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canadian tax journal / revue fiscale canadienne (2009) vol. 57, n o 2, 213 - 58
The Painter and the PE
Joel Nitikman*
Précis
Depuis plusieurs décennies, on trouve dans les conventions fiscales la définition de base
d’un établissement stable (es) : une installation fixe d’affaires par l’intermédiaire de
laquelle une activité est exercée. Depuis 1977, et avec des ajouts en 2000 et par la suite,
le commentaire de l’ocde a eu pour effet d’élargir et de préciser cette définition en y
adjoignant la condition que pour qu’un non-résident ait un es, il doit en outre avoir le
« droit de disposer » de ces installations d’affaires. L’ocde a délibérément pris soin de ne
pas définir le « droit de disposer ». Elle laisse plutôt le sens à donner à cette expression
se dégager des quelques exemples et des explications vraiment peu instructives qu’elle
fournit dans son commentaire. Par l’examen d’articles et de la jurisprudence publiés au
Canada et à l’étranger et du commentaire de l’ocde, le présent article étudie la
signification de l’expression « droit de disposer ». Il importe de répondre à plusieurs
questions si on souhaite saisir pleinement ce concept. Qu’est-ce que le droit de
disposer ? Qui doit l’avoir ? Est-ce une condition préalable à l’existence d’un ES ou tout
simplement la conséquence de celle-ci ? S’agit-il d’une condition vérifiable dans les faits
ou sur le plan juridique? L’auteur conclut que le droit de disposer est davantage qu’une
question d’utilisation dans les faits. Il établit en quelque sorte que la condition
indispensable à l’existence d’un ES est le droit juridique des non-résidents d’exercer une
activité par l’intermédiaire d’une installation fixe. En somme, l’exemple du peintre dans
le commentaire de l’ocde n’est pas mauvais en tant que tel, il doit tout simplement être
interprété dans le contexte d’un certain nombre de présomptions qui ne sont pas
expressément formulées dans l’exemple.
Abstract
The basic definition of a permanent establishment (pe) has been set in income tax treaties
for several decades: a fixed place of business through which or in which a business is
carried on. Beginning in 1977, and with expansions in 2000 and later, the oecd commentary
augmented or clarified the definition by indicating that to have a pe, a non-resident must
have a right of disposal over its place of business. The oecd has deliberately not defined
* Of Fraser Milner Casgrain, LLP, Vancouver (e-mail: [email protected]). The idea for
this article originated when I was involved as part of the team developing the argument for the
Knights of Columbus case, discussed below. There were numerous discussions with other counsel
inside and outside the team, and it would be impossible for me to say which ideas are my own
and which originated from the comments of others. I have also had e-mail exchanges with tax
experts around the world and have based my thoughts on them. Any mistakes are mine alone.
213
214 n canadian tax journal / revue fiscale canadienne
(2009) vol. 57, n o 2
“right of disposal.” Rather, it has left this phrase to be interpreted through examples and
less-than-edifying explanations in the commentary. Through a review of Canadian and
foreign case law, articles, and the oecd commentary itself, this article explores the
meaning of right of disposal. Several questions must be answered to understand this
concept fully. What is a right of disposal? Who must have it? Is it a necessary condition of
a pe or merely a result of having a pe? Is it a factual test or a legal test? The article
concludes that a right of disposal is more than a mere factual use test. It establishes that
a sine qua non of a pe is a non-resident’s legal right to carry on a business through a fixed
place. The article concludes that the painter example in the oecd commentary either is
wrong or must be read in the context of a number of assumed facts that are not explicitly
stated in the example.
Keywords: Fixed n oecd n permanent establishments n right of disposal n treaties
Contents
Legislative and Treaty Framework
The Act
Double Taxation Conventions
Implementing Legislation
What Is a PE?
The Characteristics of a Fixed PE
Fixed Place
Place of Business
Through Which the Business Is Carried On
At the Disposal of
Disposal: A Definition?
A Factual Use Test?
Same as “Carrying on Business”?
The Indian Cases
Ericsson, Motorola, and Nokia
Western Union
Rolls Royce
Galileo
Wesstad
The Canadian Cases
Dudney
The Canada Revenue Agency’s Response to Dudney
Toronto Blue Jays
American Income Life Insurance and Knights of Columbus
The Painter Example
Later DTCs
Plain Language and Purpose
The OECD Commentary
The Residence State’s Interpretation
Other Models
Later Commentaries
Conclusion
215
215
215
217
218
219
219
219
220
220
223
225
227
228
228
231
232
233
238
239
239
241
243
245
249
252
252
253
256
256
257
257
the painter and the pe n 215
There is nothing permanent except change.
Heraclitus of Ephesus
Greek philosopher 540-480 bc
Since 1899, all or almost all double income taxation conventions have provided that
a resident of one country (the residence state) who earns business income in another
state (the source state) is not taxable in the source state on this income unless the
income is attributable to a permanent establishment (pe) that the non-resident has
in the source state. The basic definition of a pe is a fixed place of business in the
source state. The purpose of this article is to explore whether and to what extent a
fixed place of business must be at a non-resident’s “disposal” for the place to constitute a fixed pe under Canada’s income tax treaties. If the place of business must be
at the non-resident’s disposal to constitute a fixed pe, what exactly does “disposal”
mean in this context? To understand the issues, some background is required.
L e g i s lat i v e a n d T r e at y F r a m e w o r k
The Act1
Paragraph 2(3)(b) provides that a non-resident of Canada is taxable in Canada on
business income earned from carrying on business in Canada. If the non-resident is
taxable under paragraph 2(3)(b), then the amount of his “taxable income earned in
Canada” on which he is taxed is determined under division d of part i.2
Double Taxation Conventions
When a taxpayer who is resident in one country carries on business in another
country, both countries may (but are not required to) tax him on the same income.
This double taxation is an impediment to international economic prosperity. To alleviate double taxation and promote international business,3 many countries around
the world have entered into double taxation conventions (dtcs). dtcs are almost
always, although not always and not necessarily, bilateral rather than multilateral—
1 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”).
Unless otherwise stated, statutory references in this article are to the Act.
2 Non-resident corporations carrying on business in Canada may also be subject to branch tax
under part XIV.
3 See Canada Revenue Agency (CRA), Audit Manual (Ottawa: CRA) (looseleaf ), chapter 15,
“International Audit Issues,” section 15.11.0, where the CRA states, in relevant part:
Canada has entered into numerous tax treaties with other countries partly because
international trade is on the rise. To attract more foreign investment and allow our
goods to compete around the world, Canada has entered into over 80 tax treaties in
order to provide for a level playing field for Canadian business. As such, decisions, as
much as possible, are tax neutral. . . .
In its treaties, Canada has attempted to eliminate double taxation (tax on income
in Canada and tax on the same monies in a foreign country) in order to encourage
investment and allow Canadian companies to operate on an international basis. As
(2009) vol. 57, n o 2
that is, they are entered into between only two countries, usually referred to as contracting states in the dtcs.
It is sometimes said that the purpose of a dtc is to relieve against double taxation of the same income by two contracting states at the same time.4 It is more
accurate to say that the purpose of a dtc is to achieve this goal by allocating taxing
jurisdiction over various types of income between the two states:5
It is quite clear that the purpose of the Convention is to avoid double taxation of enterprises doing business in the two countries and, to that end, to provide for the equitable
allocation of the profits of such enterprises as between the two contracting powers.6
This appears to be the view in at least the common-law world. In FC of T v.
Lamesa Holdings BV,7 the Full Court of Australia considered the provisions of the
1976 Netherlands-Australia dtc and stated:
The Agreement is an agreement for avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income. Although, therefore, the Agreement
has this dual object, the Agreement substantially concerns allocation of taxing power.8
mentioned, it appears evident that if international trade is to be increased, tax
considerations should be minimized.
Tax conventions are a bridge between two independent taxing systems. . . .
A treaty (terms and conditions) is a negotiated agreement between two countries,
where negotiators try to find a way to encourage investment by preventing double
taxation, while allowing each country a fair share of the tax generated by the trade
between the two countries, i.e. the increased flow of capital, goods and services.
4 It has been suggested that because prevention of double taxation is a goal of DTCs, it should
not be possible to create a situation of double non-taxation—that is, where neither state taxes a
person on a particular source of income. For a strong counterargument, see Luc De Broe,
International Tax Planning and Prevention of Abuse: A Study Under Domestic Tax Law, Tax Treaties
and EC Law in Relation to Conduit and Base Companies (Amsterdam: International Bureau of
Fiscal Documentation, 2008).
5 It has been argued that the traditional definition of a PE fails to take into account modern
business practices and hence fails to allocate income from a business properly between the
source and the residence states. I argue for a formulary apportionment of business income—
that is, an allocation based on a mathematical formula relating to various factors relevant to the
earning of the income. The formulary apportionment concept is not new and has been debated
almost from the inception of DTCs. It has not, to date, been accepted. See Kerrie Sadiq,
“Jurisdiction To Tax and the Case for Threshold Reform” (2005) vol. 1, no. 2 Journal of the
Australasian Tax Teachers Association 162-91.
6 Utah Mines Ltd. v. The Queen, 92 DTC 6194, at 6196 (FCA). See also Chong v. FC of T, 2000 ATC
4315, at paragraph 26 (FC); David A. Ward, “Canada’s Tax Treaties” (1995) vol. 43, no. 5 Canadian
Tax Journal 1719-58, at 1727; and Jinyan Li, Arthur Cockfield, and J. Scott Wilkie, International
Taxation in Canada: Principles and Practices (Markham, ON: LexisNexis Canada, 2006), 29.
7 97 ATC 4752 (Full FC).
8 Ibid., at 4755. See similarly Deutsche Asia Pacific Finance Inc. v. Commissioner of Taxation (No. 2),
[2008] FCA 1570, at paragraph 88 and Smallwood v. Revenue and Customs, [2009] EWH 777
(Ch.), rev’g. Trevor Smallwood Trust v. Revenue and Customs, [2008] UKSPC SPC00669.
As an internationally accepted fiscal rule, under virtually all dtcs, the source
state agrees not to tax the business profits earned there by a taxpayer who is a resident of a residence state9 (referred to hereinafter, from Canada’s point of view, as a
“non-resident”), unless the non-resident has a pe in the source state, and then only
to the extent that the profits are attributable to—that is, connected with—this particular pe. In other words, the dtcs allocate to the residence state the right to tax
business income earned by its residents in either state, unless the income is earned
through a pe in the source state. In this case, both states are allocated the right to
tax the income. Accordingly, under dtcs the existence of a pe is both a necessary
and a sufficient nexus for taxation of business income earned by a non-resident in
the source state, to the extent that the income is attributable to the pe.10
Implementing Legislation
Canada has entered into approximately 86 bilateral dtcs. A Canadian treaty (relating
to tax or otherwise) has no force of law in Canada unless it is given such force by a
Canadian or provincial statute.11 Accordingly, each dtc is brought into force by
means of a statute that gives the dtc the force of law in Canada, usually called an
implementing statute.12
Because the purpose of a dtc is to allow a non-resident to pay less tax in Canada
than she would pay under the Act, there are necessarily inconsistencies between the
dtc and the Act.13 Each implementing statute gives the dtc priority over any other
law in Canada, including the Act. In essence, the dtc overrules the Act where the
two conflict. For example, section 3(2) of the Canada-United States Income Tax
Convention Act, 1984,14 which brings the us dtc into force in Canada, states:
In the event of any inconsistency between the provisions of this Act, or the Convention, and the provisions of any other law, the provisions of this Act and the Convention
prevail to the extent of the inconsistency.
9 That is, a taxpayer who is resident in the residence state under the definition of “residence” in
the DTC, usually contained in article 4 of the DTC, and meaning a person who is liable to tax
in the residence state. For this purpose, “liable to tax” means subject to the most comprehensive
regime of taxation imposed by this state (The Queen v. Crown Forest Industries Limited et al., 95
DTC 5389 (SCC)), though not necessarily required to pay any actual tax (Canada Revenue
Agency, Income Tax Technical News no. 35, February 26, 2007).
10 In computing the amount of income attributable to a PE, see, in addition to any other rule,
section 4 of the Income Tax Conventions Interpretation Act, RSC 1985, c. I-4, as amended.
11 Francis v. The Queen, 56 DTC 1077 (SCC).
12 Not every country has the same rule: in the United States, treaties automatically have the force
of law under the US Constitution.
13 Or, as it was put in Galileo, infra note 42, at paragraph 11.1, a “tax Treaty is basically not a
Taxing Code, but a Code for NOT Taxing, or for Limiting Taxation.”
14 SC 1983-84, c. 20.
(2009) vol. 57, n o 2
Accordingly, if the Act imposes tax on a certain kind of income but the dtc allocates
exclusive jurisdiction to tax this income to the other state, the dtc takes priority,
and the income is not taxable in Canada.15
Thus, under Canada’s dtcs, Canada has given up the right it would otherwise
have under paragraph 2(3)(b) to tax the income from a business carried on in Canada by a non-resident, except to the extent that the income is attributable to a pe in
Canada. To say it more correctly, Canada has allocated to the residence state the sole
right to tax business income earned in Canada by a non-resident, except to the extent
that the income is attributable to the non-resident’s pe in Canada. If the non-resident
carries on business through a pe in Canada, then both states may (although the residence state is not required to) tax the income earned through the pe. In essence, the
dtc establishes a pe as the minimum but sufficient nexus that a non-resident must
have with Canada before being taxable on her business income here.
W h at I s a P E ? 16
Article 7 of Canada’s dtcs allocates taxing jurisdiction over business income to the
residence state, except that Canada may tax this income to the extent, but only to
the extent, that the income is attributable to a pe in Canada.17 Thus, the dtcs prevent
Canada from taxing the non-resident’s Canadian business income unless it is earned
through a pe in Canada.18 It is obviously critical to know how a pe is defined.
Article 5 of the oecd model dtc19 defines three20 different kinds of pes: the only
one dealt with in this article21 is a “fixed pe,” which is defined in article 5(1) as
follows:
15 Again, not every country follows this rule: in the United States, the “later in time” rule permits
the later of a DTC and a provision of the Internal Revenue Code to take priority.
16 For a discussion of the origin of the concept, see John F. Avery Jones et al., “The Origins of
Concepts and Expressions Used in the OECD Model and Their Adoption by States” [2006]
no. 6 British Tax Review 695-765, at 722-31.
17 In very early model DTCs, there was a “force of attraction” principle under which any business
income earned by a non-resident in a source state was taxable there, as long as the non-resident
had at least one PE in the source state. This principle was dropped in favour of the rule that
business income must be attributable to a specific PE in the source state to be taxable there.
18 Another way of making the same point is to state that the non-resident must meet the
“threshold” test of having a PE in the source state before the state can tax income that has its
source there. It has been suggested that this two-step analysis may not be correct and that the
existence of a PE is the item that establishes the source of the income in the source state. See
Robert Couzin, “Canada’s Income Tax Treaties,” International Fiscal Association (Canadian
branch), 2008 Travelling Lectureship Series, 46; but see to the contrary, Sadiq, supra note 5, at
note 23 and accompanying text.
19 Organisation for Economic Co-operation and Development, Model Tax Convention on Income
and on Capital (Paris: OECD) (looseleaf ).
20 The 2001 United Nations Model Double Taxation Convention Between Developed and
Developing Countries creates a fourth type: a services PE, recently adopted by the fifth
(Footnotes 20 and 21 are continued on the next page.)
For the purposes of this Convention, the term “permanent establishment” means a
fixed place of business through which the business of a resident of a Contracting State
is wholly or partly carried on.
The Characteristics of a Fixed PE
A fixed pe as defined above has the following three characteristics:
1. there must be a “fixed place” in Canada;22
2. the fixed place must constitute a “place of business”; and
3. the non-resident’s business must be carried on through this place.
Fixed Place
According to the oecd commentary on article 5, “fixed” in this context means being
in one place geographically. It also means being more or less permanent—that is,
there must be at least an intention to operate the business at a particular geographic
location for the indefinite future (although, according to the commentary, the intention may inadvertently not come to fruition without destroying a pe).
