International Taxation of Permanent Establishments: Principles and Policy

Title......Page 5
Copyright......Page 6
Contents......Page 7
Model Tax Treaties......Page 8
Transfer Pricing Guidelines......Page 9
1 Outline......Page 11
2 Structure......Page 16
1 Introduction......Page 21
2 International taxation......Page 22
2.2 Policy aims of international taxation......Page 24
2.2.2 Trade and investment policy......Page 25
2.2.3 Inter-nation equity......Page 27
2.2.4 Tax neutrality......Page 28
2.2.4.1 Capital export neutrality......Page 29
2.2.4.2 Capital import neutrality......Page 32
2.3 Jurisdiction to impose taxes......Page 33
2.4 The concepts of residency and source......Page 34
2.4.1.1 Benefit principle......Page 35
2.4.1.3 Economic allegiance......Page 36
2.4.2 Residency jurisdiction......Page 37
2.4.3 Source jurisdiction......Page 39
2.4.4 Problems with the source principle......Page 41
2.5 Worldwide taxation and territorial taxation......Page 44
2.6 International tax planning, tax avoidance and tax evasion......Page 48
3 International tax law......Page 52
3.2 Tax treaties......Page 53
3.2.1 Economic and juridical double taxation......Page 54
3.2.2 Tax treaties and domestic law......Page 57
3.2.3 The net benefits for countries under tax treaties......Page 59
3.3 The UN Model Tax Treaty and the OECD Model Tax Treaty......Page 60
4.1 Emergence of globalization......Page 62
4.2 Globalization of business, markets, and regulation......Page 64
5 Consequences of globalization for international tax policy......Page 66
6 The effectiveness of international taxation......Page 72
7 Conclusion......Page 74
1 Introduction......Page 75
2 Tax avoidance......Page 76
2.2 Revenue consequences of tax avoidance......Page 79
3 Transfer pricing......Page 80
3.1 Arguments for using the arms length principle......Page 83
3.2 Problems with applying the arms length principle to international enterprises......Page 85
3.2.1 Administrative burden......Page 86
3.2.2 Intangible assets......Page 87
3.2.3 Uncertainty......Page 88
3.2.4 The arms length principle does not reflect business reality......Page 89
3.2.5 Theory of the firm and the reasons for the existence of international enterprises......Page 90
3.3.1 The 1981 Report......Page 94
3.3.2 The 1992 Report......Page 96
3.4 Problems for taxpayers in complying with transfer pricing rules......Page 97
3.5 The evolution of OECD transfer pricing methods......Page 99
3.5.1 Formulary apportionment......Page 103
4 Some problems arising from the bilateral operation of tax treaties......Page 104
4.1 Treaty shopping......Page 105
4.2 Maintaining a treaty network and treaty override......Page 108
4.4 Incomplete coverage of countries......Page 111
4.5 Auditing......Page 112
5 The need for international tax reform......Page 114
6 Conclusion......Page 115
1 Introduction......Page 116
2 International juridical double taxation......Page 117
3 History of double taxation......Page 118
5 1889 to World War I: Bilateral tax treaties and the permanent establishment concept......Page 120
6 World War I to 1946: The League of Nations......Page 121
6.1 The League of Nations - Committee of Experts (1923 Report)......Page 122
6.1.1 The 1923 Report in context......Page 124
6.2 The League of Nations - Technical Experts (1925 Report)......Page 127
6.3 League of Nations - Committee of Fiscal Experts (1927 Report)......Page 130
6.4 League of Nations - General Meeting of Government Experts on Double Taxation and Tax Evasion (1928 Report)......Page 133
6.4.1 Thomas Adams: Multilateral tax treaty......Page 137
6.5 League of Nations Fiscal Committee (1st Meeting, 1929)......Page 138
6.6 League of Nations Fiscal Committee (2nd Meeting, 1930)......Page 140
6.7 League of Nations Fiscal Committee (3rd Meeting, 1931)......Page 142
6.7.1 The draft multilateral tax treaties......Page 143
6.8 The Carroll Report (1933)......Page 144
6.9 League of Nations Fiscal Committee (4th Meeting, 1933)......Page 146
