INTRODUCTION

In the current economic climate, the operation of a

multinational corporate (MNC) comes with the inherent

risk of ‘double taxation’ (DT)1 which is the apprehension

of having the same income, by the same taxpayer in two

separate countries being taxed at the same time. This

might occur due to a country’s decision to tax its

residents on their world-wide income (often referred to

as the ‘residence’ principle). Similarly a foreign state

where income is generated may also simultaneously claim a

right to tax profits of the non-resident corporations

which arise under its jurisdiction; such principle is

often described as the ‘source principle’2.

The two principles have been the reason for giving rise

to controversial issues in the field of international

taxation3 in relation to the ‘allocation of right to tax’

and more specifically with regards to permanent

establishment (PE). The absence of a general consensus

1A.A. Kragen, Double Income Taxation Treaties: The O.E.C.D. Draft, 52Cal. L. Rev. 306 (1964). Accessed on March 12 2013 from http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=3008&context=californialawreview&seiredir=1&referer=http%3A%2F%2Fwww.google.co.uk%2Furl%3Fsa%3Dt%26rct%3Dj%26q%3Ddouble%2520income%2520taxation%2520treaties%253A%2520the%2520oecd%2520draft%26source%3Dweb%26cd%3D4%26ved%3D0CEQQFjAD%26url%3Dhttp%253A%252F%252Fscholarship.law.berkeley.edu%252Fcgi%252Fviewcontent.cgi%253Farticle%253D3008%2526context%253Dcalifornialawreview%26ei%3DqMllUcjxDZTc4QTXv4DwDg%26usg%3DAFQjCNH7e2CHIk7kkj6h6z_4qtX2qckurg%26bvm%3Dbv.44990110%2Cd.bGE#search=%22double%20income%20taxation%20treaties%3A%20oecd%20draft%22 2J. Isenbergh, International Taxation: U.S. Taxation of Foreign Taxpayers and Foreign Income, 2000, Vol.3

3Ibid

1

towards the adoption of a uniform definition as to what

constitutes a PE has revealed the need for its defining

meaning in the international context. This is mainly due

to the level of importance akin to the concept of PE,

namely ‘assigning’ states the right to tax where PE is

situated.

The aim of this piece is to articulately analyse various

forms which suffice for the establishment of PE. To aid

this objective, a great deal of emphasis will be shedded

to relevant parts of Article 5 of the Organisation for

Economic Co-operation and Development (OECD)4. Whilst

doing so, the United Nations (UN) Model Convention will

be deployed too for substantive comparisons with the OECD

regime5. As Van Gogh once quoted ‘there is no blue without yellow

and without orange’6 similarly there is no double taxation

without misinterpretation of provisions and misconstrued

tax rights. Consequently the second strand of this paper

will microscopically focus on the confusion in which

Article 5 of the OECD has created by way of

interpretation which subsequently leads to misconstrued

right to tax between to countries.

The PE Definition

4 OECD, Model Tax Convention on Income and on Capital 2010 (OECD Publishing, 2012) M-16 Art 5(1)5 United Nations, United Nations Model Double Taxation Conventionbetween Developed and Developing Countries (United NationsPublications 2011)6See:http://www.brainyquote.com/quotes/quotes/v/vincentvan150778.html#bTEf5cStdmIWBGqd.99 

2

The constant reminder of lack of a clear and precise

meaning of PE has led leading scholars and professionals

in requesting the clarity of the PE concept in order to

eliminate uncertainty and ambiguity, so that taxpayers

are well informed prior expanding their operations7. The

OECD and later the UN have attempted to define PE. In

order to evaluate this effort, this paper will engage in

a step-by-step examination to discover if it is

practically successful.

Article 5(1) of the OECD Model Convention defines

'permanent establishment' as a "fixed place of business through

which the business of an enterprise is wholly or partly

carried on”. Although in the provision per se, there is

lack of further elaboration as to what forms a ‘fixed

place of business’, which is central to the PE

definition, the OECD Commentary lays down a three-limb

test.8

The OECD states that the term place of business covers

any premises, facilities or installations used for

carrying on the business … exclusively for that purpose. 9

In certain circumstances, automated machinery or

7 L. Olivier, ‘Permanent Establishment Requirement in anInternational and Domestic Taxation Context: An Overview, S. AfricanLJ, 20028See: OCED Interpretation and Application of Article 59See: OECD Commentary on Article 5 Concerning the Definition ofPermanent Establishment. P.44 Retrieved on 23rd March 2013 fromhttp://www.oecd.org/ctp/treaties/48836726.pdf

3

equipments have been accepted in gaining the PE status10.