Place of Business
The fixed place must constitute a “place of business” as opposed to a place to earn
income from property or capital gains. To some extent, this element needs no explanation: a pe is relevant only in connection with article 7, which allocates taxing
jurisdiction over business income to the residence state unless the business is carried
on through a pe in the source state.
protocol to the Canada-US DTC (the Convention Between Canada and the United States of
America with Respect to Taxes on Income and on Capital, signed at Washington, DC on
September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984,
March 17, 1995, July 29, 1997, and September 21, 2007). The services PE is now included in
the OECD commentary, but not the actual text of the OECD model DTC for reasons
explained in “Conversations from the OECD: Jeffrey Owens” (2008) vol. 51, no. 12 Tax Notes
International 1007-9.
21 The other two being a construction PE and an agency PE. The various types of PEs are
independent of each other, so that the conditions necessary to meet one definition are
irrelevant to the others: McDermott Industries (Aust.) Pty Ltd. v. FC of T, 2005 ATC 4398, at
paragraph 61 (Full FC). For a contrary view on construction PEs, see Hans Pijl, “The
Relationship Between Article 5, Paragraphs 1 and 3 of the OECD Model Convention” (2005)
vol. 33, no. 4 International Tax Review 189-99.
22 In Australia, the internal definition of a PE is similar to the general DTC definition but does
not use the word “fixed.” Nevertheless, the internal definition is interpreted and applied as if it
did use this word. See Taxation Ruling TR 2002/5, “Income Tax: Permanent Establishment—
What Is ‘a Place at or Through Which [a] Person Carries On Any Business’ in the Definition
of Permanent Establishment in Subsection 6(1) of the Income Tax Assessment Act 1936?”
March 13, 2002, paragraphs 18-24 (all Australian rulings or interpretations referred to herein
are available online at http://law.ato.gov.au/atolaw/searches.htm).
(2009) vol. 57, n o 2
Through Which the Business Is Carried On
The business must be carried on “through” the fixed place. What does “through”
mean in this context? There are at least two possibilities: one is that emphasis should
not be put on the word “through” but rather on the words “carried on,” so that it is
not sufficient to own a fixed place of business or to have access to that place; the
non-resident must actually carry on a business there. Read in this fashion, the word
“through” is equivalent to the word “in,” which was the terminology used in the
definition of a fixed pe in the 1963 oecd model dtc.23 This reading is supported
by the fact that when “in” was changed to “through” in the definition of a fixed pe in
the 1977 oecd model dtc, the 1977 commentary continued to state: “This means
usually that persons who, in one way or another, are dependent on the enterprise
(personnel) conduct the business of the enterprise in the State in which the fixed
place is situated.”24 Since the commentary’s explanation uses the word “in,” it seems
difficult to suggest that “through” means something else. It is also notable that many
of Canada’s existing dtcs continue to use the word “in” rather than “through”; it has
never been suggested that a different understanding of a fixed pe exists under one set
of DTCs as compared with the other. It can also be pointed out that the 1977 oecd
model and the models since then still refer to a non-resident “having” a pe, in articles 5(5) and 5(6). This implies that the change from “in which” to “through which”
in article 5(1) of the model between 1963 and 1977 was not a substantive change.25
Nevertheless, another interpretation of “through” is possible: it could mean that
the non-resident need not own, rent, or even legally have access to the fixed place.
The fact that a business is carried on “through” a fixed place is sufficient to create a
fixed pe. As discussed in the next portion of this article, this interpretation is equivalent to saying that a non-resident need not have any control over the fixed place of
business—that is, the fixed place of business need not be at the non-resident’s disposal as long as in fact the non-resident is actually using it as a place to carry on her
business.
At t h e D i s p o s al o f
The current oecd commentary is schizophrenic about whether the non-resident
must have any control over the fixed place of business: some portions of the commentary suggest that she need not have any; others suggest that control is a condition
23 Organisation for Economic Co-operation and Development, Draft Double Taxation Convention
on Income and Capital (Paris: OECD, 1963).
24 Organisation for Economic Co-operation and Development, Model Double Taxation Convention
on Income and on Capital (Paris: OECD, 1977), paragraph 2 of the commentary on article 5
(emphasis added).
25 Richard G. Tremblay, “Permanent Establishments in Canada,” in Report of Proceedings of the
Forty-First Tax Conference, 1989 Conference Report (Toronto: Canadian Tax Foundation, 1990),
38:1-69, at 38:21-22. See, especially on this point, paragraph 31 of “Issues Arising Under
Article 5 (Permanent Establishment) of the Model Tax Convention,” in the OECD model
DTC, supra note 19, at R19.
necessary to a finding of a fixed pe.26 None of the model dtcs or their commentaries drafted since 1923, up to and including the 1963 oecd commentary, required
that the fixed place be at the non-resident’s “disposal” before it could constitute a
fixed pe.27 In 1977, for the first time, the commentary started to refer to the notion
that a fixed place of business must be at the non-resident’s disposal.28 Paragraph 4 of
the 197729 oecd commentary on article 5 stated:
The term “place of business” covers any
premises, facilities or installations used
for carrying on the business of the enterprise whether or not they are used
exclusively for that purpose. A place of
business may also exist where no premises are available or required for carrying
on the business of the enterprise and it
simply has a certain amount of space at its
disposal. It is immaterial whether the
premises, facilities or installations are
owned or rented by or are otherwise at
the disposal of the enterprise. A place of
business may thus be constituted by a
pitch in a market place, or by a certain
permanently used area in a Customs
depot (e.g., for the storage of dutiable
goods). Again the place of business may
be situated in the business facilities of
another enterprise. This may be the case,
for instance where the foreign enterprise
has at its constant disposal certain premises
or a part thereof owned by the other
enterprise.
L’expression “installation d’affaires”
couvre tout local, matériel ou installation
utilisé pour l’exercice des activités de
l’enterprise, qu’il serve ou non
exclusivement á cette fin. Il peut même y
avoir une installation d’affaires lorsque
aucun local n’est disponible ni nécessaire
pour l’exercice des activités de l’entreprise
et que celle-ci dispose simplement d’un
certain emplacement. Il importe peu que
l’entreprise soit ou non propriétaire ou
locataire du local, du matériel ou de
l’installation ou qu’elle l’ait d’une autre
manière á sa disposition. Ainsi, l’installation
d’affaires peut être constituée par une
place sur un marché, ou par un certain
emplacement, utilisé de manière
permanente, dans un dépot de douane
(par exemple pour l’entreposage de
marchandises taxables). L’installation
d’affaires peut aussi se trouver dan les
locaux d’une autre entreprise. Ce peut
être le cas, par example, lorsque
l’entreprise étrangère dispose en permanence
de certains locaux ou d’une partie des
locaux appartenant á l’autre entreprise.
26 By contrast, the United States, Treasury Department, United States Model Technical Explanation
Accompanying the United States Model Income Tax Convention of November 15, 2006 does
not mention the concept of disposal.
27 These materials are collected in United States, Joint Committee on Internal Revenue Taxation,
Legislative History of United States Tax Conventions, vol. 4, Model Tax Conventions (Washington, DC:
US Government Printing Office, 1962).
28 On the other hand, the mere fact that a place is at a person’s disposal does not mean that the
person is carrying on a business through that place. See Unisys Corporation Inc. v. FC of T, 2002
ATC 5146 (NSW SC).
29 The paragraph was added by the 1974 amendment to the 1963 commentary. Emphasis has
been added.
(2009) vol. 57, n o 2
This was the only paragraph of the 1977 commentary on article 5 that addressed
the concept of disposal. Paragraph 4 is somewhat ambiguous: the second sentence
says that a place of business may exist when space is at a non-resident’s disposal;
however, it does not make this a requirement since it is expressed as an alternative
to having premises available or required. The third sentence says that it is immater
ial (which appears to mean irrelevant) whether the premises are owned or rented or
otherwise at the non-resident’s disposal. If the third sentence is intended to stand
alone, then this appears to mean that it is irrelevant whether the premises are at
the non-resident’s disposal, so that a pe may exist even if they are not at the nonresident’s disposal.30 On the other hand, if the third sentence is not a stand-alone
sentence, but rather (as it appears to be) a continuation of the second sentence in
the sense that it is an explanation of the word “disposal” in the second sentence,
then it can mean that the premises need not be owned or even rented as long as they
are somehow at the non-resident’s disposal.31 The fourth sentence, which by the
word “thus” is obviously intended to be an example to illustrate the third sentence,
refers to a pitch in a marketplace. Such a pitch would not be owned or even necessarily rented, but it certainly would be at the non-resident’s disposal, as would the
permanently used customs depot.
In contrast with the ambiguity of the first portion of paragraph 4, the last two
sentences strongly suggest that a fixed place must be at the non-resident’s disposal
to constitute a fixed pe. An enterprise that carries on business through another enterprise’s place literally meets the three elements of a fixed pe listed above: there is
a fixed place of business through which the first enterprise’s business is carried on.
But rather than simply stop there and state that the first enterprise has a fixed pe,
the last sentence indicates that a fixed pe exists only if the first enterprise has part of
the second enterprise’s space at its “constant disposal.”
Regardless of whether the 1977 version of paragraph 4 of the commentary on
article 5 was intended to mean that the non-resident must have the place of business
at her disposal to constitute a fixed pe, it became clear, starting in 2002,32 that while
30 It is on the basis of this reading that some commentators believe that a factual use test is
sufficient to create a PE. See the section of this article entitled “A Factual Use Test?” below.
31 Or, to put it another way, there really should be a semi-colon between the two sentences,
rather than a period. This is certainly the view expressed by Arvid Aage Skaar, “More Catholic
Than the Pope? A Norwegian Supreme Court Decision on Permanent Establishment and the
183-Day Rule” [1997] no. 6 British Tax Review 494-517, at 502. With great respect, however,
Skaar’s analysis of the grammar of paragraph 4 does not lead the reader directly to this
conclusion about its meaning.
32 These changes were first published by Working Party No. 1 to the Fiscal Committee of the
OECD on October 2, 2001. See Organisation for Economic Co-operation and Development,
Committee on Fiscal Affairs, Working Party No. 1 on Tax Conventions and Related Questions,
“Draft Contents of the 2002 Update to the OECD Model Convention,” October 2, 2001
(online: http://www.oecd.org/dataoecd/49/34/2372805.pdf ). The changes were discussed in
“Issues Arising Under Article 5 (Permanent Establishment) of the Model Tax Convention,”
supra note 25, adopted by the Committee on Fiscal Affairs on November 7, 2002, and adopted
the oecd model was not revised significantly, the commentary was revised33 to the
point where having the space at a non-resident’s disposal clearly became a sine qua
non of having a fixed pe.34
Disposal: A Definition?
What does it mean for a non-resident to have a fixed place of business at her disposal? The commentary does not define the notion of disposal, and this failure is
deliberate.35 Rather, the commentary proceeds by way of example to illustrate what
does or does not constitute disposal. It is perhaps worthwhile setting out Working
Party No. 1’s April 12 letter on this point:
The thrust of your [the Business and Industry Advisory Committee’s (biac’s)] comments on these paragraphs is that “[t]he revised Commentary does not define the term
‘disposal’ but sets forth four examples to illustrate when the place of business of another person is, or is not, to be considered at the ‘disposal’ of the enterprise.” [. . .]
“The most important deficiency of the revised Commentary is the lack of guidance as
to what factors constitute ‘disposal.’ ”
The words “at the disposal” are not found in paragraph 1 of Article 5. The relevant
words are a “place of business [. . .] through which the business of an enterprise is
wholly or partly carried on.”
by the OECD in a report entitled “The 2002 Update to the Model Tax Convention” on
January 28, 2003. These reports do not appear to explain the concept of disposal more than is
set out in the commentary itself.
The changes to the commentary are part of a larger debate on the “source versus
residence” debate. For an attempt to untangle the main elements of the debate, see Carol A.
Dunahoo, “Source Country Taxation of Foreign Corporations: Evolving Permanent
Establishment Concepts” (2008) vol. 86, no. 3 Taxes: The Tax Magazine 37-56.
33 For a discussion about whether the revisions to the commentary took into account the correct
context for the meaning of a PE, see Carol A. Dunahoo, “Source Country Taxation of Foreign
Corporations: Thoughts on Evolving Permanent Establishment Concepts” (2007) no. 235
Daily Tax Report J-1.
34 See paragraphs 4.1-4.6 and paragraphs 41 and 41.1 of the commentary on article 5.
35 See the letter dated April 12, 2004 from the Organisation for Economic Co-operation and
Development, Committee on Fiscal Affairs, Working Party No. 1 on Tax Conventions and
Related Questions, to the Business and Industry Advisory Committee of the OECD (the
BIAC), which responded to the BIAC’s report entitled “Comments of the Business and
Industry Advisory Committee (BIAC) to the OECD with Respect to the OECD Model Tax
Convention as Revised by the 2002 Update,” September 15, 2003. The April 12, 2004 letter is
referred to in the BIAC’s report, “Comments of the Business and Industry Advisory Committee
(BIAC) to the OECD on the OECD Public Discussion Draft: ‘Proposed Clarifications of the
Permanent Establishments Definition,’ ” June 30, 2004. Both BIAC reports are available on the
BIAC’s Web site at http://www.biac.org/policygrp/stmts-tax.htm. The BIAC issued a followup
report, “BIAC Comment to the OECD CFA WP1 on Article 5: PE Definition,” May 4, 2005
(online: http://www.uscib.org/docs/Final_BIAC_Comment_on_Article_5.pdf ). It is understood
that the OECD did not respond to the 2005 comment. For a further comment on the BIAC,
see Richard M. Hammer, “The Continuing Saga of the PE: Will the OECD Ever Get It
Right?” (2004) vol. 33, no. 8 Tax Management International Journal 472.
(2009) vol. 57, n o 2
The concept of a place that is “at the disposal” of an enterprise was included in the
Commentary in 1977 to clarify in which circumstances a place of business could be found to
be a permanent establishment. We have now given examples of when a place should and
should not be viewed as being “at the disposal of an enterprise.” Since the words “at the
disposal” are not found in the Article, we see no benefit in defining those words.
As shown in the examples that we have used, the issue of when a particular location
constitutes a “place of business [. . .] through which the business of an enterprise is
wholly or partly carried on” is inherently related to the nature of the business under
consideration. To try to formulate an abstract definition of the words “at the disposal
of an enterprise” (which are not even found in the paragraph) would therefore not be
possible.
You provide a detailed critique of the examples and suggest several factors that
should be taken into account in determining whether a particular space is at one’s
“disposal.” In the Working Party’s deliberations on this new language in the Commentary, the Working Party considered the issues you have raised along with many
other issues. The Working Party did not consider it appropriate to adopt the type of
“factor” approach you have suggested. Nonetheless, the Working Party will continue
to monitor this area and consider appropriate modifications to the Commentary.36
Thus, the (deliberately undefined) concept of disposal is not to be tied to a list of
factors, as suggested by the biac in its September 15, 2003 report,37 but is dependent on the nature of the business being carried on. Nevertheless, while undefined
and somewhat elusive, the April 12 letter makes it clear that the place must be at the
non-resident’s disposal to constitute a fixed pe.
Working Party No. 1’s insistence on a right of disposal is both consistent and inconsistent with the commentary. On the one hand, the commentary states clearly
that even the illegal use of a fixed place of business may create a fixed pe, which implies that a taxpayer need not have any sort of “right” to use the place of business,
and that the mere fact of physical use is sufficient. One does not commonly consider
that a place used illegally to carry on a business is a place that is at the taxpayer’s
disposal.38
36 Organisation for Economic Co-operation and Development, Committee on Fiscal Affairs,
Working Party No. 1, April 12, 2004 letter, supra note 35, paragraphs 4.1-4.6 (emphasis added).
37 Business and Industry Advisory Committee to the OECD, “Comments of the Business and
Industry Advisory Committee (BIAC) to the OECD with Respect to the OECD Model Tax
Convention as Revised by the 2002 Update,” September 15, 2003, supra note 35.
38 It has been suggested that for a place in a source state to be at a non-resident’s disposal, the
non-resident must be able to use the place whenever she so desires. It has also been suggested
that the way to reconcile this definition with the notion that a place can be a fixed PE even if it
is used illegally is to interpret “illegally” in this context as meaning “illegally to the knowledge
or at least tolerance of the authorities” or “illegally but not yet discovered by the authorities.”
See Martin B. Tittle, Permanent Establishment in the United States: A View Through Article V of
the U.S.-Canada Tax Treaty (Lake Mary, FL: Vandeplas, 2008), 67-68. With due respect, it is
difficult to agree that the OECD commentary intended either of these interpretations of
On the other hand, paragraph 4.2 of the commentary gives as an example a nonresident who meets on a regular basis in a customer’s office. Paragraph 4.2 states
expressly that the reason that the customer’s premises are not a fixed pe for the nonresident is because they are not at the non-resident’s disposal, even though, as Skaar
points out,39 the premises otherwise meet the definition of a fixed pe in article 5(1).
