Scope of OECD Convention

Question 1

What is the personal scope of the OECD MC?

Answer 1

• Article 1: double test:
  
  1. Person: art. 3: “individual, company or any other body of persons”
     
     • Company = any body corporate or any entity treated as such for tax purposes. Distinct legal person from shareholders.
     • Body corporate = legal person under company law –> look at domestic legal order
  2. Resident: art. 4: any person liable to unlimited tax liability in a state pursuant to criteria in art. 4.

Question 2

What are partnerships?

Answer 2

• Difference between:
  
  1. Tax transparant = the entity itself is not liable to tax but the partners are taxable on their pro rate share in the profits.
  2. Countries may have different views on the same entities:
     
     • See Starbucks case.

Question 3

Are partnerships entitled to benefits of convention?

Answer 3

• It depends.

1. Yes if legal person is liable to tax in State of Residence.
2. Not if transparaent entity = even if it has legal personality because it is a “body of persons” that is not a resident of one of the contracting states.
   
   • If they are UK partners = income of a resident of UK so the partners are able to rely on the benefits.

Question 4

What is the relationship between entitlement to treaty benefits of partners and of partnership?

Answer 4

• Article 1 (2): specifically written into the treaty.

Question 5

What is the savings clause?

Answer 5

• Article 1(3): this convention shall not affect hte rights of a CS to tax its own residents except for the benefits…
• Most treaty provisions restrict the rights of the source State but some exceptionally restrict those of the Residence State.
• Purpose of the savings clause: to prevent that a treaty restricts the taxing rights of the RS unless specifically foreseen in the treaty in the listed exceptions.
• Essential purpose = prevent that treaty overrides domestic anti avoidance provisions.
  
  • Taxpayers were trying to make the argument that domestic anti-avoidance provisions could not be used based on the supremacy of international law.

Question 6

What is the distinction between subsidiary and branch?

Answer 6

• 2 choices under EU law for Second Establishment:
  
  • Setting up a separate legal entity under Belgian company law = dochtervennootschap
  • Operating under legal personality of F SA and opening a branch in B = a branch also needs to register in Belgium.

Question 7

What are the tax consequences of the difference between a branch and subsidiary?

Answer 7

• The separate legal person under Belgian law with seat of management in belgium is a resident of Belgium for tax purposes and entitled to Belgian tax treaties = Belgium max tax worldwide income.
• The Belgian branch of the French SA is not a resident of Belgian for tax purposed: but a non-resident of Belgium and is not entitled to Belgian tax treaties, French SA can claim benefits under French tax treaties = also for its Belgian branch.
  
  • Belgium may only tax BE source income = BE sales because non-resident.
  • Branches themselves can never realy on treaties.

Question 8

What was the Saint-Gobain case?

Answer 8

• Saint-Gobain SA, company resident in France, owned a branch in Germany = PE for tax purposes and Saint-Gobain was subject to limited tax liability.
• Through the branch/PE, Saint-Gobain held shares in a US company and 2 wholly owned German subsidiaries which in turn held sub-subsidiaries in other countries.
• Dividends from US company were directly received by the German branch. A subsidiary in Germany = could get exemption for the dividends but branches were explicitly shut out from the exemption.
  
  • So: economic double taxation
  • No domestic tax credit for underlying corporate income tax on the dividends = juridical double taxation
• So Saint-Gobain went to ECJ: freedom of establishment: ECJ decided that Germany has to give same treatment to nationals & non-nationals and cannot discriminate against branch.
• The freedom of establishment also includes freedom to choose most appropriate legal form for its activities = choice of legal form should be neutral.

Question 9

What does the freedom of establishment entail according to the Saint-Gobain case?

Answer 9

1. Same treatment in host state (Germany) as host state confers to nationals
2. Nationals of MS (France) must have:
   
   1. The right to set up or manage companies = subsidiaries in other MS on the same conditions as nationals of that MS
   2. The right to set up branches in other MS

• Freedom of establishment confers on economic operators the freedom to choose the most appropriate legal form for the pursuit of activities in another MS:
• The refusal to grant tax advantages to PEs of non-resident companies makes it less attractive for those companies to have intercorporate holdings (=shares held by 1 company in another company) through German branches

Question 10

What is also important from the Saint-Gobain case?

Answer 10

• The disadvantageous treatment of non-resident corporations with German branches in comparison to corporations resident in germany cannot be compensated with other advantages which branches may enjoy over domestic companies.
  
  • Court has been criticized for this = very narrow view of rules.
• The reduction of tax revenue which would result from the granting of certain tax concessions also to PEs of non-resident companies does not justify the refusal of such concessions and to apply a treatment that is different from the treatment of domestic companies.

Question 11

Do tax treaties have to comply with EU-law?

Answer 11

• Tax treaties must comply with EU-law, also if concluded with a non-EU-country because it is up to the MS to make sure that they are complying with EU law.
  
  • Counterargument Germany: disturbs the reciprociality of the treaty.
• MS may enter into negotiations to avoid double taxation. MS are free to fix in their tax treaties the connexting factors to allocate the taxing powers between themselves.
  
  • But in exercising these powers must comply with EU law.
• In case of adouble tax treaty between a MS and a non-EU country: the national treatment principle requires the MS to grant to PEs the same conditions as those which apply to resident companies:
  
  • Rejection of argument that extension of national treatment would upset reciprocity of tax treaty.

Question 12

What are the 2 lessons we can draw from the Saint-Gobain case?

