handbook-tb

Adolfo Martín JimenézThe concept of PE is defined in Article 5 of the United Nationsand OECD Model Conventions and has been used in the internationaltax arena from the outset, starting with the work of the Leagueof Nations 30 and the first bilateral tax treaties negotiated betweencountries. The PE concept is one of the thresholds — perhaps the mostimportant one — in the United Nations and OECD Model Conventions,as well as in actual tax treaties. It identifies a level of presence in thesource country which allows that country to tax non-residents onbusiness profits that are attributable to a PE located within its territory,under Article 7 of the United Nations and OECD Model Convention.A fixed place of business (Article 5 (1) of the OECD ModelConvention), construction projects that last more than a fixed time(12 months under Article 5 (3) of the OECD Model Convention), ora dependent agent with the authority to habitually enter into contractsin the name of the taxpayer (Article 5 (5) of the OECD ModelConvention) may constitute a PE. 31 However, Article 5 (4) of the OECDModel Convention excludes the right of the source country to tax businessprofits that can be attributed to specific activities listed therein orother activities of a preparatory or auxiliary character, even if theseactivities are carried out through a fixed place or through a dependentagent in that country.At first glance, the function of the PE concept is clear, althoughits interpretation and application are not. The Commentary on Article5 of the OECD Model Convention can be read in different — sometimeseven contradictory — ways, with the consequence that thereare no uniform interpretations by tax authorities or courts in differentcountries. The underlying economic/policy principles behindthe PE clauses in Article 5 of the United Nations and OECD Model30For a thorough study of the concept, see, for instance, B. Arnold,“Commentary on Article 5 of the OECD Model Convention,” in IBFD, GlobalTax Treaty Commentaries, supra note 12; and A. Skaar, Permanent Establishment:Erosion of a Tax Treaty Principle (Deventer: Kluwer, 1991).31There are relevant differences between Article 5 of the OECD ModelConvention and Article 5 of the United Nations Model Convention. Similarly,attribution of profits does not follow the same principles in Article 7 of theOECD Model Convention and Article 7 of the United Nations Model Convention.These differences will be discussed in section 4 below.344