handbook-tb

Preventing avoidance of permanent establishment statusReport, the main limitation of Article 5 (5) was already clear:signing of contracts is not an adequate substitute for fixed placeof business as it is not a measure of economic presence in thesource country. This led to the acknowledgement that “signing,”as such, was not a crucial element of the test under Article 5 (5).In this regard, the threshold was lower for cases where final signature— rubber stamp — was reserved for the non-resident (allthe elements of the contract having been negotiated by someonein the source country). Also, it was recognized that splitsto avoid “habitually contracting” needed to be addressed withanti-avoidance rules. This was evidence of the inappropriatenessof the dependent agent PE test as a measure of presencein a country. On the other hand, the independence of the samecompanies of a group was reinforced by the changes in theCommentary on Article 5 (6) of the OECD Model Conventionand by the new paragraph 38.1 therein, although the issue ofcommissionaires or business models that did not need agentPEs (or fixed places) was not addressed.‣ ¾ The reaction of the OECD to the Philip Morris case was anotherexample of a formalistic interpretation and limitation of thescope of anti-avoidance norms as opposed to a substantiveinterpretation in the context of Article 5 of the OECD ModelConvention. In that case, 66 the Italian Supreme Court (Cortedi Cassazione) linked the dependence/independence test tothe circumstances of the group as a whole, and not to the subsidiariesconsidered in isolation. The OECD dismantled thatapproach, which could have represented a fundamental changeregarding the evolution of the PE concept. 67 The changes of2005 in the OECD Commentary on Article 5 (paragraphs 33,41, 41.1 and 42) basically made clear that: (a) companies of agroup were to be considered separately and, therefore, the PEtest must be applied to each of them; and (b) where a company66Decisions of the Italian Supreme Court (Corte di Cassazione) of 7March 2002, No. 3667 and No. 3368.67See United States Council for International Business, “OECD Workon the PE definition,” available at www.uscib.org/docs/OECD_Note_PE_Definition.pdf; see also L. Schoueri and O. Günter, “The Subsidiary as a PE,”(2011) Vol. 65, No. 2 Bulletin for International Taxation, 69 ff.359