This strongly implies that a right of disposal is required to create a fixed pe, separate and apart from the requirement that the non-resident carry on business through
the fixed place.
A Factual Use Test?
Before the 2002 amendments to the commentary, there was a suggestion that the
right of disposal was no more than a factual use test and therefore did not add anything to the definition of a pe.40 However, the commentary now seems to make the
“illegal.” Certainly there is no indication of any such intention in the reports leading up to
paragraph 4 of the commentary on article 5. I suggest that in fact the illegality concept cannot
stand with the disposal concept, and that the latter is intended to overrule the former.
39 Arvid A. Skaar, section 2.4.3 of Irene J.J. Burgers and Giammarco Cottani, eds., The Taxation of
Permanent Establishments (Amsterdam: International Bureau of Fiscal Documentation)
(looseleaf ).
40 See “Discussion,” in International Fiscal Association, The OECD Model Convention—1997 and
Beyond: Current Problems of the Permanent Establishment Definition, proceedings of a seminar held
in New Delhi in October 1997 during the 51st Congress of the International Fiscal Association
(The Hague: Kluwer Law International, 1997), 49-63, at 55. The CRA seems to have agreed at
that time. See CRA document no. 9712976, February 18, 1998, which states: “The above
quotation [on illegality] clearly indicates that there is no need to have control over a premise by
a taxpayer before the taxpayer can be said to have a permanent establishment. As long as a certain
amount of space is at the disposal of the taxpayer, a permanent establishment exists.” At least
one commentator appears to have agreed that no right of any kind is required; mere factual use
is sufficient: see Brian J. Arnold, “Threshold Requirements for Taxing Business Profits Under
Tax Treaties” (2003) vol. 57, no. 10 Bulletin for International Fiscal Documentation 476-92, at 479.
Arnold does not explain how this interpretation is affected, if at all, by the Dudney case, infra
note 43.
Clearly others disagree and insist that a right of disposal, as opposed to mere factual use,
must exist to establish a fixed PE: Tremblay, supra note 25; Aarvid A. Skaar, Permanent
Establishment: Erosion of a Tax Treaty Principle (Deventer, the Netherlands: Kluwer Law and
Taxation, 1991), 155, note 1 and accompanying text; Klaus Vogel et al., Klaus Vogel on Double
Taxation Conventions: A Commentary to the OECD-, UN- and US Model Conventions for the
Avoidance of Double Taxation on Income and Capital, 3d ed. (The Hague: Kluwer Law International,
1997), 286; Philip Baker, Double Taxation Conventions, 3d ed. (London: Sweet & Maxwell)
(looseleaf ), sections 5B.08-5B.09, note 4 and accompanying text. It is not clear whether Skaar’s
views remain as set out in his 1991 text in light of the 2002 changes to the OECD commentaries.
See Aarvid Aage Skaar, “Erosion of the Concept of Permanent Establishment: Electronic
Commerce” (2000) vol. 28, no. 5 International Tax Review 188-94, at 189, and Annika Deitmer,
Ingmar Dörr, and Alexander Rust, “Invitational Seminar on Tax Treaty Rules Applicable to
Permanent Establishments—In Memoriam of Prof. Dr Berndt Runge” (2004) vol. 58, no. 5
Bulletin for International Fiscal Documentation 183-89, at 184.
(2009) vol. 57, n o 2
right of disposal an additionally required element of the definition of a pe.41 This
has been confirmed in four Indian,42 one Norwegian, and four Canadian43 cases.44
It has been suggested that the issue of whether the existence of a pe requires only
a factual use test or a right of disposal depends on the source country’s internal concept of the “right to use” concept.45 It is true that article 3(2) of the oecd model
dtc says that undefined words in the dtc take their meaning from the law of the
state that applies the dtc (which in this case is the source state); however, the word
“disposal” does not appear in the dtc but only in the commentary, and hence article 3(2) does not appear to apply. In any event, article 3(2) is subject to any context
41 Matthias Geurts, “Server as a Permanent Establishment?” (2000) vol. 28, no. 4 International
Tax Review 173-75, at 174; and D.A. Albregtse, “The Server as a Permanent Establishment and
the Revised Commentary on Article 5 of the OECD Model Tax Treaty: Are the E-Commerce
Corporate Income Tax Problems Solved?” (2002) vol. 30, no. 10 International Tax Review 356-64,
at 361.
42 See Ericsson, Motorola and Nokia v. Deputy Commissioner of Income Tax (2005), 96 TTJ 1 (ITAT);
Western Union Financial Services Inc. v. Addl. DIT (2006), 8 ITLR 1067 (ITAT) (for a comment
on another issue arising in the case, see Patrick Marley, “Recent International Cases,” in Report
of Proceedings of the Fifty-Eighth Tax Conference, 2006 Conference Report (Toronto: Canadian Tax
Foundation, 2007), 15:1-16, at 15:1-13); Rolls Royce v. Deputy Director of Income Tax (ITAT Delhi,
October 26, 2007) (online: http://www.itatonline.org/ ); and Galileo International Inc. v. Deputy
Commissioner of Income Tax (ITAT Delhi, November 30, 2007) (online: http://www.itatonline.org/)
appeal dismissed 2009-TIOL-161-HC-DEL-IT, February 25, 2009 (HC) (online: http://www
.tpweek.com/assets/pdf/Galileo-TIOL-copy-with-citation.pdf ). For another comment on these
cases, see Jean Pierre Le Gall, “The David R. Tillinghast Lecture: Can a Subsidiary Be a
Permanent Establishment of Its Foreign Parent?” (2007) vol. 60, no. 3 Tax Law Review 179-213.
In DIT (International Taxation) v. Morgan Stanley and Co. Inc., [2007] 292 ITR 416 (SC), the
court held that a US corporation that engaged an affiliated Indian corporation to perform “back
office” services did not have a fixed PE in India. The reasons for judgment are less than perfectly
clear: it appears that the court held that the back office services did not amount to the US
corporation’s business, and therefore the US corporation was not carrying on its business
through the Indian office. There is no discussion of the concept of a right of disposal. For
other comments, see Gaurav Taneja, “PE Problems” (2008) vol. 36, no. 2 International Tax
Review 57-58; and Hans Pijl, “Morgan Stanley: Issues Regarding Permanent Establishments
and Profit Attribution in Light of OECD View” (2008) vol. 62, no. 5 Bulletin for International
Taxation 174-82.
43 Dudney v. The Queen, 99 DTC 147 (TCC); aff ’d. 2000 DTC 6169 (FCA); followed in Toronto
Blue Jays Baseball Club et al. v. Ontario (Min. of Fin.), 2005 DTC 5360 (Ont. CA), and in
American Income Life Insurance Company v. The Queen, 2008 DTC 3631 (TCC) (AILI ); see also
Knights of Columbus v. The Queen, 2008 DTC 3648 (TCC).
44 Saris Shalhav, “The Revised Permanent Establishment Rules” (2003) vol. 31, no. 4 International
Tax Review 131-47, at 132, has suggested that premises are at the non-resident’s disposal when
they are within the non-resident’s actual use, dominion, or control. With respect, I disagree. As
discussed below, under the heading “Dudney,” it is clear that PanCan’s premises were in fact
being used by Dudney, yet they did not constitute a PE for him.
45 Jerome B. Libin and Timothy H. Gillis, “It’s a Small World After All: The Intersection of Tax
Jurisdiction at International, National, and Subnational Levels” (2003) vol. 38, no. 1 Georgia
Law Review 197-298.
that indicates that a unilateral definition was not intended. The concept of “disposal,”
whatever it means, appears to be intended to be a universal concept, not dependent
on the internal law of any particular state.
Same as “Carrying on Business”?
In my view it is important not to concatenate the issue of whether a non-resident is
carrying on business through a fixed place of business in a source state with the issue
of whether the non-resident has this place at his disposal. It seems clear from the
oecd commentary that these are separate issues.46 The salesman example in paragraph 4.2 of the commentary on article 5 is perhaps the clearest example: it seems
obvious that the salesman is carrying on his business at the customer’s office; his
business, after all, is to make sales. Yet he has no fixed pe merely because he does
not have this office at his disposal. The lawyer example posited by counsel for
Mr. Dudney and accepted by the Court of Appeal47 provides another excellent illus
tration of the difference between the two concepts: it seems clear that the lawyer is
carrying on his business in the client’s office by visiting him there, but he has no
fixed pe because he does not have the office at his disposal.48
46 See Peter H. Dehnen and Silke Bacht, “Recent Problems of Definition and Taxation of German
Permanent Establishments” (2005) vol. 59, no. 10 Bulletin for International Fiscal Documentation
445-52, at 445-46, who clearly list the two elements separately. See also CRA, Audit Manual,
supra note 3, which indicates that the question of whether a place is at a non-resident’s disposal
is different from the question of whether the non-resident is carrying on business there. But see,
to the contrary, Pijl, supra note 42, at 178-79, note 12 and accompanying text, who suggests
that “at the disposal” is inherent in the concept of “carrying on business through.” This is also
the view expressed by Liesl Fichardt, “Is There a Permanent Establishment?,” draft paper for
the International Fiscal Association’s 2009 Vancouver Congress (online: http://www.ifa-uk.org/
NATDFTRPT2009.pdf ), who suggests that a “right of use” test means only that the space must
be “at the disposal” of the non-resident, without defining what that means. In my respectful
view, Fichardt errs in suggesting that the UK domestic case law on whether a place is a nonresident’s place of business is relevant to the concept of whether a place is at a non-resident’s
disposal.
47 See the discussion of Dudney below.
48 In Australian Taxation Ruling TR 2002/5, supra note 22, at paragraph 42, the following example
is given: “HKco is a computer service provider and a resident of Hong Kong. It successfully
tenders to train the employees of Ausco, a company resident in Australia, in a new computer
system. To undertake the training, HKco sends four of its employees to Australia for six months.
Ausco provides HKco employees with a room in one of its offices for that six months. Because
HKco has at its disposal a room in Ausco’s offices for six months and carries on its business at or
through that room, HKco has a place at or through which it carries on its business in Australia”
(emphasis added). It seems clear from this that the concepts of disposal and carrying on business
are separate concepts, although query whether the employees had any “right to disposal” of the
room. Presumably they could be moved to another room at Ausco’s discretion and could not
carry on any activities within the room other than activities in relation to the tender. It is likely
that they did not have access to the office building outside standard business hours and perhaps
did not even have keys to the building. No such factors are discussed in the ruling.
(2009) vol. 57, n o 2
T h e I n d i a n Ca s e s 4 9
Starting with Motorola in 2005,50 the courts in India have reviewed the concept of
whether a right of disposal is a condition necessary to the existence of a pe in four
cases.
Ericsson, Motorola, and Nokia
The reasons for judgment addressed the combined appeals of Ericsson, Motorola, and
Nokia. Each case involved a non-Indian parent corporation that carried out certain
telecommunications work and supplied certain goods in India through its Indian
subsidiary. In each case the parent, from time to time as required, sent employees to
India, where they had the use of the subsidiaries’ Indian offices. The cases involved a
number of different issues, but the only relevant one for present purposes is whether
the use by the parents’ employees of the subsidiaries’ Indian offices to carry out the
parents’ businesses created fixed pes in India for the parents.
In the Ericsson appeal, the tribunal held that no fixed pe was created. The tribunal
held that the mere use of the subsidiary’s offices by the parent’s employees, without
more, was not sufficient to create a fixed pe, because the employees did not have any
right of disposal over the subsidiary’s space—that is, they had no right to enter the
space at will, and could do so only with the subsidiary’s permission.51 The parent thus
had no “right” to use the subsidiary’s premises, and therefore the parent had no fixed
pe. On the basis of the oecd commentary in article 5, the tribunal emphasized that
a non-resident (in this case, the parent corporations) must have a right to use the
premises for the purpose of its business and not solely for the purpose of the business
of the premise’s owner. Because the parent in Ericsson did not have such a right in
respect of its Indian subsidiary’s premises, the parent had no pe there, even though
it otherwise exhibited the three elements of a pe.
Somewhat surprisingly, the tribunal reached the opposite conclusion in the Motorola appeal. It observed that while in the Ericsson case the parent’s employees worked
only for the parent and not for the subsidiary and thus had no right to enter the
subsidiary’s offices, in the Motorola appeal the parent’s employees worked for both
49 For another comment on these cases and Morgan Stanley, see Sanjay Chakrabarti and Riad
Joseph, “Permanent Establishment and Income Attribution in India” (2008) vol. 51, no. 6 Tax
Notes International 517-20. It appears that Indian tax law is roughly the same as Canadian tax
law, to this extent: a non-resident of India must first be taxable under the Indian Income Tax
Act on his business income, which requires him to have a “business connection” in India. The
expression “business connection” has a wide though uncertain meaning. It admits of no precise
definition. It appears to be somewhat the same as the Canadian concept of carrying on business
in Canada, although apparently wider and easier to satisfy. Then, the non-resident may show that
the business income is exempt in India under a DTC between India and the non-resident’s home
country as a result of a lack of a PE in India. See especially Western Union, supra note 42, at
paragraphs 17-19; Galileo, ibid., at paragraphs 8.1 and 8.2; and Rolls Royce, ibid., at paragraph 18.
50 Ericsson, Motorola and Nokia, supra note 42.
51 Ibid., at paragraphs 127-28.
the parent and the subsidiary. Because they worked for the subsidiary, they must
have had the right to enter and use the subsidiary’s offices, and in any event Motorola
had not (for whatever reason) denied that the parent’s employees had the right to
enter the subsidiary’s offices to work for both the parent and subsidiary.
The Nokia appeal appears to have been decided on an entirely different basis, although what exactly this basis was is hard to decipher from the reasons for judgment.
The tribunal held, not that the subsidiary’s offices were a fixed pe of the parent, but
that the subsidiary was “virtually a projection” of the parent in India, and therefore
the parent had a pe in India:
[W]e are of the view that having regard of the findings recorded by both the ao and the
cit(Appeals), the ntpl can be considered as a pe . . . ntpl, the Indian subsidiary, is
the virtual projection of the assessee itself in India. . . . [I]n respect of the services rendered
by ntpl to the assessee under the “marketing agreement,” it was compensated on the
basis of cost plus 5% more. It stands to reason that in respect of the marketing activity,
ntpl has no scope for incurring any loss. Nevertheless, its accounts shows [sic] a book
loss of Rs. 10 crores (approximately) and even if the depreciation loss of Rs. 2 crores
[is] ignored still the loss is around Rs. 8 crores. The question posed by the Income-tax
authorities is: Where from this loss has arisen? The answer is that such a loss has risen
only from the installation activity carried out by the ntpl. In other words the installation
charges received by ntpl from the cellular operator in India were not commensurate
with the costs and expenses incurred therefore and that is the reason why such a loss
has been incurred. Now the other question is how does that result in ntpl being regarded as the pe of the assessee company. The answer is that since ntpl is a wholly
owned subsidiary of the assessee in India and is consequently in a position to control and monitor
its activities, the installation charges were directed to be so fixed that they were not
commensurate with the services rendered by ntpl . . . [T]here was sample [sic, ample]
scope for the assessee to control and monitor the activities of ntpl which, it should
be remembered is a 100% subsidiary of the assessee, in such a manner that ntpl became
a virtual projection of the assessee company in India. The other point made by the Incometax authorities was that the assessee even represented to the Indian cellular operator
that it will not dilute its share holding in the Indian subsidiary below 51% without the
written permission of the Indian cellular operators. This allegation of the Income-tax
authorities has not been refuted or proved wrong by the assessee in the course of the
proceedings before them or even before us. This also shows that the distinction between the two corporate entities, namely, the assessee on one hand and ntpl, its
100% subsidiary on the other hand, virtually got blurred with the result that it can be
said that when the Indian cellular operators were dealing with ntpl in connection
with the installation contract and marketing agreement, they were in fact dealing with
the assessee itself. We are therefore, of the opinion that the test propounded by the
Andhra Pradesh High Court in the case of cit Vs. Vishakhapatnam Port Trust 144
itr 146 is fully answered. We are, therefore, unable to find fault with the cit(Appeals)
for holding that ntpl, the 100% Indian subsidiary of the assessee, constituted the assessee’s pe in India.52
52 Ibid., at paragraph 274(b) (emphasis added).
(2009) vol. 57, n o 2
It is not clear if the tribunal is saying that the subsidiary is a sham, or an agent,
or a bare trustee: the tribunal uses the phrase “virtual projection” without really explaining what it means or how it establishes the three conditions necessary to create
a fixed pe.53 The tribunal says that the parent could “control and monitor” the activities of the subsidiary but of course that was also true in the Ericsson appeal, where
the tribunal held that there was no pe. This aspect of the case is puzzling, and it remains to be seen how later courts will apply it. In my view, this aspect of the case
was simply wrong.54
53 It seems almost certain that the tribunal had in mind the comments in Commissioner of Income
Tax v. Visakhapatnam Port Trust (1983), 144 ITR 146 (HC), which had stated:
A “Permanent establishment” connotes a projection of the foreign enterprise itself into
the territory of the taxing State in a substantial and enduring form: (vide F.E. Koch’s
Book on the Double Taxation Conventions published by Stevens & Sons, London,
1947, Vol. I, at p. 51, quoting Mitchell B. Caroll [sic] before the sub-committee of the
committee of U.S. Senate Foreign Relations). It is common practice for an enterprise
which carries on trade or business in one country to expand its operations, with out
incorporation or further incorporation into another country, for it then has a branch
there, or a permanent establishment which can be regarded as having sufficient presence
in that country to make them taxable there in the same manner as the residents of that
country. (Harvey Mc. Gregor, Old Exemptions-New Credits. The Rights of Permanent
Establishment under the Double Taxation Agreements between U.K. and U.S.A.-1
(British Tax Review [1977] Pt. 6, p. 327).