Answer 12

1. Branches cannot invoke tax treaties
2. Tax treaties must comply with EU law: also embedded in treaty: art. 351 TFEU.
   
   • If contrary: they must be renegotiated, grandfathering rule = so very old rules may still conflict if it is a treaty between EU and non-EU.
   • EU conflicts must always comply with EU law

Question 13

Which taxes are covered?

Answer 13

• Article 2: only taxes on income and capital:
  
  • So not VAT, succession, gift taxes are not covered.
    
    • Exception: art. 24: non-discrimination applies to all taxes.
• Taxes are covered on behalf of which authorities tax is imposed: federal, regional, municipal.
• List is not exhaustive.

Question 14

What are the rules of interpretation in the Vienna Convention

Answer 14

• General rules of international public law: Vienna Convention on the law of treaties: art. 31-33
• Good faith = parties same idea of meaning = common meaning = ordinary meaning. Not a unilateral interpretation
• Principle of effectiveness = if effect double taxation, probably not the meaning.
• Textual interpretation in accordance with ordinary meaning. This does not mean literal of grammatical interpretation.

Question 15

What does context mean in the art. 31 VCLT?

Answer 15

• Context: art. 31(2): contemporaneous and later agreements approved by the Contracting states:
  
  • Protocols = document signed by 2 states = they can differ.
• Object and purpose = purposive interpretation = object of treaty as supported by text.
  
  • This does not mean teleological interpretation = purpose prevails over form: judicial law making is not allowed.
  • Teleological interpretation = text does not allow you to achieve object of treaty but you still achieve notwithstanding text treaty = not allowed in Belgium = bound by treaty.

Question 16

What is article 32 Vienna Convention?

Answer 16

• Article 32: use supplementary means of interpretation
• Non authentic extrensic instruments = inferior role = last resort
• Often the preparatory work is not available and they are non-binding because not signed by the 2 states.

Question 17

Are the OECD commentaries part of the context of a treaty?

Answer 17

• No, official OECD commentaries are non binding but they are important interpretative reference.
• No need to bring them under art. 31-33 VC because it is not numerus clausus: recourse to other instruments is permitteed on the basis of principles of logic and good sense: but only discretionary and cautiously.

Question 18

Can we refer to the commentaries?

Answer 18

• We can refer to current commentary if it’s a fair interpretation of the OECD MC and if tax treaty follows OECD and States have not recorded observation to the Commentary.
  
  • Because both states could read commentary = aware of interpretation.
  • Exception: states can make observations to the commentary by a country = take that into account because they state that they are not okay with that interpretation.

Question 19

Can we refer to later OECD commentary?

Answer 19

• You have to be careful with later commentary: it is okay if fair interpretation supported by the text of the OECD MC = e-commerce, software.
• Not okay when:
  
  1. Gap filling commentary: OECD nog able to amend MC = try through commentary: “changing treaty by changing commentary” = usually to the detriment of taxpayer.
  2. Commentary reversal prior positions
  3. Contradictory commentary

Question 20

Is there a rule of interpretation in the OECD MC?

Answer 20

• Article 3(2) OECD MC: really important because wide application.
  
  • Also includes legislation and case law and EU law!
• Used for terms used in the Convention but not defined therein:
  
  • Domestic tax law of state applying the treaty
    
    • Unless other interpretation required by “context”: including OECD commentary
    • Unless other interpretation required by “good faith” interpretation

Question 21

Under OECD MC: static or dynamic interpretation?

Answer 21

• It happens that there are changes of domestic law after signing of tax treaty.
• Since 1995: OECD opts for dynamic interpretation “at any time”. But quid odler treaties with no such special language?
  
  • Freens case.
• But limits: “treaty context” or “good faith interpretation” requires not to use new domestic law

Question 22

What was the Freens case?

Answer 22

• Dutch resident (individual) receives remuneration from Belgian BVBA as one of its active partners in the ’80s.
• Tax administration: article 7 applies: Dutch taxpayer derived business profits from a Belgian PE (registered seat/office of Belgian BVBA = Belgian PE of Dutch resident).
  
  • Belgium may tax.

Question 23

What was the legal ground of argument of tax authorities in the Freens case?

Answer 23

• Upon conclusion of the treaty under Belgian domestic tax law, income derived by an active partner in a BVBA was taxed as business profits and Dutch partner was deemed to have a PE in the seat of management of the Bvba.
• The later change in the domestic tax legislation (1976: no business profits anymore, but separate category of professional income) does not affect the attribution of the right to levy tax under the treaty

Question 24

What were the arguments of the taxpayer in the Freens case?

Answer 24

• At time of application of the treaty (1980), it does no longer provide that income derived by an active partner qualifies as business profits Þ therefore the tax administration’s argument is not supported by the treaty
• Income of an active partner is not dealt with in any of the defined income categories of the treaty (Art. 6 – 21)
• Thus, Art. 22 must be applied (“other income”) Þ the Netherlands (and not Belgium) are entitled to tax the income

Question 25

What did the Supreme Court say in the Freens Case?

Answer 25

• Since the treaty does not define the term “business profits” and no apparent definition arises from the grammatical structure, Article 3 (2) of the treaty applies
• Thus, “business profits” must be interpreted according to Belgian law (law of the State where the Company is resident and activity is performed)
• The income derived by an active partner from the BVBA does not qualify (anymore) as business profits at the time the treaty is applied and it is not included in any express income category, therefore Article 22 must be applied
• Thus, in applying Article 3 (2), the Court rejects static interpretation of Article 7 by Tax Administration

Question 26

What were the consequences of the Freens case?

