECD's counterargument against the STA is valid. Since the STA would result in an unfair allocation of taxing rights between source and residence countries, it is difficult to counter commissionnaire arrangements. Moreover, there are two reasons why the AOA may not be the appropriate approach. First, as the STA advocates have pointed out, it is extremely difficult to implement the AOA in practice. If remunerations received by a local subsidiary from a foreign principal enterprise are at arm's length for all functions, assets, and risks, there would be no profits to attribute to the agency PE by further application of the transfer pricing rules. Even though profits theoretically exist based on other functions, assets, and risks that are not extinguished by due commissions, it is too difficult to divide functions, assets, and risks into two parts and calculate the amount of each part of the profits. Second, even under the AOA, a fair allocation of taxing rights between a source country and a residence country will not be achieved. If a local subsidiary constitutes an agency PE, it follows that the subsidiary would economically and legally depend on its foreign principal enterprise. In other words, the local subsidiary generally has very few functions, assets, and risks of its business in the source country. Thus, even if there are profits to attribute to an agency PE, the amount of the profits would be very limited. Therefore, the AOA would not result in a fair allocation of taxing rights between a source country and a residence country like the STA.

In order to come up with new approaches, both theoretical and practical aspects should be considered. After overall profits from business carried on in a source country are allocated to both a foreign principal enterprise and a local subsidiary under the transfer pricing rules, how the profits should be split is the key issue. As explained previously, Carroll thought the residual profits should be allocated to the foreign principal enterprise because the real center of management rested with the enterprise. However, the residual profit comes not from the real center of management, but from the close relationship between the foreign principal enterprise and the local agency. When the local agent's business activity is integrated with the foreign principal enterprise's business -- that is, a local agent is dependent on its foreign principal enterprise -- the multinational enterprise could avoid (internalize) transaction costs. This increases efficiency in raising capital, advertising products, achieving economies of scale, and protecting valuable intangibles by taking advantage of commissionnaire arrangements.62 This internalization of costs, which is generated from the close relationship between the local agent and the foreign principal enterprise, is the characteristic of the residual profits.

How should the residual profits generated from the close relationship be allocated between a foreign principal enterprise and an agency PE? Some may insist that traditional arm's-length standards should be used to allocate profits like the AOA. However, because the residual profits are generated from a close relationship between a foreign principal enterprise and an agency PE, there are no comparables, and the allocation would be arbitrary if arm's-length standards are used.63 In this respect, the formulary apportionment method theoretically seems to be the most appropriate because it focuses on the material fact that multinational enterprises integrate their business. Under this method, worldwide incomes of multinational enterprises are allocated on the basis of customers' locations.64 However, as advocates recognize, international cooperation among countries would be required in order for this method to work.65 As the OECD points out in the BEPS action plan, there are practical difficulties in adopting the formulary apportionment method.66 The formulary apportionment method leaves details open for interpretation, and it would be difficult for all countries to consent to it. Thus, instead of using multinational enterprises' worldwide income, only the residual profits would be allocated the same way as in the formulary apportionment method.

This method (residual profit-split method) is based entirely on the destination to which the goods and services provided by the multinational enterprise are sold.67 Source countries are able to exercise taxing rights on business profits because local customers are unchanged under commissionnaire arrangements. That is, this method would be the best course to directly counter the transfer of the assets, functions, and risks of business operations. The residual profit-split method is therefore effective in preventing abusive commissionnaire arrangements. Further, under this method, the implementation would be much easier than the AOA because the destination to which the goods and services are provided is clearly decided.

In conclusion, the residual profit-split method is consistent with the character of residual profits and could prevent abusive commissionnaire arrangements.


IV. Conclusion

The two proposals discussed above can respond to multinational enterprises taking advantage of commissionnaire arrangements as a tool for BEPS. The proposals, however, raise challenges of their own. Also, since the residual profit-split method is inconsistent with current transfer pricing rules, using it would have a substantial impact on transfer pricing rules. Nevertheless, fundamental changes are needed to effectively prevent abusive commissionnaire arrangements because the current provisions and interpretations are not able to counter them. It is the author's hope that the proposals discussed here will contribute to the ongoing discussions about BEPS in the best possible way.

FOOTNOTES

1 OECD, "Addressing Base Erosion and Profit Shifting" (2013), available at http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/addressing-base-erosion-and-profit-shifting_9789264192744-en#page1.

2 OECD, "Action Plan on Base Erosion and Profit Shifting" (2013), available at http://www.oecd.org/ctp/BEPSActionPlan.pdf.

3 Id. at 8.

4 Id. at 18.

5 Id. at 19.

6 At paragraphs 5 and 6 of article 5 of the OECD model tax convention (OECD model).

7 Michael F. Swanick, Mark Mudrick, and Erik Bouwman, "Tax and Practice Issues in Commissionnaire Structures," Tax Notes Int'l, Jan. 13, 1997, p. 137.