In our opinion, the words “permanent establishment” postulate the existence of a
substantial element of an enduring or permanent nature of a foreign enterprise in
another country which can be attributed to a fixed place of business in that country. It
should be of such a nature that it would amount to a virtual projection of the foreign enterprise
of one country into the soil of another country [emphasis added].
However, a review of that decision (online: http://law.incometaxindia.gov.in/Directtaxlaws/
act2005/%5B1983%5D144ITR0146(AP).htm) does not indicate that the court meant that a
fixed PE exists merely because there is some sort of “virtual projection,” divorced from the
criteria set out in the text of and commentary on article 5. In fact, the court refers to another
decision as follows:
The Supreme Court of Belgium ( judgment of the Supreme Court of Belgium on
French-Belgium Treaty) has held that a Belgian subsidiary of a French parent company
was not the parent’s “permanent establishment,” notwithstanding the very tight control
exercised by the parent company over the sales-territory and product lines allocated to the
subsidiaries notwithstanding the considerable amount of management and financial reporting
which was required of the subsidiary. This decision of the Belgium Supreme Court, if
regarded as persuasive in other countries, is of immense relief to multinational
corporations . . . which often do lay down strict guidelines for the operations of their
subsidiaries: (vide Michael Edwardes-Ker’s Book, The International Tax Treaty Service
published by In Depth Publishing Ltd., 1978 Dublin (13)) [emphasis added].
For other comments on Visakhapatnam Port Trust, see Ashima Gadi and Aparna Grace
Wilson, “Double Taxation and Permanent Establishments” (2003) vol. 43, no. 4 Indian Journal
of International Law 729-47.
54 This part of the decision brings to mind the much-criticized decision the Italian Supreme
Court in Ministry of Finance ( Tax Office) v. Philip Morris (GmbH), May 25, 2002, no. 7682/02
Western Union55
Western Union is, of course, the us corporation with a long history of transmitting
cash by wire or other means. The us parent had a business in India. It entered into
contracts with persons in the United States and gave them a control number. They
transmitted this control number to persons in India who took the number to any
one of several Indian businesses (such as banks and post offices) with which the parent had entered into agency agreements. The agent verified the control number,
using the parent’s software that had been installed in the agent’s office. Once that
software connected with the parent’s computer in the United States and verified the
control number, the agent paid out the entire cash to the Indian person. The us
parent, some time later, repaid the agent the cash that it had paid out, plus a commission. In addition to its agency arrangements, the us parent has a liaison office
(lo) in India, which did not carry on any business or earn any revenue and which
was staffed with Indian personnel. Its functions were marketing, training the agents,
and acting as a liaison with the Indian government. Western Union was assessed on
the basis that it had a pe in India, either a fixed pe (through the agents’ offices, the
lo, or the software installed at the agents’ offices) or an agency pe.
(Supreme Court of Cassation), unofficial English translation, Ministry of Finance v. Philip Morris
(2002), 4 ITLR 903. The facts are complicated (see, among numerous articles, Matias Milet,
“Permanent Establishments Through Related Corporations Under the OECD Model Treaty”
(2007) vol. 55, no. 2 Canadian Tax Journal 289-330). Essentially, the court held that an Italian
indirect subsidiary of a multilayered group of non-Italian corporations constituted a PE of the
entire group. This decision was made despite the determination by the lower courts that the
premises of the Italian subsidiary were not at the group’s disposal. See Raffaele Russo and
Edoardo Pedrazzini, “Permanent Establishments Under Italian Tax Law: An Overview” (2007)
vol. 47, no. 8-9 European Taxation 389-97, at 395-96. On October 17, 2003, the Tax Executives
Institute filed a comment on the case with the OECD and strongly suggested that the case was
wrongly decided because the subsidiary’s space was not at the group’s disposal. The institute made
a further submission on June 7, 2004 (both available online at http://www.tei.org/ ). Taking
these comments and others into account, the OECD deliberately amended the commentary
related to PEs to overcome the effect of this decision (Milet, supra, at note 97). Nevertheless,
the Italian Supreme Court again found, in a second Philip Morris case, judgment no. 17206/06,
January 26, 2006, published on July 28, 2006, that the subsidiary constituted a PE of the nonresident group. The court found that the new OECD commentary was not binding because
Italy had entered an observation thereto. See Marco Q. Rossi & Associati, “Italy’s Supreme Court
Affirms Philip Morris,” International Tax Newsletter 8/06 (online: http://www.fdta-cite.org/
links/ctryresources/italy/Newsletterno.806.pdf ). There are a number of comments on this
case: see Emidio Cacciapuoti and Raffaele Russo, “Multinational Enterprises and Permanent
Establishments: The Philip Morris Case,” in Raffaele Russo and Renata Fontana, eds., A Decade
of Case Law: Essays in Honour of the 10th Anniversary of the Leiden Adv LLM in International Tax
Law (Amsterdam: International Bureau of Fiscal Documentation, 2008), chapter 4; and Michiel
Muizelaar, “Adding Smoke to the Fire: Ministry of Finance (Tax Office) v. Philip Morris
GMBH and the Expanding Concept of Permanent Establishment” (2004) vol. 18, no. 1 Emory
International Law Review 211-69.
55 Western Union, supra note 42.
(2009) vol. 57, n o 2
The tribunal found that the us parent had a “business connection” in India, but
that this did not necessarily mean it had a pe in India, and held there was no pe of
any kind in India. In particular, the tribunal held that the agents’ offices, the lo, and
the software did not constitute fixed pes because the us parent had no right to enter
and make use of the agents’ offices. Thus, the tribunal’s decision accords with Ericsson
and Motorola in requiring that there be a right to use the premises in order to establish that the premises are at the non-resident’s disposal.
Rolls Royce56
Rolls Royce Private Ltd Company (rrplc) was incorporated in the United Kingdom. It supplied aeroengines and spare parts to Indian customers, mainly the Indian
navy and Indian air force. rrplc had a uk-incorporated subsidiary, Rolls Royce
India Limited (rril). rril had an office in India, which provided support services
to rrplc. rrplc reimbursed rril for all of the costs that rril incurred in India in
the provision of its support services, including but not limited to the salaries and
expenses of its employees, the cost of operating its office premises, and any payments it made to its subcontractors. rril received service fees from rrplc in the
amount of 5.1 to 6 percent of the reimbursed expenses. rrplc’s employees visited
India frequently and occupied and used rril’s premises during these visits. rrplc
was assessed in India on the basis that the marketing and sale of goods to Indian
customers were carried out by rrplc through rril’s pe situated in India. rrplc
appealed.
After finding57 that rrplc had a business connection in India because rril had a
permanent office in India, the tribunal considered whether rrplc had a pe in India.
It is not clear if the tribunal upheld the principle that a fixed pe requires that the
place of business be at a non-resident’s disposal. The decision specifically says that
the non-resident must have “control” over the premises.58 On the facts, the tribunal
found that rrplc had a fixed pe in India because rril’s premises were “available”
to all of rrplc’s employees, and rrplc paid all of rril’s expenses in maintaining
its premises. This seems to be very much on point with paragraph 4 of the oecd
commentary on article 5, which appears to equate a right of disposal with mere
availability.
On the other hand, both the tribunal’s decision and paragraph 4 of the commentary are open to criticism on at least two points, or perhaps two ways of stating the
same point. First, there was no evidence and no allegation that rrplc or its employees had any right to enter rril’s premises; while it could certainly have arranged
such a right because it was the parent corporation, the same was true of Ericsson,
where the tribunal held that the parent did not have the subsidiary’s offices at its
56 Rolls Royce, supra note 42.
57 Ibid., at paragraph 19.
disposal. Second, while rrplc’s employees may well have had rril’s premises
“available” to themselves, in the sense that they could use the premises, there was
no evidence or allegation that they had the premises at their unilateral disposal, as
opposed to using them at rril’s discretion. It is equally possible to say that the
salesman in paragraph 4.5 of the oecd commentary has his client’s offices “available” to him, yet it is clear that he does not have a fixed pe there:
Whilst the Committee agreed that no formal legal right to use a particular place was
required for that place to constitute a permanent establishment, it recognised that the
mere presence of an enterprise at a particular location would not necessarily mean that that location was at the disposal of that enterprise. That led the Committee to discuss the circumstances in which the presence of representatives of one enterprise on the premises
of another enterprise could constitute a permanent establishment. One example is that
of a salesman who regularly visits a major customer to take orders and meets the purchasing director in his office to do so. In that case, the customer’s premises are not at
the disposal of the enterprise for which the salesman is working and therefore do not constitute
a fixed place of business through which the business of that enterprise is carried on (depending
on the circumstances, however, paragraph 5 could apply to deem a permanent establishment to exist).59
It remains to be seen whether later cases will equate “disposal” with “mere availability.” In Canada at least, such an equation appears to be foreclosed by the Dudney
and Blue Jays cases discussed below.60 In both of these cases, the non-resident had
certain premises “available” to them; however, with no control over the premises or
any right to use them, there was no fixed pe.
Galileo61
The facts in this case are very complicated. Galileo, a us corporation, was in the
business of maintaining and operating a system for providing electronic global distribution services to airlines, hotels, and tour and cab operators by connecting them
to travel agents (tas) by using a computerized reservation system (crs). As a crs
service provider to airlines, Galileo performed the following functions:
receiving all relevant information from the various airlines, processing this
information, storing it on its database, and updating it on a continuous basis;
n receiving requests from tas for information contained in the database, booking requests, enabling booking and requests for changes in bookings;
n
59 See “Issues Arising Under Article 5 (Permanent Establishment) of the Model Tax Convention,”
supra note 25, at paragraph 27 (emphasis added).
60 Dudney, supra note 43, and Toronto Blue Jays, ibid.
61 Galileo, supra note 42.
(2009) vol. 57, n o 2
forwarding the booking initiation or update requests from the tas to the airlines’ servers, receiving responses from the airlines’ servers, and forwarding
the responses to the tas;
n providing reports to airlines about the bookings made through the crs in
various forms and using various parameters.
n
Galileo entered into participating carrier agreements (pcas) with various airlines. Under a pca, a ticketing facility referred to the functionality whereby Galileo
enabled a Galileo subscriber, via a computer-to-computer communications capability between the CRS and the participant’s system, to retrieve data created in the participant’s system and transmit the data to the CRS, so that a booking file was created,
and a ticket for the passenger could be issued through the CRS. For this purpose,
Galileo maintained and operated a master computer system (mcs), consisting of 18
mainframe computers and servers in the United States. The mcs was connected to
the airlines’ servers, to and from which data was continuously sent and obtained,
regarding, inter alia, flight schedules, seat availability, fare structures, flight connections, meal preferences, and the availability of special facilities (such as infant or
senior citizen requirements) on a real-time basis. All input processing and output
was managed, processed, and stored by Galileo through the mcs in the United
States.
Galileo appointed distributors to market and distribute the crs services to the
tas. In India, Galileo entered into a distribution agreement with an unrelated corporation, Interglobe, to market and distribute crs services to the tas in India.
Within the distribution agreement, there was a service level agreement. The intent
of this agreement was to outline the level of service that each party committed to
deliver to the end subscribers (the tas appointed by Interglobe who were to use the
crs system for booking the air tickets and hotel rooms). Interglobe, in turn, entered
into subscriber agreements with various tas to provide the tas with access codes,
equipment communications links, and support services. The tas could obtain access
to Galileo’s crs through the access code provided by Interglobe, or they could
choose, independently, to access the crs of Galileo’s competitor.
The mcs was connected to tas in India through a communications network arranged by an unrelated corporation, Société Internationale de Télécommunications
Aeronautiques (sita), under an agreement between Galileo and sita. sita was an
independent service provider that owned nodes in India, and Galileo’s crs connected
to these nodes through communication links. At its own cost, Galileo obtained connectivity services from its data centre in the United States to sita’s Indian nodes.
sita did not own local Indian communication lines and therefore contracted with
the local telephone companies for the appropriate circuits.
There were six levels of participants involved in the scheme: the passengers, the
tas, Interglobe, sita, Galileo, and the airlines. The tas were remunerated by the airlines. Galileo was remunerated outside India by the airlines and did not receive any
remuneration from the tas. Galileo paid fees to Interglobe for acting as a distributor.
Galileo also paid sita for the communication services that it provided. Interglobe
was entitled to charge fees to the tas for providing support services and equipment,
for example, but it did not in fact charge them.
India assessed Galileo on the basis that all of the activities in respect of bookings
made by the tas in India were completed in India through the hardware installed
in and from the tas in India. The assessing officer held that income accrued or
arose in India to Galileo. He assumed that Galileo had a pe in India under article 5,
and therefore held that the income was taxable as business income under article 7
of the India-us dtc.62 He found that the computers were a fixed pe in India. Because the computers installed in India and the mainframe situated outside India were
connected through leased lines provided by Galileo, they became an extension of
Galileo’s mcs when a booking was made through the computer and completed.
On appeal, the commissioner of income tax (appeals) held that Galileo had a fixed
pe in India because as the computers were fixed places of business through which
Galileo’s business was wholly or partly carried on. The commissioner held that the
computers in India at the tas’ offices occupied a place and were connected with
Galileo’s us mcs. According to the commissioner, the computers of the ta and the
crs were integrated, and therefore Galileo’s crs was within the premises of the tas.
On further appeal, the tribunal found that Galileo had a business connection in
India,63 and held64 that only 15 percent of its business income could be attributed to
62 The Convention Between the Government of the United States of America and the Government
of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, signed at New Delhi on September 12, 1989.
63 Galileo, supra note 42, at paragraph 8.2. It is worth setting the paragraph out in full, because it
shows the context in which the fixed PE issue was analyzed:
The appellant has developed a fully automatic reservation and distribution system
known as GALILEO system with ability to perform comprehensive information,
communication, reservation, ticketing, distribution and related functions on a
worldwide basis. Through this Galileo system, the appellant provides service to various
participants i.e. Airlines and hotels etc. whereby the subscribers who are enrolled
through the efforts of NMC can perform the functions of reservations and ticketing
etc. Thus the Galileo system or the CRS is capable not only [of ] processing the
information of various Airlines for display at one place but also enables the subscribers
to book tickets in a way which is a seamless system originating from the desk of the
subscriber’s computer which may or may not be provided by the appellant but which in
all cases are configured and connected to such an extent that such computers can
initiate or generate a request for reservation and also receive the information in this
regard so as to enable the subscriber to book the Airlines seal or hotel room. The
request which originated from the subscriber’s computer ended at the subscriber’s
computer and on the basis of information made available to the subscriber, reservations
were also possible. It is to be noted that all the subscribers in respect of which income is
held taxable are situated in India. The equipment i.e. computer in some cases and the
connectivity as well as configuration of the computer in all the cases are provided by the
appellant. The booking takes place in India on the basis of the presence of such seamless
CRS system. On the basis of booking made by the travel agent in India, the income
generates to the appellant. But for the booking no income accrues to the appellant. Time
(Footnotes 63 and 64 are continued on the next page.)