Answer 26

• By applying Article 22, only the Netherlands were allowed to tax the income (State of residence of the active partner)
• However, in practice, the Netherlands did not tax this income under NL domestic law (see supra cardinal rules, relative effect of tax treaties)
  
  • Leads to double non-taxation

Question 27

What was the effect of MAP in the Freens case?

Answer 27

• Art. 25 (3) mutual agreement procedure (MAP) between B and NL (“gap filling MAP”)
  
  • Active partner comes under Art. 16 of treaty (directors of limited liability company by shares (NV)) > taxing rights with state of residence of company
• Belgian Courts:
  
  • The MAP violates the clear terms of Art. 16 of B/NL tax treaty = unallowed teleological interpretation.
  • The MAP has been negotiated by the executive branch of the B/NL governments (i.e. the delegates of the Min of Fin of B and NL) and has not been approved by parliament
  • Not enforceable under B law (although the MAP is an authentic interpretation instrument under Art. 31 (3) Vienna Convention)

Question 28

What were the facts of the case of the Belgian Supreme Court in 2003?

Answer 28

• Art. 18 OECD MC: pensions are taxable in State of residence
• Belgian resident emigrates to France. Collects B source pension as a F resident. France does not tax pension if paid as a lump-sum
• Reaction of B legislator: introduction of two fictions:
  
  1. Pension is deemed to be paid the day before the taxpayer transfers residence (while in reality it is paid after the transfer) and thus
  2. to a B resident (while in reality it is paid to a F resident)
• “paid to” is undefined treaty term = interpretation in accordance with changed domestic law
• Result: pensions taxed in B

Question 29

What did the Belgian Supreme Court decide in the case in 2003?

Answer 29

• Decision: Belgian legislator violates Art. 26 and 27 VCLT: not a good faith application or interpretation of treaty

Question 30

What was the Dutch Supreme Court notional salary case?

Answer 30

• Facts: B resident controlling shareholder and director of Dutch company. After treaty: Nl introduces a fiction in domestic law: sh/dir is deemed to earn annually a salary at the expense of the Dutchco. Salary is taxable in NL under Art. 15. Salary is not defined.
• Taxpayer argument: Netherlands has given taxing rights away = fictious taxing salary would bring value of company down.
• •Decision: No application of domestic salary definition = against the treaty context: article 3(2)
  
  • Unless Belgium has a similar rule = reciprocity.
• Context: “intention”: a state may not make a treaty inoperative by later changes to domestic laws and breach permanency commitments & reciprocity.

*

Question 31

What is the conclusion on article 3(2)?

Answer 31

• Undefined treaty terms = to be interpreted in accordance with domestic tax law of state applying treaty.
  
  • In a dynamic way = taking into account domestic law changes after treaty is signed.
• Unless “context requires otherwise”
  
  • Unclear term: commentary unhelpful to clarify.
  • Context = intention of treaty partners when signing treaty (if that were true dynamic interpretation would always be impossible but that goes against the clear terms of art. 3(2).
  • Context = the meaning of the treaty term in the other state.
  • A state should not make a treaty inoperative bu later changes in its domestic law and breach the permanency of commitments and principle of reciprocity.
  • But in any event: wider than “context” in the meaning of art. 31 VCLT.
• Unless dynamic interpretation is not a good faith interppretation of treaty. Synonym to “context requires otherwise”.

Question 32

What is the definition of resident?

Answer 32

• Article 4: no autonomous definition: refers back to domestic laws.
• Personal attachment to a state: “liable to tax” in a state on basis of specific criteria provided for under laws of that state.
• Difference:
  
  • Liable to tax = being a taxpayer under law of a state
  • Subject to tax = actually paying tax.
• Eg. companies enjoying a temporary tax holiday, pension funds, persons with losses, persojns within tax free bracked = liable to tax.
• Internationally recognised criteria for unlimited tax liability: domicile, residence, place of effective management, any other criterion of similar nature.

Question 33

What is not included in the definition of article 4?

Answer 33

• Article 3: “resident” does not include: “any person who is liable to tax in that state in respect only of income from sources situated in that State”
  
  • Quite obvious: a person subject to tax on income from sources in a given state (limited tax liability) = non-resident of that state.
  • Also countries thtat do not subject taxpayer to tax local income and only pay taxes on Swiss income = massive exodus.
• Interpretation difficulties: company resident of State A subject to a special tax regime in A that only taxes domestic source income = are not residents.

Question 34

How does the definition of residents relate to territorial tax regimes?

Answer 34

• Hong-Kong
• OECD: interpretation in light of object and purpose of the provision:
  
  • Excluding persons who are not subject to the most comprehensive tax liability generally imposed by that state –> if territorial system is the States most comprehensive tax liability, such persons are not excluded, thus residents.
• This is an example of non-literal interpretaion, but other meaning to achieve object and purpose. Contextual interpretation is used.

Question 35

What happens when there is double residency for individuals?

Answer 35

• Occurs foten = not a formal test but factual & intentional. Conflict of interpretation.
  
  • Also some countries use very wide criteria = want more residents to tax = double worldwide taxation so very bad for the taxpayer.
• Double residency: tie-breaker rules for individuals: chronological order:
  
  1. Permanent home: availability at all times
  2. Centre of vital interest: closest personal & economic relations
  3. Habitual abode: count of days during relevant periods
  4. Nationality: happens that he’s a national of another state = treaties are bilateral so this does not help.
  5. Mutual agreement between tax authorities of both states = measure of law resort: only in extreme circumstances.

Question 36

What happens with double residency for companies?