However, a place of business may exist even in the

absence of premises as long as a certain amount of space

is at the enterprise’s disposal11. According to an OECD

report12, the phrase ‘at the disposal of’ requires that an

enterprise may use a place for such duration of time that

the enterprise chooses to pursue its business plan

activities. The non-usage of unutilized capacity of the

resident’s activities should not be perceived as

sufficient for the fulfillment of the disposal

requirement.

Adding to that, the OECD went further to comment that it

is immaterial whether such space is rented or owned by

the enterprise. There is no formal legal right regarding

the use of such place, as ‘the mere fact that enterprises possess a

certain amount of space at its disposal13’ will be deemed sufficient.

By replacing ‘in which’ with ‘through which’14, there was

intention to broaden the scope and expand the range of

situations where business activities are carried on at a

given location which is at the disposal of the enterprise

for that purpose. Therefore, the enterprise will be

considered to carry on its business through that specific

location15. 10Ibid. p.4411Ibid12See: OECD ‘Interpretation and Application of Article 5 of theOECD’ p.8-1013OECD Model Convention para 4.114OECD Model Convention para 4.215OECD Commentary Para.4.6

4

(A) Fixed and Permanent

The second criterion states that the place of business

has to be fixed;16 this illustrates that there has to be a

geographic location. One must be able to point to a

location…17 and hence there has to be a degree of nexus

between business and that specific geographic point18

where business is carried on. Furthermore some degree of

concern has been raised as to whether the business

activities carried on by an enterprise, which is of a

moving nature between various locations,19 constitutes a

single place of business. To shed light on such issue,

the OECD reiterate that ‘a single place of business will generally be

considered to exist where, in light of the nature of the business, a particular

location within which the activities are moved may be identified as

constituting a coherent whole commercially and geographically…’20

Connected to that, there is an inherit presumption that a

place of business must be established with some degree of

permanence. Whilst the OECD assumes some degree of

proximity between the time period and the nature of the

enterprise’s activity,21 arguments in regards to the level

of permanence are still left unanalyzed.

16OCED Model Convention Article.5.1 17Ibid18See: OECD ‘Interpretation and Application of Article 5 of the OECD’ p.8-1019Ibid p.1420OECD Commentary 2010 para21See: OECD ‘Interpretation and Application of Article 5 of the OECD’p.44

5

Carrying on business through fixed place

The final test is that the place of business must act as

the location through which business is carried out, and

not the business itself. The business of the enterprise

is usually conducted by the personnel at the premises.

The adoption of the changes to the OECD commentary by the

Committee on Fiscal Affairs disapproves the notion that

‘human intervention’ 22 is not an element in deciding

whether PE arises. Although the first23and second

Pipeline cases did support the view that human

intervention a necessary pre-requisite for the purpose of

establishing PE, however the Supreme Court of Germany in

the third Bundesfinanzhof24 echoed and supported the

notion.

Non-Exhaustive list

In an attempt to provide examples of PE, the OECD

inserted paragraph 2 presenting a list which is by ‘…no

means exhaustive…’25 these examples have to be seen

against the background of the general definition provided

under paragraph 126. Therefore, there is an assumption

that the Contracting States have to interpret the

22Bundesfinanzhof No: IR 226/723See: Ibid24BFH 30.10.1996, III R 12/92, BStBl II 1997, 12.25OECD Commentary Para.1226See: P, Baker, ‘Double taxation convention: a manual on the OECD Model Tax Convention on Income and on Capital’ 2001. P.5-7

6

examples listed, such as “a place of management” or “a

branch” 27, in a certain way to ensure that these places

of business satisfy the requirements of paragraph 128. The

OECD Commentary also stressed that paragraph.2 is not

designed to extend the boundaries of the PE definition

and for this reason it cannot be perceived to be

conclusive.29

The construction of the non-exhaustive list of what might

constitute a place of business illustrates the intention

of the OECD to allow flexibility in the process of

establishing the PE. The definition of PE varies across

the Contracting States and there are notable differences

in what constitutes a ‘fixed place’ in those

jurisdictions. Allowing the Contracting States a level of

discretion in interpreting and deciding whether the

physical establishment is satisfied under their

jurisdictions, it accommodates judicial activism and

correlates their PE definition with a particular case at

stake. For example, the OECD used ‘place of management’

to echo that an office does not necessarily constitute a

place of management, since other forms of place of

management will suffice too30. It was emphasized that if

the law of the Contracting States does not distinguish a

27OECD MODEL TAX CONVENTION 2012 Commentary p.9-10 28 See: P, Baker, ‘Double taxation convention: a manual on the OECD Model Tax Convention on Income and on Capital’ 2001. P,5-7. Sweet & Maxwell.29OECD Commentary Para.1230OECD MODEL TAX CONVENTION 2012 Commentary p.9-10

7

place of management from an office, then “there is no need to

refer to the former term in their bilateral convention”31.

