handbook-tb

Hugh J. Ault and Brian J. Arnold4. Base protection issues involving permanentestablishments4.1 General considerationsUnder the laws of many countries, and under both the United NationsModel Double Taxation Convention between Developed and DevelopingCountries (United Nations Model Convention) 12 and the OECD ModelTax Convention on Income and on Capital 13 (OECD Model Convention),the concept of “permanent establishment” (PE) plays a key role in determiningthe taxing jurisdiction and hence the tax base of the country.With respect to business activities, the existence of a permanent establishmentis necessary to allow the source country to tax the businessincome derived by a resident of the other country, and may also requirethe residence country to exempt the income. Thus, the exact contentof the definition of permanent establishment is of crucial importance.The various definitions of permanent establishment differ substantiallyboth in domestic laws and in the United Nations and OECD ModelConventions. For example, under Article 5 (5) (b) of the United NationsModel Convention an agent who holds a stock of goods from which heregularly fills orders can constitute a permanent establishment even inthe absence of the power to conclude contracts in the name of the principal.Under the OECD Model Convention, Article 5 (5), authority toconclude contracts is necessary for the actions of an agent to constitute apermanent establishment for the principal. Similarly, under Article 5 (3)(b) of the United Nations Model Convention, the furnishing of servicesfor a certain period of time in connection with the same or connectedprojects may constitute a permanent establishment, even in the absenceof a fixed place of business. Under the OECD Model Convention, a fixedplace of business is required.The broad question of which activities should constitute a permanentestablishment as a fundamental rule in determining taxing12United Nations, Department of Economic and Social Affairs, UnitedNations Model Double Taxation Convention between Developed and DevelopingCountries (New York: United Nations, 2011).13OECD, Model Tax Convention on Income and on Capital (Paris:OECD, 2014).16