(2009) vol. 57, n o 2
this business connection. The 15 percent was a somewhat random figure arrived at
without any expert evidence or valuation and based solely on the tribunal’s assessment of the amount of “value” contributed by the Indian assets and the non-Indian
assets. Next,65 the tribunal held, in what has become a very controversial matter that
lies beyond the scope of this paper, that Galileo’s payment to its agent, Interglobe,
in India was sufficient to “consume” the whole of the 15 percent of income otherwise attributable to India. In other words, whatever income Galileo earned that was
and again it is contended that the whole of the processing work is carried out at host
computer situated at Denver in Colorado, USA and only the display of information is
in India for the proposition that there is no business connection in India. We are unable
to agree with such proposition. The CRS extends to Indian territory also in the form of
connectivity in India. But for the request generated from the subscriber’s computers
situate in India, the booking is not possible which is the source of revenue to the
appellant. The assessee is not to receive the payment only for display of information but
the income will accrue only when the booking is completed at the desk of the subscriber’s
computer. In such a situation, there is a continuous seamless process involved, at least
part of which is in India and hence, there is a business connection in India. The
computers at the subscriber’s desk are not dumb or are in the nature of kiosk incapable
of performing any function. The computers along with the configuration has been
supplied either by the appellant or through its agent Interglobe and the connectivity
being provided by the appellant enables the subscribers to access the CRS and perform
the ticketing and booking functions. The existence of business connection can be
summarised thus:
1) Assessee hires SITA nodes in most major cities in India together 800 land lines
for maintaining telecommunication network in India as evident at page nos. 278
to 281 of the assessee’s paper book No. 1.
2) Assessee secures the provision of the operation of the communication network
from SITA node to travel agent as evident at page 281 of assessee’s paper book
No.1.
3) By Clause 15.3 of the Distribution Agreement, the assessee specifically
authorises Interglobe (Galileo India) to conclude agreements with the Travel
agents in India in accordance with the model Subscriber Agreement which forms
an annexure to the said Agreement.
4) Assessee lays down targets and closely supervises and reviews the performance of
Galileo India on day today [sic] basis in accordance with the Annual Plan and the
service manual prescribed by it as per Clause 14 of Distribution Agreement.
5) Assessee allots access code to the travel agents for using the CRS.
6) The assessee’s business comprises of:
a) Maintenance and running of CRS;
b) Providing computer modem and software to the travel agents in India so that
they can use the CRS for making the bookings which generate charge on the
airlines;
c) Assessee hires from SITA and maintains and operates telecommunication
network in India so that travel agents could make the bookings.
All these activities are integral part of the core business carried on by the assessee
and these are not auxiliary or preparatory in nature.
attributable to its Indian business connection, the amount paid to Interglobe was a
valid deduction against and equal to this income, so that there was in fact no net income left over to be taxed. Finally, and without prejudice to the previous point, the
tribunal held that Galileo had a fixed pe in India. Counsel for Galileo had argued,
citing Motorola and Western Union, that to have a fixed pe, Galileo must be entitled, as
a matter of right, to enter into and make use of the Indian premises for its business;
in other words, it must have these premises at its disposal. Counsel for the government agreed that the premises must be at Galileo’s disposal, but argued that “all that
was required to satisfy the power of disposition test was actual disposition which did
not need to go any further than necessary for allowing the permanent establishment
to function.”66 Thus, in quite stark terms the tribunal was faced with the issue of
whether having a place at one’s disposal is a factual use test or goes beyond that.
The tribunal appears to have accepted all of paragraph 4 of the oecd commentary as validly stating the law in India. It appears to have agreed with counsel for
Galileo that the premises must be controlled by or at the disposal of a non-resident
to create a fixed pe, but held on the facts that that test had been met:
In the present case it is seen that the crs, which is the source of revenue is partially
existent in the machines namely various computers installed at the premises of the
subscribers. In some cases, the appellant itself has placed those computers and in all
the cases the connectivity in the form of nodes leased from sita are installed by the
appellant through its agent. The computers so connected and configured which can
perform the function of reservation and ticketing is a part and parcel of the entire crs.
The computers so installed require further approval from appellant/Interglobe who
allows the use of such computers for reservation and ticketing. Without the authority
of appellant such computers are not capable of performing the reservation and ticketing part of the crs system. The computer so installed cannot be shifted from one place
to another even within the premises of the subscriber, leave apart the shifting of such
computer from one person to another. Thus the appellant exercises complete control over
the computers installed at the premises of the subscribers. In view of our discussion in the
immediately preceding paragraph, this amounts to a fixed place of business for carrying on
the business of the enterprise in India. But for the supply of computers, the configuration
of computers and connectivity which are provided by the appellant either directly or
through its agent Interglobe will amount to operating part of its crs system through
such subscribers in India and accordingly pe in the nature of a fixed place of business
in India. Thus the appellant can be said to have established a pe within the meaning of
paragraph 1 of Article 5 of Indo-Spain Treaty.67
It seems doubtful that this aspect of the case is correct. The fact that Galileo had
control over the computers did not mean that it had control over or even access to
the premises in which these computers were situated. Had this tribunal applied the
test set out in Ericsson, the decision would have been different.
66 Ibid., at paragraph 12.1 (quoting Vogel, supra note 40, at 286).
67 Ibid., at paragraph 17.1 (emphasis added).
(2009) vol. 57, n o 2
W e s s ta d 6 8
The requirement in some of the Indian cases that a foreign parent corporation have a
right to enter the offices of an Indian subsidiary may be contrasted with what may be
called a “straightforward” application of the disposal concept in a Norwegian case.
A Swedish corporation hired a Mr. Wesstad in August 1995. His duties included
visiting Norwegian customers and soliciting new potential customers four days per
week and spending one day (Friday) every week planning the next week’s sales work,
writing sales reports, and doing other paperwork. The customers’ orders were either
placed directly from the Norwegian customers to a factory in Sweden or they were
given to Wesstad, in which case he sent them to Sweden. On Fridays, when Wesstad
was planning and reporting his activities, he worked from home. Initially, he received
some but not a full reimbursement from the Swedish employer for the use of his
telephone, fax, and general office equipment. Starting in February 1996, Wesstad was
no longer compensated for the use of the telephone and fax, but was given a proportional increase in salary. This change was made retroactively. The Norwegian tax
authorities argued that the Swedish corporation had a pe in Norway, in Wesstad’s
home office, pursuant to article 5 of the 1995 and 1997 versions of the dtc.69
The court held that the Swedish employer had a pe at Wesstad’s home office in
Norway. It observed that the home office constituted a “place of business” and considered that the term should be interpreted broadly, pursuant to paragraph 4 of the
1977 commentary on article 5 of the oecd model dtc. According to the court, it was
sufficient that the taxpayer had a place of business “at its disposal” (which appears to
mean, in this context, that it paid for and was entitled to use the place, although query
whether it actually was so entitled, given the retroactive change to the reimbursement arrangement). Moreover, it was immaterial whether the Swedish corporation
had any legal claims to Wesstad’s home office.
Based on a review of the Indian cases and this case, there is considerable doubt
about whether there must be a right of disposal in some technical sense, or whether
the fact that a place of business is merely “available” to a non-resident as and when
she desires it is sufficient. Although one or two cases have held otherwise, it nevertheless seems that there must be more than a mere factual use of premises to create
a fixed pe.
68 Norway-Universal Furniture Ind. AB v. Government of Norway, November 19, 1999 (summary
available on Tax Treaty Cases Online (Amsterdam: International Bureau of Fiscal
Documentation)).
69 The Convention Between the Nordic Countries for the Avoidance of Double Taxation with
Respect to Taxes on Income and on Capital, signed at Helsinki on September 23, 1996.
T h e Ca n a d i a n Ca s e s
Dudney70
Mr. Dudney was an American citizen who was ordinarily resident in the United States
and had a degree in aerospace engineering from a us university. In addition, he was
an expert in what at the time was a relatively new discipline known as object-oriented
technology (oot), a sophisticated method used to develop computer systems.
An arm’s-length corporation, Object Systems Group Corporation (osg), entered
into a master services agreement with a Canadian corporation, PanCanadian Petrol
eum Limited (PanCan). osg agreed to train PanCan’s employees in the use of oot.
The agreement did not contain a specific time for completion of the training, and
either party was free to terminate the contract by giving 30 days’ notice. osg used
both its own employees and independent contractors to carry out the PanCan training, but could not find enough qualified instructors in Canada. It therefore recruited
contractors in the United States, including Dudney. Although Dudney expected to
work for osg for a year on the PanCan contract, his contract with osg allowed either
party to terminate the arrangement on 30 days’ notice.
Dudney worked in PanCan’s office in Calgary, Alberta. He started working in a
small room, but after three months, PanCan moved him to a larger room, which he
shared with other consultants. Later PanCan moved Dudney to another room in a
different PanCan building. Dudney carried out the actual oot training in the offices
of the PanCan employees being trained or in a conference room. Sometimes there
were meetings or consultations in the space provided to Dudney. PanCan strictly
limited Dudney’s use of his allocated space: he could use it only to carry out the osg
contract; he could not conduct any other business from there; he could use the telephone only for business related to the osg/PanCan contract; and his access to the
building was controlled by a magnetic card system, and restricted to business hours
on weekdays only.
Dudney did not bring any equipment with him from the United States to PanCan’s offices. He had an office at his home in Texas. From time to time, he used the
PanCan telephone in his allocated space to pick up voice-mail messages left at his
us office. He had no letterhead or business cards identifying him as working at
PanCan. He had no business licence in Calgary, and he was not identified as working in the PanCan premises, either on the directory in the lobby of the building or
otherwise. Dudney invoiced osg directly on a per-hour basis for work done. He
prepared these invoices at either his Calgary home or his Texas office and faxed them
to osg. osg paid him by cheque sent to his Texas office. He maintained a bank account in Calgary, which was used only for personal items related to daily living, and
in Texas, in which he deposited his osg cheques. Dudney lived in Canada for 300
days in 1994 and for about 40 days in 2005. Eventually, he terminated his osg contract for personal reasons.
70 Dudney, supra note 43.
(2009) vol. 57, n o 2
The Crown did not argue that Dudney was resident in Canada. Clearly, he was
resident in Canada for the purposes of the Act—if nothing else, he had sojourned
here for more than 183 days.71 Presumably, the Crown believed that he was tiebroken in the United States under article iv of the Canada-us dtc, perhaps under
the “centre of vital interests” test.72 However, the Crown argued that because Dudney
had performed his Canadian services at a fixed geographic location in Calgary, he
had a fixed base (which the court found to mean essentially the same thing as having
a pe)73 in Canada during 1994 and during 40 days in 1995. Under the dtc, the
Crown contended, a non-resident person who provides services in Canada at an
identifiable location has a fixed base available to him, even if the location is entirely
under the control of someone else. The Tax Court of Canada held otherwise:
The Appellant had no control over the premises in which he worked, nor was he identified with them in any way. This was not seriously challenged by the Respondent,
whose case was simply that by working at a fixed location in Canada, albeit one dictated
and totally controlled by PanCan, the Appellant became subject to taxation here. The
Appellant had no freedom to come and go from the building where he worked except
during normal business hours, and he could not do any work there, except that done
under the contract for PanCan. Any other company wishing to use his services would
not be able to find him there, as he was not identified anywhere as working at that location. He had no space in the building that was his exclusively, and in fact the location at
which he did his work changed from time to time at the sole discretion of the PanCan
personnel. He did not, in my opinion, have a fixed base regularly available to him.74
The Court of Appeal affirmed this decision, stating:
Thus, where a person is denied the benefit of article xiv on the basis that he has a fixed
base regularly available to him in Canada, the question to be asked is whether the person carried on his business at that location during the relevant period. The factors to
be taken into account would include the actual use made of the premises that are alleged to be his fixed base, whether and by what legal right the person exercised or could
exercise control over the premises, and the degree to which the premises were objectively
71 Paragraph 250(1)(a).
72 Based on the writer’s experience, today the CRA would argue strongly that Dudney was tiebroken into Canada.
73 Australia agrees with this. See Australian Tax Office, Interpretive Decision ATO ID 2006/9,
“Taxation of Income of Non-Resident Performing Independent Personal Services: Fixed
Base—The 1967 UK Agreement,” January 13, 2006 (which reversed and replaced ATO ID 2005/75). According to paragraph 1 of the Australian Taxation Office, Practice Statement Law
Administration PS LA 2001/8, “ATO Interpretative Decisions,” revised June 8, 2007, an ATO
ID is an edited and summarized version of a longer and more complete “interpretive decision.”
According to paragraphs 10-12 of Practice Statement Law Administration PS LA 2003/3
“Precedential ATO View,” revised June 8, 2007, an interpretive decision is essentially a binding
ruling on an interpretation of any provision of the laws administered by the Commission of
Inland Revenue of Australia.
74 Dudney, supra note 43, at paragraph 14 (TCC).
identified with the person’s business. This is not intended to be an exhaustive list that
would apply in all cases, but it is sufficient for this case.
The evidence as a whole gives ample support for the conclusion that the premises
of PanCan were not a location through which Mr. Dudney carried on his business. Although Mr. Dudney had access to the offices of PanCan and he had the right to use
them, he could do so only during PanCan’s office hours and only for the purpose of
performing services for PanCan that were required by his contract. He had no right to
use PanCan’s offices as a base for the operation of his own business. He could not and did not use
PanCan’s offices as his own.75
Based on this case, at least in Canada, it seems that there must be an actual right
to use a foreign place of business before a non-resident has a fixed pe there. Mere
factual use is not enough, and even having an office that is in some sense available
does not appear to be enough.76
The Canada Revenue Agency’s Response to Dudney
Originally it seems that the Canada Revenue Agency (cra) accepted the Dudney
decision by suggesting that there must be an element of control over a space in order to create a pe:
The [cra’s] position with respect to the Dudney case has been clearly set out in Technical News Issue No. 22, dated January 11, 2002, where it is provided:
The cra will apply Dudney in cases where it can be concluded that, based on
the facts, the taxpayer does not have sufficient physical control of space to be
carrying on his or her business in a particular place. We do not propose to litigate another case based on the taxpayer’s use of space within the premises of
another person unless we can reasonably maintain, based on the particular facts,
that the taxpayer had sufficient physical control of the space to carry on those
aspects of his or her business that are appropriate to the space.77
75 Ibid., at paragraphs 19-20 (FCA) (emphasis added).
76 In both ATO ID 2006/9 and ATO ID 2005/75, supra note 73, the Australian Tax Office held
that a UK designer who operated for 111 days in Australia out of a client’s office, with no
particular space allocated to the designer and with a different space allocated to the designer at
different times, nevertheless had the space under his disposal. The earlier ID based this
decision on paragraphs 4 and 4.1 of the OECD commentary on article 5, whereas the latter ID,
although citing both of these paragraphs, appears to base its view only on paragraph 4. There is
no discussion concerning how either paragraph supports the view that the designer has the
space at his disposal, given that he was not in control of any portion of the space. In Interpretive
Decision ATO ID 2006/309, “Permanent Establishment: UK Convention and Subsection
3(11A) of the Agreements Act—Sublicensing of Broadcasting and Apparatus Licences,” August
31, 2005, the Australian Tax Office held that a UK broadcaster who licensed certain broadcast
rights to an Australian but who did not have any office space in Australia did not have a fixed
PE there because it had no space there at its disposal through which it carried on business.
77 See Canada Revenue Agency, District Office Memo. 2002-0162287, “Fixed Base in Canada,”
January 2, 2003. Note also that in Wolf v. The Queen, 2002 DTC 6853, at paragraph 39 (FCA),
(2009) vol. 57, n o 2
Similarly, and more recently, the cra stated:
Computer equipment, such as a server on which a Web site is stored is tangible property having a physical location. Therefore, the location of a server in Canada may
constitute a place of business of a non-resident person if it is at the disposal of the person,
such as where it is owned (or leased) and used by the person. A non-resident person
who has its Web site hosted on a server of an independent internet service provider
(isp) in Canada would not generally be regarded as having the isp’s server and its location at its disposal. . . .