The current business environment is constantly evolving

at a very rapid pace. This development which has been

embodied especially in technological advancements has

redefined well-known platforms in which commercial

transactions take place.32 Thus the decision of the OECD

to adopt a non-exhaustive list in its PE provision can be

construed as an attempt to embrace this progress. Taking

the instance of e-commerce, which will be critically

addressed in the second branch of this paper, remains a

dark area in relation to its interaction with a fixed

place of business. This reveals the inadequacy of the

OECD in effectively coping with development and such

problem is yet to be fully solved.

The Building Sites and Construction or Installation

Project Establishment in Article 5(3)

Paragraph 3 focuses on issues pertaining to building and

construction sites or installation of project33. From a

historic point of view, it has been reported that Article

5(3) 34 was embedded into the non-exhaustive list under31Ibid32 C. Garate. The Fixed Place of Business in the Context of Electronic Commerce. 2003. Permanent Establishments in International Tax Law.

33 OECD Model Convention Article.5 (3)34 Ibid

8

Article 5(2) 35 . This was recently changed and the OECD

decided to attribute Article 5(3) in construction sites

or installations since the base tends not to remain the

same place/site throughout the whole duration of the

construction (12 months); rather it is just a step in the

progress for completing the project36. The distinctive

nature of Article 5(3) 37 can also be reflected to the

fact that the paragraph seems to be solely concerned with

the PE of contractors responsible for the construction or

installation project at stake38 and not with the owner of

the premises. Therefore it can be construed that a

landowner who gives out a contract for the purpose of

constructing a building on his site may not fall within

the definition of PE for tax purposes, rather the

contractor will deemed as a PE39 .

Another special feature of paragraph 3 is that it

provides a specific time framework for the establishment

of PE. The 12 months period has been criticized in 199240

for its vulnerability to manipulation and abuse at the

hands of MNC who may bypass the 12 months test by way of

disguising a longer contract into several shorter

contracts with different entities41

35 OECD Model Convention Article 5 (2)36 OECD Model Tax Convention 2012 Commentar. P,1437 OECD Model Convention Article.5 (3)38 OECD Model Tax Convention 2012 Commentary. P,1139 Ibid40Ibid.p,1341Interpretation and Application of Article 5 of the OECD’ p.52

9

The time period is intended to cover the project itself

as well as supervisory activities attached to it. This is

made in an attempt to determine the life-time of the

project and whilst doing so no account should be taken in

respect of the time in which the contract concerned has

spent previously on other projects or sites which are

unconnected with the site or project in question.42 A

building site is to be regarded as a single unit provided

that there is geographic and commercial coherency, even

if its construction is based on several contracts43. The

problem arising from Article 5(3) will be discussed and

supported by the Dredging dispute44 and J Ray McDermott Eastern

Hemisphere Ltd case45.

The U.N46 delineates from the OECD regime by setting a

shorter time period, 6 months, and in this way it is

substantially differentiated from the latter. The UN time

period has been often replicated to some extent by many

42OECD Model Tax Convention 2012 Commentary. P.1443OECD Model Tax Convention 2012 Commentary, para.18 44Deloitee, ‘International Tax Development in 2011: Moving Forward’ Retrieved on 23rd March 2013, from http://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Tax%20documents/International%20Tax%20Developments%202011%20-%20Moving%20Forward.pdf 45 J Ray McDermott Eastern Hemisphere Ltd v JCIT [2010] SOT 240 (Mum)46United Nations Model Convention retrieved on 16 march 2013, from http://search.un.org/search?q=taxation&Submit=Go&ie=utf8&oe=utf8&site=un_org-DESA_FFD&client=UN_Website_English&output=xml_no_dtd&num=10&as_epq=&as_oq=&as_q=&q=&proxystylesheet=UN_Website_en&filter=0

10

double taxation agreements between developing countries.47

This is because it provides a broader scope by including

para.3 (b)48 furnishing services the furnishing of

services, including consultancy services, by an

enterprise through employees or other personnel engaged

by the enterprise for such purpose,49 but only if

activities of that nature continue (for the same or a

connected project) within a Contracting State for a

period or periods aggregating more than 183 days in any

12-month period commencing or ending in the fiscal year

concerned.50 The OECD however refuse to expressly

acknowledge such provision per se, instead it was

mentioned in the OCED commentary51

The Exclusionary List

Article 5(4) 52 provides taxpayers with a list of

exclusions with activities or arrangements that cannot

constitute PE, regardless of whether the activities are

carried out through a ‘fixed place of business’53. Going

through the paragraph, it can be derived that the

excluded activities are of some peculiar nature as they

47Ibid. p.3848United Nations, United Nations Model Double Taxation Conventionbetween Developed and Developing Countries Article 5.3(b)49Ibid50Ibid51OECD Model Tax Convention 2012 Commentary, para. 42. 52The OECD Model Convention Article.5 (4)53The OECD Model Convention Article.5 (4)

11

are perceived to be ‘preparatory or auxiliary’54. The

test of dividing cases and classifying them as being of

preparatory or auxiliary nature depends on whether “…the

activity of the fixed place of business in itself forms

an essential and significant part of the activity of the

enterprise as a whole”.55

Agency PE

In the absence of a physical PE, PE is still able to

arise under paragraph 556 which provides the agency PE.