6.10 League of Nations Fiscal Committee (5th Meeting, 1935)......Page 147
6.11 League of Nations Fiscal Committee (6th Meeting, 1936)......Page 148
6.12 League of Nations Fiscal Committee (7th Meeting, 1937)......Page 150
6.13 League of Nations Fiscal Committee (8th Meeting, 1938)......Page 151
6.15 League of Nations Fiscal Committee (10th Meeting, 1945) - The London Model......Page 152
6.15.1 A comparison of the Mexico Model and the London Model......Page 153
6.15.2 Evolution of tax treaties......Page 159
7 Conclusion......Page 160
1 Introduction......Page 162
2.1 The role of the OECD Model......Page 163
2.2.1 Organisation for European Economic Co-operation Fiscal Committee......Page 164
2.2.2 OECD Draft Double Tax Convention (1963)......Page 166
2.2.3 The OECD Model since 1977......Page 167
2.3 Influence of the OECD Model......Page 169
3.1 Vienna Convention on the Law of Treaties......Page 170
3.2 OECD Model and Commentary......Page 172
3.2.1 The US......Page 178
3.2.2 Canada......Page 180
3.2.3 Australia......Page 185
4 Conclusion......Page 187
1 Introduction......Page 189
2 Background: the definition of a permanent establishment......Page 192
3 The meaning of former Article 7......Page 194
3.1 Inconsistent interpretations of former Article 7 by OECD countries in the pre-2008 Commentary......Page 196
3.1.1 OECD Discussion Drafts on the attribution of profits to permanent establishments......Page 199
3.1.2 OECD, Report on the Attribution of Profits to Permanent Establishments......Page 200
3.2 The 2008 Commentary on former Article 7......Page 201
3.3 New Article 7 and Commentary......Page 203
3.4 Pre-2008 Commentary: applying separate and single entity methods......Page 204
3.5 Interpretation of former Article 7(1): determining the profits of an enterprise under the pre-2008 Commentary......Page 206
3.5.1 The `relevant business activity´ approach......Page 208
3.5.2 The `functional separate entity´ approach......Page 212
3.5.3 Other deficiencies in the interpretation of former Article 7(1)......Page 214
3.6 2008 Report: former Article 7(1), the functional separate entity approach......Page 215
3.7 2008 Commentary on former Article 7(1)......Page 217
4 Former Article 7(2): pre-2008 Commentary and the separate entity approach......Page 218
4.1 Symmetrical accounts for notional intra-entity transactions......Page 225
4.2 Reliance on an international enterprises accounts......Page 228
4.3 Pre-2008 Commentary: the two approaches used in former Articles 7(1) and (2)......Page 229
4.4 2008 Commentary on former Article 7(2)......Page 231
5 Former Article 7(3): the single entity approach in the pre-2008 Commentary......Page 232
5.1 Intra-entity dealings in goods and intangible property......Page 235
5.2 Intra-entity dealings in services......Page 236
5.3 Intra-entity loans in non-bank enterprises......Page 238
5.4 The interaction between former Articles 7(2) and 7(3) under the pre-2008 Commentary......Page 241
5.5 Former Article 7(2) under the 2008 Commentary......Page 243
6 Conclusion......Page 246
1 Introduction......Page 248
2 The problem of allocating profits to branches of international banks......Page 250
3 The deductibility of notional interest paid on intra-bank loans: the special considerations......Page 253
3.1 The majority view: the separate entity approach......Page 255
3.2 The meaning of arms length rate of interest......Page 258
3.3 Dissenting view of the US and Japan: the single entity approach......Page 262
3.4 Application of former Article 7 in the US: the National Westminster Bank case......Page 263
3.5 The substantiation requirement: tracing intra-bank loans......Page 268
3.6 The US fungibility approach......Page 272
4 Determining the equity capital of branches of international banks......Page 275
4.1 Branches with allotted equity capital......Page 276
4.2 Branches without allotted equity capital: determining notional equity capital......Page 280