8 OECD, "Report on the Transfer Pricing Aspects of Business Restructurings" (2010), available at http://www.oecd.org/tax/transfer-pricing/45690216.pdf.

9 Id. at 16. See also Carol A. Dunahoo, "Source Country Taxation of Foreign Corporations: Evolving Permanent Establishment Concepts," 86 Tax Mag. 37, at 48 (2008).

10 Joint Committee on Taxation, "Present Law and Background Related to Possible Income Shifting and Transfer Pricing," at 11 (2010), available at https://www.jct.gov/publications.html?func=startdown&id=3692.

11 Martin R. McClintock and Stephen A. Ward, "International Tax and Business Planning Opportunities Through Commissionnaire Arrangements," 22 Int'l Tax J. 55, at 56 (1996).

12 OECD, supra note 8, at 45 (D.1 Example (A)).

13 A foreign parent enterprise can set up a new entity in a local country to take advantage of a commissionnaire arrangement, instead of the conversion from a buy-sell arrangement to a commissionnaire arrangement.

14 David Buss, David Hryck, and Robert Rothman, "International Tax Strategies," 84 Taxes 13, at 18 (2006).

15 Id. at 62.

16 There is another important issue whether the parties could be taxed on the conversion. See OECD, supra note 8, at 15. However, because this issue should be discussed as a transfer pricing issue, it is not included in this article.

17 The JCT published "Present Law and Background Related to Possible Income Shifting and Transfer Pricing" and pointed out income shifting from high-tax jurisdiction to low-tax jurisdiction by commissionnaire arrangements. See supra note 10, at 105-109. Moreover, the fact that a commissionnaire arrangement was used as an offshore tax strategy by Caterpillar Inc. was shown by the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations. See http://www.hsgac.senate.gov/subcommittees/investigations/hearings/caterpillars-offshore-tax-strategy.

18 Richard Vann, "Tax Treaties: The Secret Agent's Secrets," British Tax Review (50th Anniversary Edition) 3, at 363 (2006).

19 See Arvid S. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle, Kluwer, at 471-479 (1991).

20 League of Nations, "Double Taxation and Tax Evasion, Technical Experts," at 31 (1925).

21 League of Nations, "Committee of Technical Experts on Double Taxation and Tax Evasion," at 4124-4125 (1927).

22 League of Nations Fiscal Committee, "Report to the Council on the Work of the First Session of the Committee," at 3-4 (1929). The committee uses the term "agency" in the broad commercial sense rather than in the strict legal sense.

23 John F. Avery Jones and David A. Ward, "Agents as Permanent Establishments Under the OECD Model Tax Convention," European Taxation, at 166 (May 1993).

24 League of Nations Fiscal Committee, "Report to the Council on the Fourth Session of the Committee," at 6 (1933).

25 League of Nations Fiscal Committee, "London and Mexico Model Tax Conventions Commentary and Text, League of Nations," at 15 (1946).

26 Skaar, supra note 19, at 479.

27 The Fiscal Committee of the OEEC, "The Elimination of Double Taxation: 1st Report of the Fiscal Committee of the OEEC," at 33-34, 50-53 (1958).

28 See Avery Jones, "The United Kingdom's Influence on the OECD Model Tax Convention," British Tax Review 6, at 664 (2011). Hans Pijl, "Agency Permanent Establishments: In the Name of and the Relationship Between Article 5(5) and (6) -- Part 2," Bulletin for International Taxation, at 97 (Feb. 2013), suggests "on behalf of," "binding," and "in the name of" were used as synonyms.

29 Skaar, supra note 19, at 96.

30 Avery Jones and Ward, supra note 23, at 155-156.

31 The term "binding on the enterprise" is used in paragraph 5 of article 5 of the U.S. model income tax convention of Nov. 15, 2006.

32 Kroppen and Stephan Hueffmeier, "The German Commissionnaire as a Permanent Establishment Under the OECD Model Treaty," Intertax, at 133 (1996). Giuseppe Persico, "Agency Permanent Establishment Under Article 5 of the OECD Model Convention," Intertax, at 66 (2000), organized these discussions clearly. Vann, supra note 18, at 345.

33 Conseil d'Etat, June 20, 2003, decision 224407. See Nathalie Ayme and Jean-Luc Trucchi, "Commissionnaire Arrangement Not a PE, Supreme Court Says," Tax Notes Int'l, Apr. 12, 2010, p. 112; Renaud Joffroy and Marie-Laure Hublot, "Zimmer Wins French Decision on Permanent Establishment," 21 Int'l Tax Rev. 39 (2010-2011).

34 Stephane Gelin, "France: Conseil d'Etat, Zimmer Ltd -- French Commissionnaire and PE Under the France-UK DTC," Tax Treaty Case Law Around the Globe -- 2011 (Wolters Kluwer), at 100-101 (2012).

