handbook-tb

Adolfo Martín JimenézOECD limits its more active use, although this has not stoppedsome tax administrations from using it aggressively. 83As currently devised, transfer pricing instruments and attributionof profits to PEs have been part of the problem of avoidance ofsource-country taxation. They have exacerbated the effects of Article5 of the OECD Model Convention, even if the work on attribution ofprofits to PEs (or even transfer pricing) has opened the eyes of some83See R. Vann, “Tax Treaties: The Secret Agent’s Secrets,” supra note37, 376-380, for a criticism of the Authorised OECD Approach to dependentagent PEs. In this article, the author concluded by proposing the followingsolution: “If a PE is avoided on legal form grounds even though not independent,it is necessary to have recourse to the associated enterprises articleto capture the profits in the country of the alleged PE. The second problemrelates to . . . use of legal form based on separate legal entities and the respectfor transactions to shift the residual more or less at will (taking care to relocatea bit of brainpower at the same time) . . . If PEs could be created on aneconomic substance approach (based on independence for the boundary ofthe firm) with real profits attributed to them for significant activities in acountry regardless of playing with risks between associated enterprises, theresidual might end up where it seems to belong. Alternatively if transactionsbetween associated enterprises were less sacrosanct than they are now and arealistic value approach were taken to allocation of residual profits, again itwould be more likely that profits align with reality” (p. 380). Moreover, theauthor proposes to solve the current problems in the following manner: “(1)the independence criterion should be used to conceptualize the firm and itsboundaries, the recognition of separate legal entities in international taxationand the concept of the firm based on common ownership has been thesource of much confusion since independence has been relegated to a secondaryrole to legal form (treaty provisions could be re-interpreted to reversethe current situation); (2) the use of legal form to oust economic substanceneeds to be recognized and addressed … independence can be made concreteby treating associated enterprises in the sense of common ownership as PEsof each other unless it is established that they are legally and economicallyindependent. In this way legal form would not stand in the way of substance,but rather assist it. It would again be possible, though more daring, to reachthis result by treaty reinterpretation. The PE definition could be regarded asincorporating a concept of independence. Both the fixed place of businessand the agency PE provisions could be interpreted in this light. The provisionon associated enterprises not constituting a PE would only apply if theenterprises are in fact independent.”366