Answer 36

• There used to be a tie-breaker rule for companies but changed with BEPS Action Plans and OECD MC 2017
• Place of effective management (POEM):“place where key management & commercial decisions necessary for the conduct of the entity’s business as a whole are in substance made”.
• All relevant facts & circumstances count.
• Company can only have 1 POEM
• The problem of rotating or digitized board meetings: videoconferencing, zoom, teams:
  
  • OECD has recognised that Covid-19 = force majeure

Question 37

What was the rule for double residency for companies after the change of BEPS AP6?

Answer 37

• “Competent authorities of the CS shall endaevour to determine by mutual agreement to CS of which such person is a resident for purposes of this convention, having regard to its place of effect manageemnt, the place where it is incorporated or any other relevant factors.
• In the absence of such an agreement, such person shall not be entitled to any relief or exemption:
  
  • People are kicked out of treaty.
• States do not have a big incentive to reach an agreement in case of dispute.
• Drastic sanction under new rule.
• This is an optional provision in the MLI: Belgium has chosen not to include it in its treaties.

Question 38

What is a permanent establishment?

Answer 38

• Article 5: “PE” = key principle, also important for independent services = consultancy. This has become problematic because of e-commerce/digitalized business.
• Article 7: Business profits only taxable outside Residence State of enterprise if that enterprise has a PE in other CS.
• Various other provisions refer to presence of PE to the effect of changing the rules allocating tax jurisdiction or to the effect of changing the source of the income.
• Special non-discrimination rule for PE’s: art. 24

Question 39

What are the 2 types of PE?

Answer 39

1. Fixed place of business
2. Dependent agent
3. Also for UN: service PE: typical for developing countries.

Question 40

What is the fixed place of business?

Answer 40

• Bricks & Mortar PE: 3 elements

1. Place of business: physical location: any premises, facilities, installations, but also machinery and equipment:
   
   • Must be “at the disposal” of the foreign enterprise: immaterial whether owned, rented or otherwise at disposal: no formal legal right required.
   • See: Dudney case.
   • Lease also fine, as long as it’s at your disposal
2. Fixed = link between place of business and certain geographical point (the problem of “moving businesses”: coherent whole commercially and geographicallly: certain degree of permanency (unclear how many months and no consistency in state approaches)
3. Carrying on of the business through the place of business: personnel of foreign enterprise conducts business v business carried on through automated equipment: gaming machines, German pipeline case

Question 41

What was the Dudney case?

Answer 41

• Management consultant = working for Canadian bank and no PE = not at its disposal = no free access.

Question 42

What is article 5(2)?

Answer 42

• Non-exhaustive list provided basis tests of art. 5(1) are met: place of management, branch (must also be registrered), office, factory, workshop, mine, oil or gas.
• Place of management: place where key commercial decisions are made: POEM:
  
  • eg. 10 board meetings: 2 not physically present = not enough to say no more POEM in Belgium.
  • But systematically? US might state PE in the US = US may tax profits attributable to PE.

Question 43

What is article 5(3)?

Answer 43

• Special rule for building site, construction or installation project: 12 month test = only applies for construction companies.
• General contractor: all terms of subcontractor to be added to his time period
• Computation of 12 month test counted from beginning to end of work:
  
  • A series of site should be regarded a single unit if forms commercially and geographically coherent whole.
  • Interruptions: no deduction for seasonal and temporary interruptions cause by force majeure = you may not deduct time construction site if you have not been operative.
• Subcontractor: all less than 12 months: so no PE if wholly unrelated parties.

Question 44

What is the new anti-fragmentation rule of article 5(3)?

Answer 44

• Against contract splitting: one project divided between related parties into separate contracts of less than 12 months, often contractor is jointly and severally liable with other contractors.
• Or rely general anti-avoidance rule included in 2017 OECD Model: “the benefits under this Convention shall not be granted (…) if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted (in)directly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object & purpose of the relevant provision of this Convention”
• In MLI Belgium has chosen not to apply new anti-fragmentation rule but to apply the general anti-avoidance (which is a minimum standard and mandatory anyway)

Question 45

What is article 5(4)?

Answer 45

• Exception PE: common characteristic: “auxiliary or preparatory activities”: too remote from actual realisation of profit, difficult to allocate profit.
  
  • Solely for storage, display and delivery
  • Solely maintenance of stock for storage = warehouse
  • Solely stock for processing by third party: toll manufacturer: eg. cacao bean = transformed in chocolate but company who does, doe snot own the chocolate.
  • Solely office for purchasing: collecting information: newsgathering bureaus, info gathering for future investments: eg. Wall Street Journal: office in Brussels but just for collecting information.
  • Solely preparatory/auxiliary activities:
    
    • Advertising, R&D, supply of information, legal or accounting department:
    • Pipeline for an oil producing company.

Question 46

What is an auxiliary and preparatory activity?

Answer 46

• This is an exception so narrow interpretation = should be on behalf of same company.
• Case by case having regard to the company’s activity as a whole
• Activities may not form essential and significant part of enterprise as a whole:
  
  • An advertising agency of state A will not be able to avoid PE if it opens office in State B engaged in advertising
  • Management is never aux & prep, also no contact with potential customers (except if limited to providing information) = important for e-commerce/trade fairs = just displaying.

Question 47

What are the important changes to 2017 Commentary of BEPS to aux & prep activities?

Answer 47

• Definition of “preparatory” = carried on in contemplation of the carrying on of the essential and significant part of the enterprise’s activity as a whole
• Definition of “auxiliary” = activity that is carried on to support, without being part of the essential and significant part of the enterprise’s activity as a whole. It is unlikely that an activity that requires a significant proportion of assets or employees of the enterprise could have an auxiliary character
  
  • Zalando, Amazon: HQ in Luxembourg
    *

Question 48

What is the effect of the changes in 2017 Commentary for e-traders for prep & aux activities?

