handbook-tb

Preventing avoidance of permanent establishment statusof some of the criteria for interpreting PE thresholds after 2003has contributed to this outcome. Intuitively, one may think thatthe solution to the problem of undertaxation of groups in thecountry of source should be provided at the level of the subsidiaryby increasing its profits. If this is not possible, and emphasison contractual freedom of associated companies renders it moredifficult, the only way of correcting the undesirable result is byattributing to a PE of the parent in the source country all or partof the residual value obtained by the parent company from activitiesin the source country. 81 In fact, it seems that both strategieshave been considered by tax administrations as mutually reinforcing:sometimes the PE argument is used as an instrument(that is reinforced by the ambiguous Commentary on Article 5of the OECD Model Convention) to reach a more balanced resultin the transfer pricing area. 82 Even if, in theory, other solutionscould be more desirable, the current interpretation of PE by theand the residual profit. Attribution of profit between a principal and a PE inanother country involving the transfer of function and risk cannot be dictatedby a legal agreement alone — there must be a detailed consideration ofwhether in fact the risks and functions lie with a PE or the principal overseas.Once the functions and risks have been allocated between the PE and thehome territory of the principal, appropriate profits can be allocated to thosefunctions and risks. It will be simpler to establish a reward for the activities,which relate to ownership of the assets, such as managing and insuring stock.A cost-plus method could be used, leaving the balance of the profits from theoverall selling activity to be allocated to the PE.”81See R. Vann, “Tax Treaties: The Secret Agent’s Secrets,” supra note 37,345 ff.; and R. Vann, “Taxing International Business Income: Hard-BoiledWonderland and the End of the World,” supra note 12, 291 ff.82See J. Müller, “Attribution of Profits to a PE: A Business Perspective” inD. Weber and S. Van Weeghel, The 2010 OECD Up-Dates: Model Tax Conventionand Transfer Pricing Guidelines, supra note 69, where it is pointed outthat “You always know when you have a subsidiary. PEs, especially dependentagent PEs, can appear out of nowhere. In various countries inside and outsideof the OECD, the opening move of an aggressive tax authority will be to claimthe existence of a PE. For example, some tax authorities argue that entitiescarrying no risk must be dependent agents for those entities carrying the riskinstead. To date many of these disputes end up in transfer pricing settlements,where it is acknowledged by the taxpayer that the local entity does in factcarry some risk, and therefore should receive an increased compensation.”365