35 See Brian J. Arnold, "Tax Treaty Case Law News," Bulletin for International Taxation April/May, at 253 (2012); and Frederik Zimmer, "Norwegian Supreme Court Sides With Taxpayer in Dell Case," Tax Notes Int'l, Dec. 12, 2011, p. 771.

36 OECD, "A Revised Discussion Draft on the Definition of 'Permanent Establishment' (Article 5) of the OECD Model Tax Convention," at 34 (2012), available at http://www.oecd.org/ctp/treaties/PermanentEstablishment.pdf.

37 Lee A. Sheppard, "The Brave New World of the Dependent Agent PE," Tax Notes Int'l, July 1, 2013, p. 10.

38 Arnold, supra note 35, at 254.

39 Skaar, supra note 19, at 463.

40 Vann, supra note 18, at 361.

41 At paragraph 1 of article 7 of the OECD model.

42 League of Nations Fiscal Committee, "Report to the Council on the Work of the Second Session of the Committee," at 5 (1930).

43 League of Nations Fiscal Committee, "Report to the Council on the Work of the Third Session of the Committee," at 5 (1931).

44 League of Nations Fiscal Committee, "Report to the Council on the Work of the Fourth Session of the Committee," at 1-2 (1933).

45 Mitchell B. Carroll, "Taxation of Foreign and National Enterprises: Methods of Allocating Taxable Income," at 192 (1933).

46 Id. at 192.

47 Avery Jones and Ward, supra note 23, at 164.

48 League of Nations Fiscal Committee, supra note 24, at 1-2 (1933).

49 League of Nations Fiscal Committee, supra note 25, at 17-20, 76-77.

50 The Fiscal Committee of the OEEC, "The Elimination of Double Taxation: Third Report of the Fiscal Committee of the OEEC," at 23, paragraph 2 of Article XV (1960).

51 Vann pointed out that Carroll's view is "remuneration-for-services criterion," and that the OEEC's view is "sale-between-independents criterion." Supra note 18, at 370.

52 OECD, "2010 Report on the Attribution of Profits to Permanent Establishment," at 59-60, para. 232 (2010), available at http://www.oecd.org/ctp/transfer-pricing/45689524.pdf.

53 Vann, supra note 18, at 378. Vann called the AOA "hydra theory" because it includes two mixed theories about firm values: the remuneration-for-service approach and the sale-between-independents approach.

54 For example, Hans Pijl, "The Zero-Sum Game, the Emperor's Beard and the Authorized OECD Approach," European Tax at 29 (2006); and Carlos Eduardo Costa M.A. Toro, "Different Methods of Attributing Profits to Agency PEs," Tax Notes Int'l, Feb. 2, 2009, p. 421.

55 See Vann, supra note 18, at 379; Philip Baker and Richard S. Collier, "General Report," Cahiers de Droit Fiscal International, Vol. 91b, at 33 (2006); and Sheppard, supra note 37, at 12-13.

56 OECD, supra note 52, at 60, para. 235.

57 Annika Deitmer, "Seminar Report," Bulletin Tax Treaty Monitor, at 187 (May 2004).

58 See Toro, supra note 54, at 434-440.

59 Indian Income Tax Appellate Tribunal, Apr. 20, 2007, decisions 535/Mum/04 and 205/Mum/04. See S.S. Palwe, Samir Gandhi, Tehmina Latiwala, and Mital Patel, "Tax Tribunal Ruling Clarifies Agency PE Concept," Tax Notes Int'l, May 14, 2007, p. 686.

60 Supreme Court of India, July 9, 2007, decisions 2114/07 and 2451/07.

61 Jitender Tankikella and Bijal Ajinkya, "Morgan Stanley: Indian Supreme Court's Landmark Ruling on PE, Transfer Pricing, and Attribution of Profits," Worldwide Tax Daily. But see Pijl, "Morgan Stanley: Issues Regarding Permanent Establishments and Profit Attribution in Light of the OECD View," Bulletin for International Taxation (May 2008), at 182, pointing out that the Supreme Court's approach connected to the AOA.

62 See Reuven Avi-Yonah, "The Rise and Fall of Arm's Length: A Study in the Evolution of U.S. International Taxation," 15 Va. Tax Rev. 89, at 148 (1995-1996). He points out the internalization theory among multinational enterprise groups. See Vann, supra note 18, at 379.

63 Avi-Yonah, "Xilinx and the Arm's-Length Standard," Tax Notes Int'l, June 8, 2009, p. 859.

64 See Kimberly A. Clausing and Avi-Yonah, "Reforming Corporate Taxation in a Global Economy: A Proposal to Adopt Formulary Apportionment," in: Jason Furman and Jason Bordoff, eds., Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes (Brookings Institution Press), at 12 (2007).

65 Id. at 21-22.

66 OECD, supra note 2, at 20.

67 Avi-Yonah, "Splitting the Unsplittable: Toward a Formulary Approach to Allocating Residuals Under Profit Split," at 2, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2369944.


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