Answer 48

• Ammunition against e-traders but change in commentary = e-traders can no longer enjoy warehouse exception.
• E-trader in State A owning a large warehouse in State B where significant number of employees work in storage and delivery of goods = NOT auxiliary or preparatory = essential part of business activity.
• After sales services: a fixed place of business for delivering spare parts and carrying on repairs = NOT auxiliary or preparatory = essential part of business activity.
• Solely for purchasing goods: “it will typically not apply in the case a fixed place of business is used for the purchase of merchandise where the overall activity of the enterprise consists in selling these goods and where purchasing is a core function”
  
  • <> Belgian case law on diamond purchasing and quality control

Question 49

For whom must the activities be carried out for the prep & aux activities?

Answer 49

• All aux/prep activities must be carried on “for the enterprise itself”, i.e. in favor of enterprise of which the fixed place of business is a part
  
  • Strict interpretation: no activities for other entities of the group
  • Circumvention of the rule through cost recharging = abuse

Question 50

What if there is a combination of aux & prep activities?

Answer 50

• If aggregation leads to essential activities = not aux & prep anymore.
• “provided that such activity, or in case of sub§ f), the overall activity of the fixed place of business, is of a preparatory or auxiliary activity” (new Art. 5 (4) in fine)
• Aggregation of aux & prep activities may bring them close to essential part of the enterprise

Question 51

What was the Pipeline case?

Answer 51

• Shell: through Germany, operated fully remote from Rotterdam without personnel: PE in Germany?
  
  1. Fixed place of business
  2. No personnel –> casino case = no problem, can still be a PE
• Prep & Aux activity? Yes: transport of oil = auxiliary activity = comes under the exception

Question 52

What is the new anti-fragmentation rule in article 5(4), (1)?

Answer 52

• Purpose: prevent enterprise or group of related companies from fragmenting a cohesive business operation into several small operations with view to avoid PE arguing that each is merely engaged in aux & prep activity.
• New Rule: “§ 4 shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same or another place in the same CS and
  
  • B) the overall activity resulting from the combination of the activities carried on by the 2 enterprises at the same place, or by the same enterprise or closely related enterprises at the 2 places, is not of a prep & aux nature
  • Provided that the business activities carried on by the 2 enterprises at the same place or by the same enterprise or closely related enterprises at the 2 places, constitute complementary functions that are part of a cohesive business operation”

Question 53

What is an example of the anti-fragmentation rule?

Answer 53

• Rco (resident of R) manufactures goods in R. Its wholly-owned subsidiary Sco sells the goods in S to local customers in small stores with limited storage capacity. Rco has a small warehouse in S where its stores goods sold by Sco. When Sco runs short of stock, its employees take possession of the goods at the warehouse. Title to the goods passes from Rco to Sco at that time in view of resale to local customers
  
  • = storage is complementary to sales and part of a cohesive business operation carried on by related enterprises consisting of storage, delivery and sale in S

Question 54

What was the “old style” in article 5(5)?

Answer 54

• Agent = PE if:
  
  1. Not independent within meaning of Art. 5 (6): dependent agent (may either be individuals (even employees) or companies (related and unrelated)
  2. Operates on behalf of foreign enterprise and authority to conclude contracts in the name of the foreign enterprise (principal). Agent has authority to legally bind the principal = direct representation
  3. Relating to the business operations of the principal
     
     • ​​Exception: not for preparatory/auxiliary business:e.g. hiring personnel for a manufacturing company, purchasing agent if purchase is aux & prep
  4. Habitually exercised: substance over form: old Comm. Negotiation of all elements, but approved abroad = PE
     
     • order takers: PE?

Question 55

What is the distributor?

Answer 55

• Fully fledged distributor = buy-sell distributor is not a PE = Belgian resident.
• Main characteristics distributors:
  
  • B Subsidiary company wholly owned by French parent
  • Acts in his own name and for his own account
  • Compensation of distributor depends on functional and risk profile. Full-fledged distributor (owning marketing intangibles) usually earns a ‘residual result’ (i.e. earnings from sales minus cost of purchase and other costs)
  • Incurs full risk (stock, debtor, product liability etc.)

Question 56

What are the implications of the fully fledged distributors?

Answer 56

• No representation; the distributor is in the flow of goods
• He is bound vis-à-vis the manufacturing company (purchase) and equally vis-à-vis the client (sale)
• The legal title of the goods is transferred from the principal to the distributor and subsequently form the latter to the client
• Invoicing occurs between
  
  • (i) the manufacturing company and the distributor and
  • (ii) the distributor and the clients
• Distributor : Belgian resident subject to unlimited tax liability in B on net profit
• Main international tax issue is the determination of the transfer price (TP) on sales from ManCo to Distributor (see Art. 9 OECD MC)

Question 57

What are the main characteristics of the representation office?

Answer 57

• Business office (part of French company) with limited functionality
• A rep office conducts activities which are limited to providing information to local clients, handling complaints, customer prospection, marketing studies, market prospection, etc.
• Costs are borne by the principal

Question 58

What are the implications of the representation office?

Answer 58

• Rep offices may not be involved in the sales, negotiation or contracting process
• Merely involved in activities that are preparatory and auxiliary to the core business
• Hence, a rep office cannot bind the principal
• Representation office ≠ PE (provided limited client contact)
• French principal = no taxable presence in Belgium

Question 59

What are the main characteristics of sales store?