Although the non-resident is making supplies to the Canadian company, the nonresident does not have a permanent establishment in Canada merely as a result of the
equipment being located in Canada. The non-resident neither operates nor controls
the use of the equipment. The equipment and its location are not considered to be at the disposal of the non-resident.78
On the other hand, the
stated:
cra
took a somewhat different position in 2005, when it
[I]t is cra’s position that the analysis in making a pe determination should not stop
simply because it is concluded that there is no legal control. The factor of legal control
as described in the Dudney decision was only one of the three factors listed by the Judge
to support her decision and those factors were not intended to form an exhaustive list.
Therefore, having a legal right to exercise control over a place of business is not a requirement
in order for a person to be found to have a pe in Canada, but a factor amongst others.
In making a determination of whether or not a pe exists, there are numerous factors
to be considered that are outlined in the oecd Model Commentary and derived from
jurisprudence. Which factors are most relevant in any particular case will be largely
dependent on the nature of the taxpayer’s business. Under a different set of facts, other
factors could supersede those listed by the Judge in the Dudney decision.79
on facts similar but not identical to those in Dudney, the Crown conceded, based on Dudney,
that Wolf did not have a fixed base regularly available to him in Canada during the relevant
period. This is contrary to the CRA’s pre-Dudney position, as discussed by Sandra E. Jack, Blair
Nixon, and Wanda L. Rumball, “Permanent Establishment: The Canadian Perspective,” in
Brian Arnold and Jacques Sasseville, eds., Special Seminar on Canadian Tax Treaties: Policy and
Practice (Kingston, ON: International Fiscal Association (Canadian branch), 2000), 15:1-35.
There are numerous other comments on Dudney that emphasize the need for control over
premises before a PE can be established. See, for example, Stephen S. Ruby and Gary Webb,
“Canadian Tax Treaty Rules for Taxing Income from Services,” ibid., 19:1-39, at 19:21; Nathan
Boidman, “Does Time Alone Create a Permanent Establishment? The Courts and Revenue
Canada Go Their Separate Ways” (2000) vol. 54, no. 7 Bulletin for International Fiscal
Documentation 339-42; and Nathan Boidman, “Canadian Taxation of Foreign Service Providers:
Treaty Issues and Court Decisions” (2002) vol. 56, no. 7 Bulletin for International Fiscal
Documentation 321-25 (commenting on Dudney and Wolf ).
78 Canada Revenue Agency, GST/HST Policy Statement P-208R, “Meaning of ‘Permanent
Establishment’ in Subsection 123(1) of the Excise Tax Act (the Act),” March 23, 2005
(emphasis added).
79 Income Tax Technical News no. 33, September 16, 2005 (emphasis added).
Based solely on this quotation, it appears that the cra may have been changing
its position on the disposal requirement. But in that same publication, the cra refers
to factors such as the space being at the non-resident’s disposal or under his legal
control as being potentially helpful in determining whether any of the three elements of a pe exist (place of business, fixed, through which it is carried on). So, there
was no real change in position.
Most recently, however, the cra indicates that it will completely ignore80 the
Dudney case:
When reviewing the factor of control over the location, the fca put some importance
on whether the person had legal control of a space and set out a number of indices to be
considered in determining whether a person has the control over the premises at their
disposal necessary to establish that those premises could be considered to be a fixed
base/pe. The fca seemed to put some emphasis on the fact that while Mr. Dudney had
access to the offices of the Canadian taxpayer, and did use them, his access was limited
to the regular office hours of the Canadian taxpayer. While the Dudney case brought
attention to the factor of legal control (sometimes referred to as physical control by
the cra), in cases where we cannot demonstrate that the taxpayer had such control, the case
should be further evaluated to identify if there are other factors that may establish whether the
taxpayer had a fixed base or pe in Canada. All the facts of a particular case should be reviewed in order to assess which factors are most relevant or determinant.81
The balance of the cra’s Transfer Pricing Memorandum tpm-8 very clearly moves
away from Technical News No. 33 in making any notion of disposal or control an
element of the three factors. tpm-8 does not explain the basis on which the cra may
ignore the disposal aspect of a pe. I suggest tpm-8 is simply wrong on this point.
Toronto Blue Jays82
The Ontario Court of Appeal applied Dudney in a provincial tax case. To set the stage,
the tax under the applicable legislation was based on the salaries paid to employees
80 “Ignore” may seem like a harsh word, but I am supported in my use of it by CRA document
no. 2004-0059261E5, July 28, 2004, where the CRA states: “In addition, it is the CRA’s position
that the Federal Court decision in Dudney should generally be restricted to its own facts.”
81 Canada Revenue Agency, Transfer Pricing Memorandum TPM-08, “The Dudney Decision:
Effects on Fixed Base or Permanent Establishment Audits and Regulation 105 Treaty-Based
Waiver Guidelines,” December 5, 2005 (emphasis added).
82 The taxpayer won this case in the Ontario Superior Court (Toronto Blue Jays Baseball Club et al.
v. Ontario (Min. of Fin.), 2005 DTC 5356). The Ontario Ministry of Finance, which did not
want to risk losing on appeal, amended the Employer Health Tax Act (Ontario) before the
appeal to state that employer health tax is payable on all remuneration that an employee who
reports to a PE in Ontario receives during the year, even if the employee also reports to
extraprovincial PEs. This provision, passed in 2004, was made retroactive to 1990, although it
specifically exempted the parties to Toronto Blue Jays from retroactivity pre-2002. As discussed,
the amendment was unnecessary after the Court of Appeal reversed the Superior Court, supra
note 43. See Jules Lewy, “Locking the Stable Door After the Horse Has Been Stolen: Ex Post
Facto Laws,” in Tax Topics, no. 1758 (Toronto: CCH Canadian, November 17, 2005), 1-2.
(2009) vol. 57, n o 2
who worked at a pe in Ontario (the definition of a pe in the statute is essentially the
same as the definition of a fixed pe in article 5(1) of the oecd model dtc). The
corollary to this is that the tax was reduced to the extent that part of the employee’s
salary was attributable to a pe outside Ontario. The Blue Jays, as a professional
sports team based in Ontario, visit many other jurisdictions to play baseball there;
of course, they had to use the dressing rooms and other facilities in the other Canadian provinces and in the United States. The Blue Jays applied for a declaration
that these dressing rooms constituted pes, the goal being to reduce the salaries attributable to the Ontario pe and hence reduce the tax.
The declaration was granted in the Superior Court, but the Court of Appeal, in
finding that the dressing rooms did not amount to a pe, relied on a Quebec tax case:
In Syntax Ltd. v. Sous-Ministre du revenu du Quebec, [1981] r.d.f.q. 1, the Quebec Court
of Appeal dealt with the term “establishment” in the context of a health tax assessed
with respect to an employer’s payroll. At page 6, Bernier, j.a. stated that it is insufficient
for given offices to be used for the employer’s business. Rather, in Bernier, j.a.’s view,
there is a requirement that the establishment belong to the employer. This involves an
element of ownership, management and authority over the establishment.83
The Court of Appeal also relied on Dudney to the effect that the taxpayer must have
“the element of ownership, management and authority over the establishment as in
Syntex Ltd.”84 Accordingly, this reinforces the idea that, at least in Canada, a right of
disposal is required to create a fixed pe. The Blue Jays certainly had factual use over
the other teams’ dressing rooms and to a certain extent had these rooms available to
them as they wished (at least during the time they were there). But these circumstances were still not enough to create a fixed pe.
The cra moved quickly to try to minimize or distinguish the Blue Jays case on
the basis that it concerned a provincial statute:
Since that decision concerns Ontario’s Employer Health Tax Act and not the interpretation of a treaty, it is not precedent setting for cases involving the concept of pe
under our treaties[ 85] . . . [W ]e believe that the Blue Jays decision is of very little persuasive value.86
Given that the Ontario Court of Appeal in Blue Jays relied on the oecd commentary to support its decision, it seems doubtful that the supposed difference in
definitions between the statute and the model dtc is a strong basis on which to distinguish the case. As for what the cra saw as the court’s apparent failure to review
83 Toronto Blue Jays, supra note 43, at paragraph 17.
85 This was clearly true of the definition in issue in the case as well, and therefore not a valid point.
86 See “Non-Residents Performing Services in Canada—An Update on Withholding Tax and
Permanent Establishment Issues—Revised Excerpt from June 2005 Q & A Handout” (2007)
vol. 6, no. 3 Toronto Centre CRA & Professionals Consultation Group Newsletter, question 19.
all the elements of a pe, there was no need for such analysis. It was not disputed that
the Blue Jays carried on their business in the dressing rooms, that the dressing rooms
were fixed, and that they were fixed permanently. The only element in dispute was
whether the Blue Jays had sufficient control over the premises to make them at their
disposal. The court said they did not:
In conclusion, I am in agreement with the appellant’s submissions that the Teams connections with non-Ontario venues and the control of these venues is relatively so transitory
that they cannot be considered to be fixed places of business.87
American Income Life Insurance and Knights of Columbus88
While American Income Life Insurance (aili) and Knights of Columbus are two different
cases, they involved the same Crown counsel, the same judge, and the same expert
testimony. Counsel for the two insurance companies collaborated with each other
in developing their arguments, and the facts are (relatively speaking) similar in each
case. It is therefore convenient to discuss the two cases at the same time.
aili was a commercial enterprise in the United States that was “carrying on business” in the United States, New Zealand, and Canada. Knights of Columbus was a
registered charity in the United States that carried on business there and in Canada.
Both corporations carried on their businesses through a series of agents. While the
details were slightly different in each case, at the top of the pyramid was a chief
agent, who was required to act by Canadian regulatory laws. He was a lawyer in one
case and an accountant in the other; his work for his insurance company was only a
small part of his overall professional activities. He carried on his duties from his
usual professional office and charged an hourly fee for his service. No insurance activity took place in his office.
Underneath the chief agent was a hierarchy of agents. Each level of agent controlled several agents in the level below. Each agent earned a commission paid out
of the insurance premiums payable by the insurance customer. The more agents an
agent could recruit, the more commissions he got paid (up to certain levels). Agents
87 Toronto Blue Jays, supra note 43, at paragraph 30 (emphasis added). In Ontario, Ministry of
Revenue, Employer Health Tax Information Bulletin, “Permanent Establishment,” January 2009,
released May 1, 2009, the Minister of Revenue for Ontario appears to recognize the
requirement of an element of control to create a fixed PE:
A permanent establishment includes any fixed place of business in Ontario where dayto-day business activities are carried on (including a function of government), whether
it is for gain or non-profit. For example, this could include an office, agency, branch,
factory, farm, gas or oil well, mine, timberland, warehouse or workshop. Some other
criteria include:
n The place of business may exist for only part of the year (and does not need to
exist for a long time).
n The place of business usually belongs to the employer or the employer has certain control
and authority over it.
88 Supra note 43. I was on the team acting for the Knights of Columbus.
(2009) vol. 57, n o 2
were responsible for recruiting their own subagents. The lowest level were field
agents, who actually met with customers and tried to convince them to buy insurance. Field agents generally worked out of their homes, and had some office space
set aside there. The insurance company did not have access to the homes or pay for
the expenses incurred by the field agents in running their offices. Some of the agents
were required to name their insurance company on their business cards and to describe themselves as agents. They could not lease equipment or enter into similar
contracts in the name of the insurance company. The insurance company approved
or rejected applications for insurance in the United States.
The minister assessed each company on the basis that it was carrying on business
in Canada through either a fixed pe or an agency pe. It appears not to have been
debated that the companies were carrying on business in Canada,89 so the only issue
was whether there was a pe in Canada. Dealing only with the fixed pe issue, the court
spent a great deal of time in determining whose business was being carried on by the
agents in their home offices: was it the agent’s business of being an agent and earning a commission, or was it the insurance company’s business of selling insurance?
The Crown relied heavily on a Quebec case, Panther Oil,90 but the court easily
distinguished it on the basis that the regulation that defined a pe in this case did not
require the existence of a fixed place of business. Furthermore, that case was not followed by the Supreme Court of Canada in Sunbeam, where the court held that the
same regulation required the non-Quebec enterprise to have a fixed place of business, a “local habitation of its own.”91
The court in the two insurance cases also relied on Dudney to find that a pe required a non-resident to have a fixed place of business in Canada. The court held
that the agents were carrying on their own business at their offices and not that of
the insurance company, and therefore there was no fixed pe. In aili, the court set out
its view about the requirements for a fixed pe, which included a right to control the
premises. Thus, these cases mirror the Dudney and Blue Jays cases on this point.92
The court relied heavily on testimony provided by experts on dtcs and the oecd
commentary. The court interpreted this expert evidence to mean that the issue of
whether a non-resident is carrying on business in Canada through a fixed place of business is heavily dependent on, if not synonymous with, the question of whether the
89 The court mentions paragraph 253(b) in AILI, which presumably was also the basis for treating
the Knights of Columbus as carrying on business in Canada.
90 MNR v. Panther Oil & Grease Manufacturing Co. of Canada Ltd., 61 DTC 1222 (Ex. Ct.).
91 Sunbeam Corporation (Canada) Ltd. v. MNR, 62 DTC 1390, at 1393 (SCC).
92 In Audit Manual, supra note 3, at chapter 15, the CRA states that a public warehouse that is used
by a corporation, but that is neither owned by it nor under some measure of its control, does not
constitute by itself a fixed PE of the corporation. It also said that an office that is maintained and
controlled by an employee of the corporation at the employee’s choice and expense (rather than
at the employer’s expense) is not a fixed PE of the employer. These examples are taken from
paragraph 3 of Interpretation Bulletin IT-177R2, “Permanent Establishment of a Corporation in
a Province,” November 11, 2003. In this respect, the CRA is in agreement with the court in AILI.
non-resident has the place of business at her disposal. If she does not, then she cannot
be carrying on her business in that place and therefore cannot have a fixed pe. In
aili, the court stated:
The second element of expert testimony that cemented my view with respect to the
fixed place of business permanent establishment is the experts’ testimony regarding
the need for a power of disposal of the premises. The Respondent maintains that the
paragraphs of the oecd commentary casts doubt on this principle, confirmed by both
Mr. Rosenbloom and Mr. Vann, that a fixed place of business can only exist if the
premises are at the disposal of the non-resident. I disagree with the Respondent. The
commentary gives several examples. I read nothing in them that diminishes the importance of the power of disposal: quite the contrary. I concluded that ail did not have
a fixed place of business. The experts’ testimony regarding the need for a power of disposal,
applied to the facts before me, confirms my view that ail does not have a fixed place of business in Canada, as there are no premises over which ail has any power of disposition.93
As to exactly what is a “right of disposal,” the expert evidence was not too clear.
In Knights of Columbus, the court referred to two of the experts on this point as
follows:
Although the Commentary to the oecd Model refers to a place of business being “at the
disposal” of the enterprise, the experts provided valuable insight as to what was intended
by this aspect of the fixed place of business. It does not mean simply that the Knights
of Columbus must have a key to the agent’s premises, as this would too easily circumvent the objective of this requirement, though, according to Mr. Vann, it is necessary
to show an independent right of disposition in the principal, in this case the Knights of
Columbus. Mr. Vann did not, in any detailed way, clarify the independent right, other than
to stress the importance of distinguishing between the agent’s fixed place of business
and the enterprise’s fixed place of business. This begs the question—whose business is
the agent carrying on at his place of business, or as Mr. Rosenbloom put it:
A place of business that is simply useful or used by an agent to carry on its function as an agent must be distinguished from a place of business that is used by
the Knights to carry on its business, and the tool that we have to make that distinction is the words “at the disposal.”94
In the final result, the court was not required to, and did not, give an exhaustive
definition of the nature of the right of disposal that must exist before a non-resident
can be said to be carrying on his business through a fixed place in a source state.
The most the court felt that it was required to do was to give an example of what
might or might not meet the concept. The following quotation is from Knights of
Columbus:
93 AILI, supra note 43, at paragraph 87 (emphasis added).
94 Knights of Columbus, supra note 43, at paragraph 40 (emphasis added).
(2009) vol. 57, n o 2
Further, in his opinion, after quoting the oecd Commentary, Mr. Vann clarifies the
position as follows:
From these extracts it is clear that a place of business of a representative of an
enterprise cannot be a place of business of the enterprise unless the enterprise itself or through other representatives has access to the fixed place of business in its
own right and not simply because it is the place of business of the representative.