For the sake of clarification, the OECD has inserted

paragraph 6 in order to exempt from the agency PE ambit

independent agents. Starting from paragraph 5, the agency

PE is addressed to dependent agents. In trying to form

the boundaries of paragraph 5, the OECD stated that “a

dependent agent may be legally separated from the enterprise that he/she

represents, in other words maybe a separate legal enterprise, or an director

of the principle…’57 The paragraph will only successfully

establish agency PE if it is evidence that the person has

sufficient power to bind the enterprise by the contracts

he signs. As it is expressly underlined, “lack of active

involvement by an enterprise in transactions may be indicative of a grant of

54See: The Definition of Permanent Establishment. P.13. Retrieved on 23rd March 2013 from See: http://www.kluwerlaw.com/McmsTemplates/resources/SampleChaptersPDF/858.pdf

55 OECD Model Taxation Convention 2012 Commentary. Para.2456The OECD Model Convention Article.5 (5) 57OECD Model Taxation Convention 2012 Commentary. Para.33

12

authority to an agent”58. It is equally important that this

power is ‘habitually exercised’ in another Contracting state.59

The back drop of the analysis of paragraph 5 lacks

purport distinction in understanding that the operation

of several jurisdictions can vary and this is the case

especially when we have a civil law jurisdiction and a

common law jurisdiction opposing as to what line of law

should be followed in dealing with agency PE. For

example, ‘authority to conclude contract…’60 and the

‘habitual’61 nature of such authority maybe futile as it

may not be sufficient in a civil law jurisdiction.

The UN substantially differentiates its agency PE by

adding an extra sub-paragraph which refers to a person

who “…habitually maintains… a stock of goods or merchandise from which

he regularly delivers goods or merchandise on behalf of the enterprise.62 It

can be said that this widens the scope of dependent

agents under the UN provision, since it does not require

the agent to exercise power in concluding contracts.

Independent Agents

Article 5(6) sets out that an independent agent,

including a broker, general commission agent or any other

58 Ibid. para.32.159 Ibid. para.3360Ibid61OECD Model Taxation Convention 2012 Commentary. Para.33.162See: United Nations Model Double Taxation Convention between Developed and Developing Countries. 2011 p.11

13

agent of an independent status, shall not result in

agency PE63. The issue of independence was clarified

further in the commentary where the OECD asserted that

‘an agent must be independent of the enterprise both ‘legally’ and

‘economically’64 and he act in the ordinary course of business when acting on

behalf of the enterprise’65.

There are other factors that should be considered when

determining whether an agent is independent, for example

the number of principals is often a strong indication.

Being an agent whose activities are performed wholly or

almost wholly on behalf of one enterprise for a long

period of time is more likely to be an independent

agent.66 In contrast, the U.N defined independent agent

as

‘’Acting as such will usually not create a permanent establishment for the

enterprise making use of the agent, because such an agent is effectively

operating their own business providing a service...” 67

Looking at the UN model, it is obvious that significant

amount of consideration is given to the amount of time

that the agent devotes to its principal, and also if it

can be interpreted that there is an arm’s length68

63The OECD Model Convention Article.5 (6)64OECD Model Tax Convention 2012 Commentary. Para.33.765OECD Model Tax Convention 012 Commentary. Para.33.866 Ibid67United Nations, United Nations Model Double Taxation Convention between Developed and Developing Countries Article 568Ibid. p.140

14

relationship between the agent and the client, then it

may be said that such agent is an independent agent.

This requirement has been greatly criticised by tax

experts and legal scholars alike including R. Vann69 whose

concern was premised on the fact that the life span and

longivity of the activities are extremely confusing, thus

creating some ambiguity as to when an agent can be

deemed as independent.