5 Conclusion......Page 284
1 Introduction......Page 286
2 Background......Page 287
3 The authorized OECD approach......Page 288
3.1 The reasons for using the OECDs transfer pricing rules for permanent establishments......Page 290
3.2 The history of OECDs transfer pricing rules under Article 9......Page 291
3.2.1 The 1979 OECD transfer pricing report......Page 292
3.2.2 Transfer Pricing Guidelines......Page 294
4 A permanent establishment as a functional separate enterprise......Page 295
5 The first step of the authorized OECD approach......Page 297
5.1 Functional analysis......Page 299
5.2 Assets used......Page 301
5.3 Functional analysis of risks assumed by an international bank branch......Page 304
5.4 Risks assumed......Page 305
6 Attributing equity capital to a bank branch......Page 306
6.1 The allocation of equity capital to international bank branches under the 2008 Report......Page 308
6.2 Use of the Basel Accord for tax purposes......Page 312
6.3 The shortcomings of the authorized OECD approach in attributing equity capital to branches......Page 313
6.3.1 The off-balance sheet exposures of an international bank......Page 314
6.3.2 The Basel II standards as a proxy for the arms length principle under the authorized OECD approach......Page 315
6.4 A simplified method for estimating the equity capital of a bank branch......Page 319
7 The problems with the authorized OECD approach......Page 322
8 Conclusion......Page 324
1 Introduction......Page 326
2 Background......Page 327
3 Authorized OECD approach on former Article 7(2)......Page 328
3.1 Recognizing intra-entity transactions: first step of the authorized OECD approach......Page 331
3.3.1 Change in the use of a tangible asset......Page 334
3.3.2.1 Effect on the profits attributed to a permanent establishment......Page 336
3.3.2.2 Internal dealings and the use of intangible property......Page 339
3.3.2.3 Cost contribution arrangements......Page 340
4.1 Comparative uncontrolled price method......Page 342
4.2 Resale price method......Page 343
4.3 Cost plus method......Page 344
4.3.1 Contract manufacturing and toll manufacturing......Page 345
4.4 The transactional profit methods......Page 347
4.5 The transactional profit split method......Page 348
4.6 Transactional net margin method......Page 350
4.7 The rise of the TNMM......Page 352
4.8 Best method rule......Page 353
4.9 The erosion of the traditional transaction methods......Page 356
5 Conclusion......Page 359
1 Introduction......Page 361
2 Background......Page 363
3 New Article 7......Page 367
4 Article 7(2)......Page 370
4.1 Building site permanent establishments......Page 384
5.1 Background......Page 385
5.2 New Article 7(3)......Page 387
5.3 Alternative version of new Article 7(3)......Page 393
6 Article 7(4)......Page 396
7 Provisions deleted from Article 7......Page 398
8 Conclusion......Page 401
1 Introduction......Page 403
2 The need for international tax reform......Page 404
3 Multilateral tax treaty......Page 407
3.1 Advantages of a multilateral tax treaty......Page 410
3.2 The process for concluding a multilateral tax treaty......Page 411
4 Unitary formulary apportionment......Page 413
4.1 Formulary apportionment in the US and Canada......Page 416
4.2.1 Background......Page 420
4.2.2 Common consolidated corporate tax base......Page 422
4.2.4 Comparison of the common consolidated corporate tax base and home state taxation......Page 424
4.2.5 European accounting standards......Page 426
4.2.6 Adoption of the common consolidated corporate tax base......Page 428
4.3 Issues in the application of formulary apportionment......Page 429
4.3.2 The formula......Page 430
4.3.3 Accounting and compliance requirements......Page 432
4.3.4 Problems with waters edge formulary apportionment......Page 434
4.3.6 Income from intangible property......Page 436
5 Conclusion......Page 438
12 Conclusion
......Page 440
Bibliography......Page 446
Index......Page 464