handbook-tb

Hugh J. Ault and Brian J. Arnoldparty and sold them in the source jurisdiction, the full amount of thesales profit would be taxed in the source country. However, where theoperations are rearranged with the local company acting only as asales agent, it is possible to argue that only a small sales commissionwould be taxable in the source State. This position relies on Article 5(5) (a) of the United Nations Model Convention and Article 5 (5) of theOECD Model Convention, which require that for a PE to be presentin these circumstances, the agent must have “authority to concludecontracts” in the name of the related person supplying the goods. Thisrequirement has been interpreted to require that the agent must havethe legal authority to bind the supplier — that is to say, at the end of thecontract negotiations, the agent must have the legal authority to createbinding obligations on the supplier in order for a PE to exist, regardlessof the extent of the agent’s activity in the market jurisdiction.Under the laws of many countries, the agency relationshipcan be structured as a so-called commissionaire arrangement, underwhich an agent concludes contracts that are binding only on the agentitself and do not create any obligations on the part of the supplier, eventhough it is clear that the supplier will be supplying the goods on theterms agreed to by the agent. In such a case, the only amount taxablein the country of sale would be the “low risk” sales commission andnot the real profit on the sale of the goods, which would be attributedto the supplier, who in these circumstances would not technically havea PE in the country of sale.4.2.1 Possible responsesOne relatively straightforward response to the commissionaire problemwould be to modify the agency PE rule in the treaty to makeexplicit that the negotiation of contracts on behalf of the principaldealing with goods that the principal was to furnish would be sufficientto establish a permanent establishment. Thus, it would no longerbe required for an agent to have authority to bind in order to establishtaxing jurisdiction. It may be possible under the general and specifictax avoidance doctrines of some countries to find a permanentestablishment in the appropriate factual circumstances or by applyingsome kind of “economic substance” analysis, but in most countries thecourts have rejected the application of this anti-avoidance approach.18