This analysis indicates the level of uncertainty attached

to this unsatisfactory area of Article 5. Such

uncertainty was exacerbated by the OECD commentary which

states that facts allowed are not the only determinative,

all facts and circumstances, and whether the agent in

question bears risks and/or recieves reward…use of his

entrepreneurial skills and knowledge70

This paragraph under the aforementioned article presents

a genuine problem for common and civil law jurisdictions

that may have some reservation71 concerning the meaning of

the provision. Under the civil law concept of indirect

representation, ‘brokers’ and ‘general commmission

69R, Vann, ‘Tax Treaties: The Secret Agent’s Secrets’. The University of Sydney, Legal Studies Research No.06/05. Retrieved on 25th March 2013 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=91944070OECD Model Tax Convention 2012 Commentary. Para.33.871A.Vega and I.Rudyk, ‘Explaining Reservation to The OCED Model Tax Convention’: An Empirical Approach. OCTOBER 2011. Retrieved on 25th March 2013 from http://www.indret.com/pdf/860_en.pdf

15

agent’ have no binding effect on their principals,72 thus

there was no need to have them excluded from the above

paragraph. Under common law jurisdiction the principal

that an agent serves need not to be disclosed, such agent

can still bind the principal even if contracts are not

conducted in the name of his principal73 hence the

provision represents an unsatisfactory area of Article 5.

Associated Companies

The separate legal personality of corporations was

acknowledged in Article 5(7) which provides that a

subsidiary controlled by itself may not constitute a

permanent establishment 74 but if the activities of the

subsidiary are taken on behalf of the parent, then it

falls within the other provisions in Article 5 and PE may

arise.

The case of Phillip Morris Germany GgbH75 where there was a

dispute as to whether loyalties from the Italian Tobacco

adminstration for the license to produce and supply

cigarettes and tobacco products with the Phillip Morris

Trademark was taxable in Italy.

72R, Vann, ‘Tax Treaties: The Secret Agent’s Secrets, p.347.’ The University of Sydney, Legal Studies Research No.06/05. Retrieved on 25th March 2013 from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=91944073 Ibid74OECD Model Tax Convention 2012 Commentary. Para..4075Ministry of Finance (Tax Office) vs. Philip Morris(GmbH) 2002 CorteSuprema di Cassazione, No. 7682/05

16

It was held that the mere participation of

representatives of an Italian enterprise in phases of

negotiation or conclusion of contract with no power of

representation should be considered to be an authority to

conclude contracts in the name of a foreign enterprise

for the purposes of assessing the existence of an agency

PE in Italy76. This decision highlights the problem of

interpretation in which this section’s main purpose tries

to determine whether an intermediary is an associate of

the principle. The OECD opposed to this conclusion by

subsequently expressing its disapproval via an amendment

of the 1995 Commentary77.

Another major deference between the OECD and the UN is

that the UN incorporated ‘Insurance’ into its article 578

‘’… an insurance enterprise of a Contracting State shall, except in regard to re-

insurance, be deemed to have a permanent establishment in the other

Contracting State ….’’79

This provision again testifies to the intention of the UN in broadening its

scope of PE in order to enable developing countries more rights to tax.

However OECD in its commentary stated the right to tax

insurance depends on the factual and legal situation

76 Ibid77See: D. Feuerstein, ‘The Agency Permanent Establishment’. P.11278United Nations, United Nations Model Double Taxation Convention between Developed and Developing Countries Article 5.779 Ibid

17

prevailing in the Contracting State concerned,80 hence its

rationale for the omission on Insurance.

Problems of Interpretation

Over the years, there has been significant amount of

focus on the problems of interpretation which have marred

courts in many jurisdictions when charged with the task

of dealing with Article 581.

Although most of the arguments are premised on various

rationales and various subparagraphs of the article in

question, commentators both legal and non legal alike

have concluded that the unsatisfactory nature of Article

5 can be attributed mainly to the lack of clarity and

understanding by the OECD to recognise the unique

structure of the various legal systems82. Globalisation

and technical advancements have also posed a serious

challenge with which we are still struggling with.83 This

section will attempt to emphasize such problems, by

80 OECD Model Tax Convention 2012 Commentary. Para.3981 DIT v Morgan Stanley a 2nd Co Inc. 2002 292 ITR 416 SC82See: J.F.A Jones and D.A Ward, ‘Agents a Permanent Establishment under the OCED Model Tax Convention’. 1993. European taxation. Retrieved on 27th of March 2013 from http://www.unifr.ch/cdfpd/assets/files/publications/1993%20Agents_under_OECD.pdf83See: L.M. Castro, ‘Problems Involving Permanent Establishment: Overview of Relevant Issues in Today’s International Economy.’ The Global Business Law Review. Vol. 2:125. Retrieved on 2nd April 2013from http://www.globalbusinesslawreview.org/wp-content/uploads/2012/04/1gCastro.pdf

18

focusing on the problematic issues of agency84 and e-

commerce PE85.

Agency

To understand the concept of agency under civil and

common law,86 it is noteworthy to acknowledge, as a matter

of principle, that bilateral treaties such as tax

treaties in their respective interpretation are governed

by the Vienna Convention.87 There is a general consensus

that ‘…technical expressions adopted in a treaty will normally be the

reflection of the same expressions as they are used in the internal law of the

Contracting Parties’88.