Answer 59

• Store is part of French company
• Sales function + stock of goods
• Orders will approved by personnel of principal in store
• Contracts direct with French principal

Question 60

What are the implications of the sales store?

Answer 60

• Sales Store clearly involved in commercial process
• As the store is part of French principal, only French principal is bound to client
• French principal has PE in Belgium (fixed and agency PE = taxable presence)
• French principal subject to limited tax liability in Belgium
• On profit attributable to PE (see Art . 7 OECD MC)

Question 61

What are the main characteristics of the sales representative/agent?

Answer 61

• Concludes sales contracts in the name and for the account of the principal (binding principal)
• The agent receives a commission fee (usually a percentage of underlying sales) in order to realize an arm’s length operating margin
• Most risks borne by the principal (stock, debtor risk, product liability etc.)

Question 62

What are the implications of sales representative/agent?

Answer 62

• The agent concludes binding contracts on behalf of the principal (direct representation), the agent himself is not bound vis-à-vis the client
• The legal title of goods is transferred directly from the principal to the client
• Invoicing directly between the principal and the client
• Agent is PE of F principal in B (principal has taxable presence in B)
  
  • Unless independent agent, acting in ordinary course of business ⇔ employee = legally & economically dependent
• Profit attribution: see Art. 7

Question 63

What are the main characteristis of the order taker?

Answer 63

• Can propose sales of products to clients, often with limited negotiation margin (eg. pre-drafted price list) + solicitation
• Orders will be scrutinized and approved by the principal
• Contracts (if any) will be signed by the principal
• Compensation traditionally based on cost plus method (see Transfer Pricing)
• Order taker: usually used to avoid PE’s = rejected by tax authorities if 99/100 contracts accepted without any material change

Question 64

What are the implications of the order taker?

Answer 64

• Order taker is clearly involved in commercial process
• As a rule, the actions of an order taker cannot, however, bind the principal (as principal decides)
• PE? depends on facts; substance over form

Question 65

What is the “old style”: article 5(6): independent agent is not a PE?

Answer 65

• Examples:
  1. Brokers: bring parties together – no authority to conclude contracts
  2. Commission Agents
  
  1. Sell goods in their own name but for account of principal (undisclosed principal)
  2. Double contractual relationship/no direct contractual link between principal and customer = indirect representation
     
     • At least in civil law countries
     • Common law countries: undisclosed agent (civil law commission agent) binds the principal, there is contractual relationship between customer and principal, customer can sue either principal or agent
       3. Other agents [those of Art. 5 (5)]: if
  3. Legally & economically independent from principal and
  4. Acting in the ordinary course of business

Question 66

What does it mean to be legally & economically independent from principal?

Answer 66

1. Legal independency: instructions/control/justification
   
   • Not all control/justification is bad (every representation needs some level of justification)
   • Agent free to organize conduct of business v. interference of principal with agent’s business (client control; price setting; investment approval; investment support; financial support; etc.)
2. Economically independent:
   
   • Exclusivity (imposed or de facto?)
   • Debtor’s risk
   • Stock risk
   • Product liability
   • Coverage of the agent’s costs
   • Commission fee: a % of sales (=indication of independence) v. fixed fee
3. Has to be acting in ordinary course of business

Question 67

What are the main characteristics of a commissionaire?

Answer 67

• Most used business model
• Commissionaire wholly owned subsidiary of French company
• Acts in his own name but for the account of the principal
• The principal remains undisclosed throughout the transaction (indirect representation)
• Commission fee (mostly a percentage of underlying sales) in order to realize an arm’s length operating margin
• Limited risks assumed by commissionaire (e.g. no stock of goods, some risks may be contractually passed on to principal)

Question 68

What are the main implications of commissionaire?

Answer 68

• Contractually, clients are only liable vis-à-vis the commissionaire; the principal is not directly bound
• Commissionaire does not take title to goods
• Invoicing occurs between commissionaire and client
• Principal has NO PE
• Commissionaire (resident of Belgium) taxable in Belgium on fee

Question 69

Can agent who binds principal (Art. 5(5)) benefit from exceptions from Art. 5 (6) if he is independent and acts in ordinary course of business?

Answer 69

• Yes (see Art. 5 (5) general rule. Art. 5 (6) exception)
• Tax authorities (e.g. Belgium) have different views
  
  • As soons as agent who binds principal = have a PE so proving he is independent & ordeniary course of business = without much merit

Question 70

Is dependent commission agent a PE within Art. 5 (5) ?

Answer 70

• No: strict interpretation of text = no binding of principal = sells in own name
• Tax authorities and Courts have different views (compare Knights of Columbus case (Canada) and Zimmer case (France) to Dell AS case (Norway).

Question 71

Is a subsidiary a PE?

Answer 71

• Article 5(7):
• No as a matter of principle: PE deals with taxation of non-residents in the country of sale, while a subsidiary is a company that is resident in country of sale:
  • Still subsidiary may be PE but only if it fulfils the requirements for dependent agents
  • Many groups of companies have turned their local “buy/sell” distributor in country of sale (e.g. Belgium in the examples) into commissionaires selling goods in their own name but for account of foreign principal:
    
    • Foreign principal avoids having a PE in Belgium: not taxable in Belgium on sales profit
    • Commissionaire (a wholly owned subsidiary resident of Belgium) only taxable on commission fee
    • “High” net profit from sales under distributorship no longer taxable in Belgium

Question 72

What are the BEPS concerns regarding agents?