For the Field Agents’ residences to be considered fixed places of business of the
Knights of Columbus, the Knights of Columbus must have a right of disposition over
these premises. A right of disposition is not a right of the Knights of Columbus to sell
an agents’ house out from under him. The Knights of Columbus might be viewed as having
the agents’ premises at its disposal, for example, if the Knights of Columbus paid for all expenses
in connection with the premises, required that the agents have that home office and stipulate
what it must contain, and further required that clients were to be met at the home office and
in fact the Knights of Columbus’ members were met there. In such circumstances, although
the Knights of Columbus may not have a key to the premises, the premises might be
viewed as being at the disposal of the Knights of Columbus. This would be consistent
with Mr. Rosenbloom’s comments.
What it comes down to is distinguishing the agents’ business activities from the
Knights of Columbus’ business activities. If sufficient Knights of Columbus’ business activities are carried on at the agents’ home offices, then the condition of the premises being at the
Knights of Columbus’ disposal would be met. The Respondent argues that the agents’ activities cannot be segregated—everything they do goes towards obtaining an application,
and that is the Knights of Columbus’ business. I disagree with the Respondent.
Once it has been determined that the Field Agents are independent contractors,
which has been agreed, that is, that they are in business on their own account, then it
is illogical to find that all the organizing and recordkeeping that they conduct at home is
anything other than business activities of their own business. The Knights of Columbus do
not have any right of disposition over these premises. The argument that payment of an expense
commission creates some such right is not well founded. The expense commission is simply
an added commission bearing no relation to actual expenses, which are totally borne by
the agent. As well, the agents employ no Knights of Columbus’ staff, have no Knights
of Columbus’ signage on the property, are not under the control of the Knights of Col
umbus for what is required at the home office, and simply provide no access to the
Knights of Columbus. The agents do not meet applicants at the premises. The Knights
of Columbus make no operational decisions at the Field Agent’s premises. The Knights of
Columbus had no officers, directors or employees even visit the agents’ home offices, let
alone have any regular access. All risks connected with carrying on business at the home
offices are borne by the agents themselves. The agents are not carrying on the Knights
of Columbus’ core business from these premises. Their premises cannot therefore be
found to be a fixed place of business permanent establishment.95
Thus, the court found that having a right of disposal over the agents’ premises
was a necessary condition to having a fixed pe and that no right of disposal existed
on the facts of the cases.
95 Ibid., at paragraphs 77-80 (emphasis added).
T h e Pa i n t e r E x a m pl e
It is now possible to discuss what has been called the “infamous,”96 “controversial,”97
and “confusing”98 painter example in paragraph 4.5 of the commentary:
A fourth example is that of a painter who, for two years, spends three days a week in the
large office building of its main client. In that case, the presence of the painter in that
office building where he is performing the most important functions of his business
(i.e. painting) constitute a permanent establishment of that painter.
As noted above, the biac was so upset by this example that it made several lengthy
submissions to the oecd to revise or eliminate it. Germany entered an observation
to this example (paragraph 45.7 of the commentary). One senior authority has clearly
expressed his “doubts” concerning the correctness of the example.99 The painter
example appears to contradict the commentary in paragraph 4, the example in 4.2,
the requirement for the office to be at the employee’s disposal in paragraph 4.3, the
example in paragraph 4.4, and the requirement for disposal in paragraphs 4.6, 41,
41.1, 42, 42.3, and 42.5.100 The Canadian decisions discussed above are clearly contrary to the painter example, as is the decision in Ericsson. In my view, this example
is simply out of step with the balance of the commentary on article 5.101
96 Lee A. Sheppard, “Revenge of the Source Countries?” (2005) vol. 106, no. 12 Tax Notes 1362-75,
at 1364.
97 Richard J. Vann, “Tax Treaties: The Secret Agent’s Secrets” [2006] no. 3 British Tax Review
345-82, at note 89.
98 Mary C. Bennett and Carol A. Dunahoo, The NFTC Tax Treaty Project: Towards a U.S. Tax Treaty
Policy for the Future: Issues and Recommendations (Washington, DC: National Foreign Trade
Council, May 2005), 81 (online: http://www.nftc.org/default/tax/tax%20treaty%20project/
NFTC%20-%20Tax%20Treaty%20Project%20(Full%20Report%20-%20May%202005).pdf ).
99 Jürgen Lüdicke, “Recent Commentary Changes Concerning the Definition of Permanent
Establishment” (2004) vol. 58, no. 5 Bulletin for International Fiscal Documentation 190-94, at 191.
100 Paragraphs 42.1 and following of the commentary on article 5 deal with electronic commerce.
Essentially, and in an over-simplification, they provide that a computer server—that is, a machine
that actually connects to the Internet—may be a fixed PE if it is located in a source state and is
at the disposal of a non-resident from the residence state; however, the mere use of a server owned
by a third-party Internet service provider or ISP to host the non-resident’s Web site does not
create a fixed PE if the server is not at the non-resident’s disposal. This commentary was applied in
Australian Taxation Office, Draft Tax Determination TD 2004/D77, “Does a Resident of a Country
with Which Australia Has a Tax Treaty, Have a Permanent Establishment Solely from the Sale
of Trading Stock Through an Internet Website Hosted by an Australian Resident Internet
Server Provider?” November 24, 2004 (which was finalized in TD 2005/2, March 9, 2005).
101 In Australian Taxation Office, ATO Interpretative Decision ATO ID 2005/24, “Permanent
Establishment of a Non-Resident Entity with Employees in Australia,” January 21, 2005, the
taxpayer corporation was a resident of Singapore for taxation purposes. It rented space in a
warehouse facility in Australia that was used solely to store spare equipment for undertaking
the operations of the entity. The warehouse facility was not used by the taxpayer as an office to
conduct its usual business activities, such as administration, marketing, and design. The taxpayer
(2009) vol. 57, n o 2
It is possible that the painter example is intended to include certain assumed
facts.102 For example, if the painter uses the building as a true place of business—he
arranges other jobs from there, issues invoices from there, and stores materials to be
used on all his jobs there—then it may be said that he has the place at his disposal, and
the place is a fixed pe. On the base facts of the example, however, his “tenuous”103
rights over the place seem to suggest that it is not at his disposal and is not a fixed
pe. The fact that he performs “the most important functions of his business” at the
premises seems to me irrelevant. Compare, for example, the salesman example in
paragraph 4.2 of the commentary or the lawyer example accepted by the Federal
Court of Appeal in Dudney.
If one did not know better, one would suggest that the painter example was inserted specifically to get around the Dudney case104 (essentially an administrative attempt
to insert a services pe provision).105 When a services pe provision is inserted in a
specific dtc (such as the fifth protocol to the Canada-us dtc or any dtc modelled
after the un model dtc), the painter example is not only unnecessary but also contradicts the time limitations built into this provision. It seems there are only two
choices: when there is no such provision in a dtc, it is difficult (if not impossible)
to conclude that the painter has a fixed pe. On the other hand, if the painter has a
fixed pe on the basis of the bare facts outlined in the example, then the whole concept
of disposal built into the balance of the commentary on article 5 is simply wrong.
Of the two choices, the former is much easier to accept than the latter.
corporation had one employee in Australia who had no authority to enter into contracts on
behalf of the corporation, had no office, and performed work solely on clients’ premises. The
Australian employee and other employees from Singapore spent between two and eight weeks
at the offices of clients undertaking installation projects and moved between sites within the
offices of clients. The functions undertaken by the Australian employee were to support project
implementation and marketing. The employee did not perform any work from the warehouse
or other facilities provided by the corporation.
The Australian Tax Office noted that paragraphs 4.2 to 4.5 of the OECD commentary on
article 5 discuss situations in which the premises of a third-party enterprise can constitute a
permanent establishment as a result of the presence of a representative of the non-resident at
these premises. However, in this case, the tax office ruled that the employees of the taxpayer
corporation were not identified with any particular location within the clients’ premises and
that the taxpayer did not have a fixed PE within these premises. This ruling reached exactly the
right result for exactly the right reason, accords with the Dudney and Blue Jays cases, and
contradicts the painter example.
102 My gratitude to Philip Baker for making this point.
103 Vann, supra note 97, at 375.
104 See Albert Baker, “Painting into a Corner?” (2002) vol. 10, no. 1 Canadian Tax Highlights 4-5,
at 5, who notes, in respect of the draft changes to the OECD commentary on article 5: “The
draft appears to require less significant presence than Dudney, which appeared to require the
physical control of a particular space.”
105 The new services PE provision added to the Canada-US DTC by the fifth protocol, supra note
20, is expressly intended to overrule the Dudney case. See the United States, Staff of the Joint
Committee on Taxation, Explanation of Proposed Protocol to the Income Tax Treaty Between the United
States and Canada, JCX-57-08 (Washington, DC: Joint Committee on Taxation, July 8, 2008).
From a policy (perhaps philosophical would be a better word) point of view, the
painter example is wrong: under the pe threshold concept, it is not sufficient for a
non-resident to carry on business in a source state to create a liability for tax there;
she must have a sufficient connection to the source state that it becomes her business
“home.”106 It seems doubtful that the painter, or anyone without some measure of
control over her place of business, would call that place her home. In the absence
of a measure of control, she is there by invitation only, and may be uninvited at any
time. This is not the type of connection that creates a threshold for taxation in the
source state. It has always been clear in the oecd commentary from 1963 and onward
(and indeed in the Organisation for European Economic Co-operation (oeec) and
the League of Nations commentary, which preceded it) that it is possible to carry on
a business, even a very substantial business, in a source state without being taxable
there, if no sufficient connection to this state exists.107
Without referring to it directly, the German Supreme Tax Court has held that the
theory expressed in the painter example is wrong.108 A Dutch corporation acted as a
106 Skaar, “Erosion of the Concept of Permanent Establishment,” supra note 40, at 189; and Dale
Pinto, “The Need To Reconceptualize the Permanent Establishment Threshold” (2006) vol. 60,
no. 7 Bulletin for International Taxation 266-79, at 273.
107 The United Nations, Economic and Social Council, Committee of Experts on International
Cooperation in Tax Matters, Subcommittee on Definition of Permanent Establishment,
Proposal for Amendments to Article 5 of the United Nations Model Double Taxation Convention
Between Developed and Developing Countries, UN Doc. E/C.18/2005/5 (New York: United
Nations, 2005), paragraph 19, specifically determined that the painter example was correct,
although it recognized Germany’s dissension, and apparently one member of the subcommittee
agreed with Germany (Proposal for Amendments to Article 5 of the United Nations Model Double
Taxation Convention Between Developed and Developing Countries, UN Doc. E/C.18/2006/4 (New
York: United Nations, 2006), paragraph 16). According to the subcommittee, a fixed PE exists
if the place of business is the object of a non-resident’s activities (the painter has the building at
his disposal because he works on the building). With respect, this is incorrect: the fact that the
painting of the building is the painter’s activity says nothing about whether the building is at
his disposal. As noted above, the example in paragraph 4.5 of the OECD commentary provides
little or no information about what access the painter has to the building and under what
circumstances. Unless disposal is merely a factual use test, nothing can be gleaned from
paragraph 4.5 about whether the painter does or does not have the premises at his disposal.
108 Decision of the Bundesfinanzhof, IR 30/07, issued June 4, 2008, published September 10,
2008, reversing the decision in FG Cologne, January 24, 2007, 13 K 336/07 (EFG 2007, 1349).
According to its Web site, this is the court of last resort within the German jurisdiction over tax
and customs matters. The decision in German is available at http://www.bundesfinanzhof.de/
www/entscheidungen/2008.9.10/1R3007.html, and an unofficial translation can be obtained
from that site. For comments, see Andrew Miles and Marie-Curie-Straße, “Continual Activity
at a Single Location Not a PE” (online: http://www.pwc.de/portal/pub/!ut/p/kcxml/04
_Sj9SPykssy0xPLMnMz0vM0Y_QjzKLd4p3cXQFSYGZbhb6kRAGVMwg3hEhEqTvre_rkZ
-bqh-gX5AbGlHu6KgIAIe1NZ0!?siteArea=49c5a94064a19372&content=e551fc44d5711fc
&topNavNode=49c24230781701df ), or Hartwig Welbers, “Germany: No PE Merely Because
of Continual Use of Facilities” (2008) vol. 19, no. 11 International Tax Review 51. This case
concerned the definition of PE in section 12 of the German general tax code, or Abgabenordnung,
which I am informed is substantially similar to that in article 5 of the model DTC. Thank you
(2009) vol. 57, n o 2
subcontractor in Germany to clean a nato airbase for at least 18 years. Its employees
were all resident in Germany. The employees, through their security clearances and
security badges, had access to the portions of the airbase where they were required
to clean, including certain security zones. They had key access to a living room with
a kitchen, lockable cabinets, and shower facilities. There was a lounge with a single
telephone and fax, which the employees could use. The Dutch corporation did not
have an office at the airbase apart from the employees’ use of the various facilities.
The Supreme Court held that the Dutch corporation had no legal right to have the
airport at its disposal, and therefore had no fixed pe there. The court held that
merely having authorization to use the airbase in the interests of another did not
create a fixed pe, nor did the actual use of the airbase. This was true even though
the actual use of the airbase continued over many years.109 Because there were no
binding “roots” to the airbase, there was no fixed pe.
This decision is entirely consistent with the salesman example in paragraph 4.2
of the oecd commentary on article 5 and entirely inconsistent with the painter example. Clearly, the Dutch corporation was performing the most important part of
its work at the airbase in Germany, yet was held not to have a fixed pe there.
L at e r DTC s
If the above discussion arises from amendments to the oecd commentary on article 5 published in 2002 (or possibly on the earlier 2000 report), how does it apply
to Canada’s dtcs that were entered into before 2002? Should the concept of a pe
in these earlier dtcs be interpreted in accordance with the later commentary? To
answer this question, it is necessary to review, briefly, some principles of dtc interpretation and then to discuss a recent decision that dealt with this issue.
Plain Language and Purpose
dtcs have been around for a long time, and certain principles have been developed
for interpreting them. As a starting point, the correct approach in interpreting a
treaty to which Canada is a party is article 31(1) of the Vienna Convention on the
Law of Treaties,110 which provides:
to Dr. Hartwig Welbers, tax partner with PricewaterhouseCoopers, Germany, for assistance on
this point.
109 Essentially overruling Fowler v. MNR, 90 DTC 1834 (TCC), which was expressly not followed
in Toronto Blue Jays, supra note 43.
110 Vienna Convention on the Law of Treaties, signed at Vienna on May 23, 1969, UN doc. A/Conf.
39/27, fourth annex, UNTS 1155/331, [1980] Can TS no. 37. The Vienna convention has not
been implemented in Canada through domestic legislation, and in that sense is not in force in
Canada. Nevertheless, the Vienna convention is generally viewed as embodying customary
international principles of treaty interpretation and hence has been cited in many Canadian
cases as setting out applicable principles for interpreting a treaty, including a DTC. See Crown
Forest, supra note 9.
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to
be given to the terms of the treaty in their context and in the light of its object and
purpose.
Article 31(1) first refers to the “ordinary meaning” (which is often called the “plain
meaning”) of the terms of the treaty. This point is often overlooked by textbook
writers and courts, but has been endorsed in no uncertain terms by the Supreme
Court of Canada. In Crown Forest, the court stated:
In interpreting a treaty, the paramount goal is to find the meaning of the words in
question. This process involves looking to the language used and the intentions of the
parties. Both upon the plain language reading of Art. iv and through an interpretation
of the goals and purposes of the Canada-United States Income Tax Convention (1980), I
reach the same destination: to allow the appeal.111
Thus, the first step in the interpretive process is looking to the plain language used.
It is then necessary to take into account the goals and purposes of the dtc as a
whole and the particular provisions in question. But it may happen that the text of
a provision in a dtc is so clear that no reference to the object and purpose is required or permitted.112
The OECD Commentary
In 1961, Canada and the United States joined the oeec, which was composed of
various European countries. Since both new member states were from North America, the oeec changed its name to the Organisation for Economic Co-operation and
Development. The oeec had and the oecd created a fiscal committee, whose main
goal is to create model dtcs. The models serve as templates on which contracting
states may base their dtcs. The first oecd model dtc was issued in 1963113 and the
second in 1977;114 various amendments to the model have been made ever since.