In relation to tax treaties whereby a non-tax concept is

advanced in a bilateral tax treaty, Contracting Parties

may apply it domestically in different ways, such concept

prove sufficient to the understand the effect of

84See: G, Persico, ‘Agency Permanent Establishment under Article 5 ofthe OCED Model Convention’ 20002 Intertax 66.85G.D. Sprague and R. Hersey, ‘Permanent Establishments and the Internet-Enabled Enterprises: The Physical Presence and Contract Concluding Dependent Agent Tests.’ 2003. GA Law Review.29986See: J.F.A Jones and D.A Ward, ‘Agents a Permanent Establishment under the OCED Model Tax Convention’. 1993, P.177. International Bureau of Fiscal Documentation, European taxation. Retrieved on 27th of March 2013 from http://www.unifr.ch/cdfpd/assets/files/publications/1993%20Agents_under_OECD.pdf87See: The Vienna Convention on The Law of Treaties 1969. Retrieved on 27th March 2013 from http://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf88 G, Persico, ‘Agency Permanent Establishment under Article 5 of theOCED Model Convention’ 20002 Intertax. P.67.

19

international agreement on civil and common law countries

when interpreting International treaties.89 For example

under civil law jurisdiction there is a distinction

between ‘Direct’ and ‘Indirect’ representation.90 However

according to Feuerstein,91 whether a foreign enterprise

may be disclosed or undisclosed to the contract

concluded by the intermediary does not make a

difference,92 because typically in a common law

jurisdiction there is no clear distinction between direct

and indirect representation.

From the discussion above, it can be said that it is

unclear whether contracts which are concluded by an

intermediary can be legally bound on foreign enterprises

because such conclusion heavily depends on the legal

system in which the contract is governed by.93

The analysis above illustrates the genesis of

interpretative confusion in respect to Article 5(5)94 by

showing that authority is needed to conclude a contract

in the name of the enterprise. Whilst examining the

89 Ibid90 J.F.A Jones and D.A Ward, ‘Agents a Permanent Establishment under the OCED Model Tax Convention’. 1993, P.156. International Bureau of Fiscal Documentation, European taxation. Retrieved on 27th of March 2013 from http://www.unifr.ch/cdfpd/assets/files/publications/1993%20Agents_under_OECD.pdf91See: D. Feuerstein, ‘The Agency Permanent Establishment’92See: D. Feuerstein, ‘The Agency Permanent Establishment’. P.10993 See: Zimmer Ltd 2010 12 ITLR 73994 The OECD Article 5.(5)

20

issue of authorisation, Skaar95 stated that the key

question should be to determine the circumstances

qualifying as an authorization. This lack of clarify was

exposed further by Persico96, who rightfully detected that

the ‘authority’ is left undefined by the OECD, thus

leaving interpretation to Article 3(2) of the OECD ,

which allows discretion to member of state to define

authority domestically.

In a bid to profer a solution Pleijsier97 proposed that

the problem of interpretation could be solved by using

international private law, which will conclude the

contract between the parties by inputing a provision

which will stipulate the law under which the contract

will be govern by. According to Sprague and Boyle the

concept of physical presence of the permanent

establishment is losing its relevance in international

tax, simply because the manner in which enterprises

conduct their transactions has been significantly

transformed98.

E-Commerce

95 A.A Skaar Permanent Establishment, Erosion of a Tax Treaty Principle (Kluwer, Deventer/Boston, 1991), p.49096 G. Persico, ‘Agency Permanent Establishment under Article 5 of theOECD Model Convention’, Intertax, vol.28, no 2, p.6997A. Pleijsier, ‘The Agency Permanent Establishment: The Current Definition-Part One’. Kluwer Law International 2001. Intertax vol.29,Issue 5.98 G.D. Sprague and M.P. Boyle, Taxation of Income derived from Electronic Commerce, Cahiers de Droit Fiscal International, General Report 2001 p.23. Volume LXXXVIa

21

The use of technology has created a new platform which

has re-defined the nature of business from physical

dealings, to what can now be described as “e-business”99.

In other words the internet has created a non-physical,

borderless, impersonal and extremely anonymous conduct of

business that is extremely difficult to track.100 Thus

there is urgency by the tax experts and tax scholars to

reconcile the new digital reality101 with the fundamental

principle components PE, as it was developed from the old

economy102 for the purpose of establishing taxing rights.

However there are divergent views as to the form of

combat which the OECD should adopt in curtailing erosion

of tax rights.