Answer 72

• Order takers not PE (substance over form not well applied)
• Agents binding principal not PE if independent & ordinary course of business (unclear principles)
• Related commissionaires not PE (because not binding principal)
• Exclusive commissionaires not PE (because not binding principal)
• The BEPS answers: changes to Art. 5 (5) and (6) (BEPS Action 7)

Question 73

What is the new article 5(5): dependent agent?

Answer 73

• Dependent agent = PE
• “subject to the provisions of §6, where a person is acting in a CS on behalf of an enterprise and in doing so habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, and these contracts are
  • A) in the name of the enterprise, or
  • B) for the transfer of ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, or
  • C) for the provision of services by that enterprise
• that enterprise shall be deemed to have a PE in that State”

Question 74

What is the policy rationele of BEPS solving the problems with dependent/independent agents?

Answer 74

• Policy rationale = PE in State of customer where intermediary’s activities are intended to result in regular conclusion of contracts to be performed by foreign seller
  
  • Order takers and negotiators of substantial parts of contracts without signing authority = PE (Art. 5 (5) 1ste sentence), “substance over form” written in OECD MC
  • Sales agents that are (almost) exclusive agents and that are closely related to foreign principal are not independent and thus PE (Art. 5 (5) (a) + (6))
  • Sales commissionaires always PE if (almost) exclusivily operating for foreign principal and closely related to principal (Art. 5 (5) (b)) + (6))
• …however, these rules are not minimum standards, thus States are not required to include them in their DTC’s through the MLI
  
  • Belgium has chosen to implement these provisions through the MLI

Question 75

What is the service PE?

Answer 75

• Company in State R can provide substantial services in State S without having fixed place of business or agency in S; its personnel works at business premises of customer (not at disposal, see supra), from hotels in S etc. = no PE in S, no taxation in S
• Basically issue for developing countries
• UN Model special clause in Art. 5 (3) (b) = deemed PE
  
  • The furnishing of services, including consultancy services, by an enterprise through its employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) within a CS for a period or periods aggregating + 183 days in any 12 month period
• Problem: Linklaters in India working for 6 monthes = no fixed place of bueinsss = authorities tried to link to hotels but fails because not at their disposal:
  
  • UN model: specific clause for service PE’s = you do not need fixed place of business = present 6/12 months = deemed PE.

Question 76

What are the 3 forms of the digital economy?

Answer 76

1. E-traders: Zalando, bol.com
2. Online advertising companies: Facebook, Google
3. Platforms: Uber, Airbnb

Question 77

What is the key policy question wrt digital economy?

Answer 77

• Key policy question: How to tax profits of e-trader in state of consumer (A)? Unlike under traditional commerce no presence of seller in A required?
• Key legal question: can server of e-trader in C constitute PE in B?
  • … which still gives no tax jurisdiction in State A
• Server = hardware + software + electronic data

Question 78

Is an internet website a PE?

Answer 78

• Internet website = software + electronic date.
• It is not a tangible asset, not a fixed place of business, not person (agent)
• No PE in A = country of customers.

Question 79

Is a server a PE?

Answer 79

• Server = hardware + software
• = Tangible asset: question: is it as its disposal? Factual:
  
  • Owns servers: okay
  • Contrast with independent service providers ⇔ PE
• = (Fixed) place of business: “carrying out business”?: or prep & aux business = gathering info = business model.
• PE in Belgium if foreign company has the server at its (exclusive) disposal
  
  • the ISP is not an agent because it cannot represent Amazon.
• Is not a contract with independent Internet Service Provder for the renting of disk space v server owned by foreign company: server might be PE in Belgium depending on circumstances.

Question 80

What was the lonely server case?

Answer 80

• German court: PE! Swiss company : server in Germany:
  
  • Supplying information = core activity: PE
  • Financial data to 3rd party.

Question 81

What is the distinction between operation of core functions vs. preparatory or auxiliary activities of a server?

Answer 81

• Article 5(4): functions of server, even if fixed establishment may carry on only preparatory or auxiliary to sales activity:
  
  • Advertising of goods/services
  • Supply of information
  • Gathering marketing data
  • PE: even if such limited services are core business = PE.
• vs. Smart Server = virtual shopping mall:
  
  • Order getting
  • Sale of digitized goods/services
  • Payment processing
    
    • PE = no human intervention required.

Question 82

What is an independent internet service provider and is it a PE?

Answer 82

• Is not a dependent agent concluding contracts in name of e-tailer, nor independent agent “playing the principal role leading to the conclusion of contracts” for transfer of ownership to property belonging to the e-trader: art. 5, §5
• = independent party whose ordinary course of business is providing internet acces = not a PE

Question 83

What is the change to the 2017 Commentary with auxiliary and praparatory activity?

Answer 83

• Important changes to 2017 Commentary: will Courts follow?
• E-trader in state A owning a large warehouse in State B where significant number of employees work in storage and delivery of goods = not auxiliary or preparatory = essential part of business activity.
• Aggregation of aux & prep activities may bring them close to essential part of the enterprise:
  
  • Purchasing office + warehousing + logistics and dispatching centre = PE

Question 84

Has the PE-concept been adapted to the digitalized economy?

Answer 84

• Does not achieve the policy goals underlying BEPS, i.e. taxation where economic value is created (where customers (or their data) are based)
  
  • Seller avoids taxation there if no physical presence (incl. server) and no agency-presence in State of consumer
  • Even if server there, how to allocate profit to it (see infra Art.7): pretend PE = independent company
• Mobility of server: able to avoid a PE if you own servers 6 months –> a way to avoid PE by moving every 6 months
• E-tailer in tax haven: worst case = Luxembourg blocked OECD from deleting warehouse from prep & aux activities
• Effect of abandoning the warehouse-exception in Art. 5 (4)?
  