A group of commentators led by Cockfield has advanced a

strong argument for changing the current PE rules,

contesting that the fundamental concept of attributing

profits to the location where the value was created is

obsolete. Thus a test that solely focuses on wealth

creation should be discontinued for the consideration of,

what Cockfield described as, the place of consumption

test.103 He attached his rationale by saying that some

99C. Garate, The Fixed Place of Business in the Context of ElectronicCommerce. 2003, p.7-8. Permanent Establishments in International TaxLaw.100Ibid101Ibid, p.51102See e.g. C. E. McLure Jr., Taxation of Electronic Commerce: Economic Objectives,Technological Constraints, and Tax Laws, 52 TAX L. REV. 269 (1997)LAWYER 507 (1997)103A.J. Cockfield, Designing Tax Policy for the Digital Biosphere: How the Internet is Changing Tax Laws, 34 CONN. L. REV. 333 (2002)

22

member states of the OECD and the UN are gravitating

towards an ‘economic presence’ test for cross-border e-

commerce tax.104 After considering the increasing

complexity surrounding taxpayer compliance strategies, he

concludes that the OECD by retaining the traditional

principles has inhibited the ability of the member

states’ tax system to protect real norms.105

However Cockfield proposed that focus should shift to the

location of the consumption, rather than that of

production,106 because the adoption of this form of

‘allocation of tax revenue…is justified under a number of

theories, including the fact that e-commerce importing

countries created the market opportunities…’107

Cockfield’s advances were rebutted because the OECD

stated that the consumption requires a real human

presence …in a geographical space where the asset of.

Conclusion

Based on the comparison above, this paper have been able

to show various ways in which a PE may arise by drawing

mainly on the provision of OECD whilst drawing

comparisons the United Nations Convention. It became

vividly clear that the sole purpose of the OECD Model

Convention was to clear the ambiguities and uncertainties

104Ibid 390-391105Ibid, p.395106Ibid107Ibid, p.62

23

which may give arise states in relation right to tax

corporate entities on their soil, however unfortunately

has not succeed absolutely in doing so due to the fact

that the grey areas most especially ‘agent’ remain an

unsolved puzzle.

Although it is tempting to label the UN as a better

provision because of its broadness, creativity and its

endeavor to safe-guide the right to tax of its member

mainly (Developing countries), rather than act as arbiter

between members of the OECD and the developing countries,

the provision has further fuelled the discourse in this

areas of taxation, creating a divisive line between

developed and developing countries.

Despite the criticisms, the importance of having a

provision such as Article.5 which try to mitigate between

states should not be missed simply because it stands as

point of which many MNC and states may refer to.

Furthermore, the relationship between the OCED and UN

Model convention cannot be denied, thus what ties them as

an instruments is greater in comparison to their

differences, therefore the two organization should pool

their expertise together to achieve a common goal of

settle the dispute between the developed and developing

countries as the difficult challenges lies ahead i.e. e-

commerce for both organizations to combat.

24

BIBLOGRAPHY

Cases

1. BFH 30.10.1996, III R 12/92, BStBl II 1997, 12. 2. DIT v Morgan Stanley a 2nd Co Inc. 2002 292 ITR 416

SC

25

3. Dudney v. The Queen (99 DTC 147) 19994. Ministry of Finance (Tax Office) vs. Philip

Morris(GmbH) 2002 Corte Suprema diCassazione, No. 7682/05

5. Pioneer Overseas Corporation v. Deputy/AssistantDirector of Income-tax, Circle-2(1), InternationalTaxation, New Delhi [2010] 37 SOT 404 (Delhi)

6. Bundesfinanzhof No: IR 226/7

7. Bundesfinanzhof No: IR 53/82

8. Zimmer Ltd 2010 12 ITLR 739

Journals

1. Pleijsier, ‘The Agency Permanent Establishment: The

Current Definition-Part One’. Kluwer Law

International 2001. Intertax vol.29, Issue 5.

2. S. Skaar , Permanent Establishment: Erosion of a Tax Treaty

Principle. deventer: Kluwer Law International, 1991

3. A.A. Kragen, Double Income Taxation Treaties: The

O.E.C.D. Draft, 52 Cal. L. Rev. 306 (1964). Accessed

on March 12 2013 from

http://scholarship.law.berkeley.edu/cgi/viewcontent.

cgi?

article=3008&context=californialawreview&seiredir=1&

referer=http%3A%2F%2Fwww.google.co.uk%2Furl%3Fsa%3Dt

%26rct%3Dj%26q%3Ddouble%2520income%2520taxation

%2520treaties%253A%2520the%2520oecd%2520draft

%26source%3Dweb%26cd%3D4%26ved%3D0CEQQFjAD%26url

%3Dhttp%253A%252F%252Fscholarship.law.berkeley.edu26

%252Fcgi%252Fviewcontent.cgi%253Farticle

%253D3008%2526context%253Dcalifornialawreview%26ei

%3DqMllUcjxDZTc4QTXv4DwDg%26usg

%3DAFQjCNH7e2CHIk7kkj6h6z_4qtX2qckurg%26bvm

%3Dbv.44990110%2Cd.bGE#search=%22double%20income

%20taxation%20treaties%3A%20oecd%20draft%22

4. A.J. Cockfield, Designing Tax Policy for the Digital Biosphere:

How the Internet is Changing Tax Laws, 34 CONN. L. REV. 333

(2002)

5. A.Vega and I.Rudyk, ‘Explaining Reservation to The

OCED Model Tax Convention’: An Empirical Approach.