  • Why not changing the Model and why has it not been incorporated in the MLI?
• Non traceability of transactions over internet

Question 85

Do we need other taxes to allow consumer state to levy tax on profits of e-tailer?

Answer 85

• VAT, but in EU: no other consumption taxes than VAT allowed
• A consumption tax is not a profit tax, but a tax on gross sales proceeds
• Digital service tax (see infra) not an income tax, nor a VAT: but a tax on gross revenues (compare to an excise duty on sale of alcoholic beverages)
• Will consumers be obliged to withhold profit taxes on gross sales or the banks and credit card companies?

Question 86

What is the main business model from digital platform models?

Answer 86

• Digital platform companies (DPC’s) offer (through an app or website) individuals the possibility to provide services to other individuals in their territory (e.g. Uber, AirBnB, TaskRabbit) (cfr. Intermediary function)
• Collection of a fee for intermediary function
• No physical presence required in the country where underlying DPC services are performed
• Issue:
  
  • Digital platform companies operate in many countries of customers but do not pay tax there (no physical presence there/No PE)

Question 87

What is the solution for the digital platform models and the tax challenges?

Answer 87

• Current state of play:
  
  • BEPS Action Plan (Action 1 & others)
  • State aid investigations on IP structures (cfr. Starbucks; Amazon) = likely not helpful
• “Fixed place of business” PE?
  
  • No office or other physical presence in the customer State
    
    • Drivers are not employees of Uber, but independent persons
• Server PE?
  
  • Server PE could apply to digital platform economies (in theory), however
    
    • Only PE in State where servers are located / Not necessarily the same as location of activities
    • Difficulty of tracing the location from which electronic commerce transactions originate
    • Quid profit allocation?
    • Avoid server PE by using services of internet service provider

Question 88

Is the agency PE a solution for the taxation of Digital Platforms?

Answer 88

• No presence of employees of the digital platform company necessary in the customer State
• Only “persons” can be agents - No concept of “software agent”
• Cfr. Google case: Like Uber, Google has local subsidiaries conducting sales support and marketing activities:
  
  • French tax authorities tried to argue that Google Ireland had a PE in France because Google France employees provided certain services to advertisers of Google Ireland
  • No Agency PE according to the French administrative Court of Paris
  • Factual considerations: no proof that employees of Google France are able to act in the name of and on behalf of Google Ireland

Question 89

Is the service PE a solution for the taxation of Digital Platforms?

Answer 89

• Only included as option in OECD Commentaries (≠ UN Model)
• Characterization issue: are DPC’s “digital service providers”? Cfr. CJEU Uber cases: Uber is not a digital service provider but a transport service provider
• If “transport service provider”, location of service = where transport takes place
  
  • Service PE provision may apply if services are provided during a certain period of time
  • Condition that people providing the services (e.g. drivers) are employees/dependent agents of the DPCs (cfr. discussion between employees/independent contractors in labor law)
• If “digital service provider”, most probably no Service PE, since the mere fact that the payer of the consideration for services is a resident of a State does not constitute sufficient nexus (although cfr. India!)

Question 90

What are the ways forward at OECD?

Answer 90

• General understanding within the OECD that long-term solutions are preferred over short-term solutions
• However, evident from public consultation of 1 November 2017 that there is political pressure to come to short-term solutions as well. Particular interest was expressed in the following short-term solutions:
  
  • But today OECD has abandoned plans for special levies on digital service providers as it believes that it is not correct to ring-fence the digital service providers as all businesses are digitalized.
  • OECD did not meet its deadline of end of 2020 to come forward with an agreed upon comprehensive solution – deadline now moved to April 2021

Question 91

What are the EU proposals for DST?

Answer 91

• “MS are under increasing political pressure to act now on taxing the digital economy to safeguard revenues and ensure a level playing field. An increasing number of MS are already taking unilateral action. A multiplicity of different approaches risks to further fragment the internal market”
• Proposed Directive on Digital Service Tax (DST, 2018) = short term interim measure
  
  • Focusing on activities where is there is large gap between value created in a MS and MS ability to tax it – user participation and user contribution central role in value creation
  • Tax = X% of gross revenues derived in EU from specific digital services
    
    • Main value created by user data either through advertising or by data transmission (i.e. social media, search engines)
    • Digital interfaces or market places whose main purpose is to facilitate interaction between users (e.g. peer-to-peer sales apps and sites)
  • Due in MS where users are involved in services and value creation
  • Only hit business with total annual worldwide revenue above X million € and digital footprint in EU (annual taxable digital revenues) above X million €
  • Termination when comprehensive measure enters into force (next slide)
  • Almost 20 countries wordldwide already apply some sort of DST with rates varying between 2 and 7%

Question 92

What is the proposed directive SDP?

Answer 92

• Proposed Directive on Significant Digital Presence (SDP) = comprehensive measure in area corporate income tax (CIT)
• Company should pay tax in MS where it has SDP even if no physical presence, i.e.
  
  • Revenues from supplying digital services to users in MS exceeds X million € per year; or
  • Number of users in MS exceeds X in year; or
  • Number of online contracts with users exceeds X in year
• Principles for profit attribution building on functions performed, assets used in value creation and risks assumed (see infra Art. 7)
  
  • Profit attribution should take account of economically significant activities performed through use of digital interface (such as use and transmission of user data; user generated content, sale of online advertising space, making available content from 3rd parties through digital market place)