OCTOBER 2011. Retrieved on 25th March 2013 from

http://www.indret.com/pdf/860_en.pdf

6. C. Garate, The Fixed Place of Business in the

Context of Electronic Commerce. 2003,p.7-8.

Permanent Establishments in International Tax Law.

7. G, Persico, ‘Agency Permanent Establishment under

Article 5 of the OCED Model Convention’ 20002

Intertax. P.67.

8. G.D. Sprague and M.P. Boyle, Taxation of Income

derived from Electronic Commerce, Cahiers de Droit

Fiscal International, General Report 2001 p.23.

Volume LXXXVIa

9. G.D. Sprague and R. Hersey, ‘Permanent

Establishments and the Internet-Enabled Enterprises:

27

The Physical Presence and Contract Concluding

Dependent Agent Tests.’ 2003. GA Law Review.299#

10. J Ray McDermott Eastern Hemisphere Ltd v JCIT [2010] SOT

240 (Mum)

11. J. Isenberg, International Taxation: U.S.

Taxation of Foreign Taxpayers and Foreign Income,

2000, Vol.3

12. J.F.A Jones and D.A Ward, ‘Agents a Permanent

Establishment under the OCED Model Tax Convention’.

1993, P.156. International Bureau of Fiscal

Documentation, European taxation. Retrieved on 27th

of March 2013 from

http://www.unifr.ch/cdfpd/assets/files/publications/

1993%20Agents_under_OECD.pdf

13. L. Olivier, ‘Permanent Establishment Requirement

in an International and Domestic Taxation Context:

An Overview, S. African LJ, 2002

14. LAWYER 507 (1997); R.L. Doernberg, Electronic

Commerce and International Tax Sharing, 16 TAX NOTES INT’L

1013 (1998)

15. D. Feuerstein, ‘The Agency Permanent

Establishment’

16. L.M. Castro, ‘Problems Involving Permanent

Establishment: Overview of Relevant Issues in

Today’s International Economy.’ The Global Business

28

Law Review. Vol. 2:125. Retrieved on 2nd April

2013 from http://www.globalbusinesslawreview.org/wp-

content/uploads/2012/04/1gCastro.pdf

C. E. McLure Jr., Taxation of Electronic Commerce: EconomicObjectives,

Eletronic Resource

1. Deloitee, ‘International Tax Development in 2011:Moving Forward’ Retrieved on 23rd March 2013, fromhttp://www.deloitte.com/assets/Dcom-India/Local%20Assets/Documents/Tax%20documents/International%20Tax%20Developments%202011%20-%20Moving%20Forward.pdf

2. OCED Commentary of Model Convention 20123. OECD Commentary 2010

http://www.oecd.org/ctp/treaties/48836726.pdf 4. R, Vann, ‘Tax Treaties: The Secret Agent’s Secrets,

p.347.’ The University of Sydney, Legal StudiesResearch No.06/05. Retrieved on 25th March 2013 fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=919440

5. R, Vann, ‘Tax Treaties: The Secret Agent’s Secrets’.The University of Sydney, Legal Studies ResearchNo.06/05. Retrieved on 25th March 2013 fromhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=919440

6. R.S. Avi-Yonah, “The Structure Of InternationalTaxation: A Proposal For Simplification”,74 Tex. L.Rev. 1301, *1304-130

7. Its in The News; Ernst & Young ‘ Global Transfer

29

Pricing Update’. July 3, 2006. Tax NotesInternational. Retrieved on 23rd of March 2013 fromhttp://tax.uk.ey.com/NR/rdonlyres/ekrg2smg3fneeh2vm6r24r3nmtma4watv7gxnhuxd6yv62c323y5uinuhvcc77qxtfrrgkf3j7qmdo7j3yhafhrp3we/ITSintheNews_20_G_TPJB.pdf

8. See: J.F.A Jones and D.A Ward, ‘Agents a PermanentEstablishment under the OCED Model Tax Convention’.1993. European taxation. Retrieved on 27th of March2013 fromhttp://www.unifr.ch/cdfpd/assets/files/publications/1993%20Agents_under_OECD.pdf

9. The Vienna Convention on The Law of Treaties 1969.Retrieved on 27th March 2013 fromhttp://untreaty.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf

10. :http://www.brainyquote.com/quotes/quotes/v/vincentvan150778.html#bTEf5cStdmIWBGqd.99

30