At the same time as the oecd issues or amends a model dtc, it issues a commentary to explain the various provisions of the model or amendment. In Crown
Forest, the Supreme Court of Canada reasoned that, since the dtc at issue was
based on the oecd model, it made sense to look at the model and commentary to
see how the oecd explained the relevant article:
111 Crown Forest, supra note 9, at 5393 (emphasis added).
112 Deutsche Asia Pacific, supra note 8.
113 Previous models had been issued by the forerunners to the OECD, including the OEEC and
the League of Nations, since 1923.
114 The 1963 model DTC, supra note 23, was officially a draft but was always taken as a complete
model. It was substantially amended in 1974, and these amendments, along with others, were
inserted in the 1977 model, supra note 24. Since 1992, the OECD has moved to a looseleaf
version of the model; amendments to it, and especially to the commentary on the model, are
now issued very frequently.
(2009) vol. 57, n o 2
I now turn to another set of extrinsic materials, other international taxation conventions
and general models thereof, in order to help illustrate and illuminate the intentions of
the parties to the Canada-u.s. Income Tax Convention (1980). Articles 31 and 32 of the
Vienna Convention on the Law of Treaties (Can. t.s. 1980 No. 37) indicate that reference may be made to these types of extrinsic materials when interpreting international
documents such as taxation conventions; see also Hunter Douglas Ltd. v. The Queen, 79
DTC 5340, (f.c.t.d.) at pp. 5344-5345 and Thiel v. Federal Commission of Taxation, 90
a.t.c. 4717 (h. c. Aus.), at p. 4722.
Of high persuasive value in terms of defining the parameters of the Canada-United
States Income Tax Convention (1980) is the o.e.c.d. Model Double Taxation Convention on
Income and Capital (1963, re-enacted in 1977): Arnold and Edgar, eds., Materials on
Canadian Income Tax (9th ed. 1990), at p. 208. As noted by the Court of Appeal, it
served as the basis for the Canada-United States Income Tax Convention (1980) and also
has world-wide recognition as a basic document of reference in the negotiation, application and interpretation of multi-lateral or bi-lateral tax conventions.115
A great amount of writing has been devoted to trying to explain how, if at all, the
oecd commentaries fit into the interpretative scheme of the Vienna Convention.116
In my respectful opinion, this debate is sterile: if two countries enter into a dtc and
explicitly or implicitly base this dtc on the oecd model, then, in the absence of
evidence to the contrary, it is reasonable to assume that the countries have adopted
the explanation of the language of the dtc into which they have entered as provided
by the commentary as it read at the time that they entered the dtc.117 The introduction portion of the commentary to the 1980 United Nations model dtc118 puts
this somewhat self-evident thought very well:
115 Crown Forest, supra note 9, at 5398.
116 It would be difficult to cite all the relevant authority. See, for example, Sjoerd Douma and
Frank Engelen, eds., The Legal Status of the OECD Commentaries (Amsterdam: International
Bureau of Fiscal Documentation, 2008).
117 Compare Harel v. DMR of the Province of Quebec, 77 DTC 5438 (SCC). In Harel, the issue was
the correct interpretation of a Quebec law that was modelled on a federal law. At the time
Quebec brought its law into force, federal administrators had put a gloss on the federal law.
The court held that in adopting the federal law, Quebec must be viewed as having adopted the
gloss as well, unless something in the Quebec law contradicted the gloss, which in this case it
did not. This case has been interpreted, quite obviously wrongly, as indicating that a tax
authority’s administrative publications on a statutory tax provision can be given weight in
interpreting that provision.
118 The UN model was developed for use between so-called developed and developing countries—
that is, between economically established and not-yet-economically-established countries. It
was issued in 1980 and most recently reissued in 2001. Its focus is on allowing taxation by the
source state (generally the developing country) rather than the residence state (generally the
developed country). For an overall comment on the 2001 UN model, see Edwin van der
Bruggen, “A Preliminary Look at the New UN Model Tax Convention” [2002] no. 2 British
Tax Review 119-34.
Within the United Nations, the model DTC falls under the auspices of the Economic and
Social Council (ECOSOC). In 1968, the ECOSOC established the Ad Hoc Group of Experts
If the negotiating parties decide to use in a treaty wording suggested in the United
Nations Model Convention, it is to be presumed that they would also expect to derive
assistance in the interpretation of that wording from the relevant commentary.119
on Tax Treaties Between Developed and Developing Countries pursuant to the ECOSOC
resolution 1273 (XLIII) of August 4, 1967, after considerable efforts made by the League of
Nations, the Organisation for European Economic Co-operation, and the United Nations. In
1980, the ad hoc group finalized the United Nations Model Double Taxation Convention
Between Developed and Developing Countries (supra note 20), the aim of which was to
promote the conclusion of treaties between developed and developing countries that were
acceptable to both parties and fully safeguarded their respective revenue interests.
In its resolution 1980/13 of April 28 1980 (see UN Doc. E/1980/80), the ECOSOC gave a
broad title to the group—namely, the Ad Hoc Group of Experts on International Cooperation
in Tax Matters—and increased its membership from 20 to 25 drawn from tax administrators of
10 developed and 15 developing countries and economies in transition. The group of experts
finds its mandate in ECOSOC resolution 1273 (XLIII), which “requests the Secretary-General
to set up an ad hoc working group consisting of experts and tax administrators nominated by
the Government, but acting in their personal capacity, both from developed and developing
countries and adequately representing different regions and tax systems, with the task of
exploring, in consultation with interested international agencies, ways and means of facilitating
the conclusion of tax treaties between developed and developing countries.”
The mandate of the group has been broadened to include the tax treaties between developed
and developing countries as well as international cooperation in tax matters. Therefore, the
group examines transfer pricing; mutual assistance in the collection of debts, and the protocol
for the mutual assistance procedure; treaty shopping and treaty abuses; the interaction of tax,
trade, and investment; financial taxation and equity market development; the tax treatment of
cross-border interest income and capital flight; and the taxation of electronic commerce.
By its resolution 2004/69 of November 11, 2004 (see UN Doc. E/2004/L.60), the ECOSOC
renamed the group the Committee of Experts on International Cooperation in Tax Matters. A
subcommittee of the committee focuses on PEs and has published several papers on article 5 of
the UN model DTC and its commentary at the first through fourth sessions of the committee.
These have been presented to, and in the main accepted by, the committee. They are available
on the committee’s Web site at http://www.un.org/esa/ffd/tax/ (unfortunately, not all of the
reports issued by the original ad hoc group of experts are publicly available, although some are).
The subcommittee reported to the third annual session of the committee in 2007 (UN Docs.
E/C.18/2007/CRP.4, E/C.18/2007/CRP.3, and E/C.18/2007/CRP.3/Corr.1) following
presentations by Mr. Sollund in 2006 at the second annual session (see UN Doc. E/C.18/2006/4)
and by Mr. Pijl at the first annual session in 2005 (see UN Doc. E/C.18/2005/5, supra note 107).
In October 2008, at the committee’s fourth annual session, a cumulative paper was presented
which includes all of the subcommittee’s recommendations regarding article 5 (UN Doc. EC.18/
2007/CRP.3/Rev.1). The most recent report of the subcommittee, UN Doc. E/C.18/2008/
CRP.3, October 2008, is an update of UN Doc. E/C.18/2007/CRP.4.
The subcommittee’s view is that the concept of disposal narrows the definition of a PE—
that is, under the disposal concept, fewer situations will exist that create a fixed PE than would
be the case without the concept. See UN Doc. E/C.18/2005/5, supra note 107, at paragraph 7.
The subcommittee decided to accept the disposal concept despite its focus on the source state,
but suggested that “substance” should take priority over form. There is no exact explanation of
what substance means, although examples are given in UN Doc. E/C.18/2005/5, at paragraphs
32 and 34.
119 Paragraph 36. This was essentially confirmed by the US Federal Court of Claims in Natl.
Westminster Bank v. US, 99-2 USTC paragraph 50,654, at 89,165 (Fed. Cl.) (appeal denied, 232
(2009) vol. 57, n o 2
The Residence State’s Interpretation
When a source state seeks to interpret a dtc to see if a non-resident is taxable on a
certain kind of income, it is relevant to learn how the domestic law of the residence
state would regard the position being asserted by the source state. The reason for
this, as noted in Crown Forest, is that a dtc is at its heart a contract, and therefore
should be interpreted as both contracting states intended. If the residence state would
interpret the dtc a certain way, it is likely intended that the source state interpret it
in the same way:
Contrary to an ordinary taxing statute a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal
or legalistic interpretation must be avoided when the basic object of the treaty might
be defeated or frustrated in so far as the particular item under consideration is
concerned. . . .
It would be odd if in construing an international treaty to which the legislature has
attempted to give effect, the treaty were not interpreted in the manner in which the state
parties to the treaty must have intended.120
Other Models
Finally,121 it is permissible to look to other dtcs, including other model dtcs, to
see how they have dealt with a particular issue. In Crown Forest, the court said:
The o.e.c.d. Model Convention is not the only international agreement worthy of consideration as an extrinsic material. I also draw from the U.N. Model Convention.122
F. 3d 906 (Fed. Cir. 2000); aff ’d. 512 F.3d 1347 (2008); rehearing denied 2008 US App. LEXIS
11124 (Fed. Cir., Apr. 21, 2008)), where the trial court said: “The Commentaries on the
Articles of the Draft Convention, OECD Document, Annex II, are presumed to have been in
the minds of the negotiators when they drafted the Treaty; consequently, they are persuasive
in resolving disputed interpretations.”
120 Crown Forest, supra note 9, at 5396 (quoting Gladden Estate v. The Queen, 85 DTC 5188, at
5191 (FCTD) and 5399 (quoting Thomson v. Thomson, [1994] 3 SCR 551, at 578) (emphasis
added). On the other hand, as indicated in Deutsche Asia Pacific, supra note 8, the mere fact that
a provision is inserted in a DTC at the insistence of or because of an underlying policy of one
contracting state does not mean that the provision cannot be applied by the other state.
121 This is not to suggest that I have set out every principle or even all the important principles of
DTC interpretation. Such a task is outside the scope of this paper. See, for example, Michael N.
Kandev, “Tax Treaty Interpretation: Determining Domestic Meaning Under Article 3(2) of the
OECD Model” (2007) vol. 55, no. 1 Canadian Tax Journal 31-71.
122 Crown Forest, supra note 9, at 5399. See AILI and Knights of Columbus, supra note 43, where the
court relied on the existence of a clause in the UN model DTC, combined with the absence of
such a clause in either the OECD model DTC or the Canada-US DTC, to infer that no such
clause could be read into the latter.
L at e r Co m m e n ta r i e s
In Prevost Car,123 the Federal Court of Appeal recorded that it was prepared to interpret a dtc on the basis of later oecd commentary in accordance with the agreement
of counsel. The court indicated that the later commentary could be reviewed when
it offered a “fair interpretation” of the oecd model on which the particular dtc in
dispute was based, as long as it did not conflict with the commentary in force at the
time that the dtc in issue was negotiated. In other words, the later commentary
must be “eliciting, rather than contradicting” the interpretation expressed in the
previous commentary.
Assuming this view is valid,124 all of Canada’s dtcs should be interpreted to require
a non-resident to have a right of disposal over the place of business in Canada before
the non-resident can be found to have a fixed pe here. The 2002 oecd commentary
on article 4 appears to fall into the category of “eliciting, rather than contradicting”
anything in the 1977 or 1963 oecd commentary on which earlier dtcs would have
been based.
Co n c l u s i o n
The current oecd commentary (albeit not the model dtc itself ) makes it a requirement that to have a fixed place of business, the place must be “at the disposal”
of the non-resident. But it deliberately does not define the notion of “disposal.” On
the one hand, it seems that the right of disposal cannot mean a legal right to use the
premises or even an implicit right to use them, because the commentary expressly
states that even the illegal use of premises may create a pe. On the other hand, it
cannot mean simply factual use, because then it would add nothing to the existing
elements of a pe,125 and the salesman example in paragraph 4.2 of the commentary
on article 5 would produce a different result.
Perhaps the simplest and yet clearest definition of what it means for a place of
business to be at a non-resident’s disposal is suggested by Baker:
These cases confirm that the fixed place of business need not be owned or leased by
the foreign enterprise provided that it is at the disposal of the enterprise in the sense of
having some right to use the premises for the purposes of its business and not solely for the
purposes of the project undertaken on behalf of the owner of the premises.126
123 Canada v. Prévost Car Inc., 2009 FCA 57, at paragraphs 9-12.
124 This appears to have been an obiter comment, which was based on counsel’s consent and was
not made with any discussion of the later articles, textbooks, and cases that have expressed the
opposite conclusion. See, for example, Michael Lang and Florian Brugger, “The Role of the
OECD Commentary in Tax Treaty Interpretation” (2008) vol. 23, no. 2 Australian Tax Forum
95-108. I predict that the Supreme Court of Canada may some day have a word to say on this
issue.
125 Skaar, “Erosion of the Concept of Permanent Establishment,” supra note 40.
126 Baker, Double Taxation Conventions, supra note 40, at section 5B.09 (emphasis added), cited with
approval in Motorola, supra note 42. This appears to be confirmed by the commentary to the
(2009) vol. 57, n o 2
It remains to be seen whether a court in Canada or elsewhere will expressly adopt
this definition or whether the oecd will revise the commentary to delete or amend
the painter example.
fixed-base provision in article 14 of the model treaty (now repealed). As explained in Dudney,
supra note 43, a fixed base is essentially the individual’s equivalent to a PE. The United States,
Treasury Department Technical Explanation of the United States Model Income Tax Convention
of September 20, 1996 states: “In general, the term encompasses situations where a fixed base
is at the disposal of the individual whenever he performs services in that State. It is not
necessary that the individual regularly use the fixed base, only that the fixed base be regularly
available to him. For example, a U.S. resident partner in a law firm that has offices in the other
Contracting State would be considered to have a fixed base regularly available to him in the
other State if the law firm had an office in the other State that was available to him whenever he
wished to conduct business in that other State. . . . On the other hand, an individual who had no
office in the other State and occasionally rented a hotel room to serve as a temporary office
would not be considered to have a fixed base regularly available to him [emphasis added].” It
seems from this that “at its disposal” and “available to him whenever he wants it” are intended
to be synonymous concepts, which strongly suggests that mere factual use of the premises is
not sufficient to create a PE.
See Austria, Case 2000/15/0118, March 18, 2004 (Supreme Administrative Court)
(summary available through Tax Treaty Cases Online (Amsterdam: International Bureau of Fiscal
Documentation)). In this case, the taxpayer was an Austrian-resident private limited
corporation (GmbH) that was engaged in the industrial production of pollens. The production
facilities were housed in a rented barn. A container was placed in front of the barn; equipped
with a desk, telephone, and fax machine; and used as an office. Ten employees were engaged
during the harvest time, which lasted every year from May to August. Two employees were
engaged for a further two months, and thereafter the business activities ceased. For the tax
years in question, the taxpayer corporation engaged the professional services of a Swiss agrarian
engineer, resident in Switzerland. During his limited stays in Austria—each year less than six
months—he was accommodated in a guesthouse. He did not have his own office but carried
out his services partly in the barn, partly in the container, and partly in the fields. The tax
authorities claimed that the Swiss engineer was subject to limited tax liability in Austria. The
remuneration paid to him was taxable in Austria under Austrian domestic law as income from
technical consultancy services (section 98(3) of the Austrian Income Tax Act). This income was
subject to a final 20 percent withholding tax under Austrian domestic law for which the
taxpayer corporation was held liable. The tax authorities took the position that the obligation
to withhold tax under domestic law was not restricted by the tax treaty between Austria and
Switzerland since the container and the barn were used for the Swiss engineer’s consultancy
services, and these constituted a fixed base under article 14 of the treaty (see the Convention
Between the Republic of Austria and the Swiss Confederation for the Avoidance of Double
Taxation with Respect to Taxes on Income and on Capital, signed at Vienna on January 30,
1974). The taxpayer corporation argued that the tax treaty restricted Austria’s right to tax, since
there was no permanent establishment in Austria under article 7 of the treaty, principally
because the mere possibility of using the office facilities of the taxpayer corporation was not
sufficient to created a PE. The court held that there was a fixed PE. According to the court, it
was uncontested that the Swiss engineer used the container as well as the barn for performing
his activities; thus, these premises were at his disposal. The court pointed out that, also as
established under prior case law, the power of disposition does not require that the premises
are owned or rented by the person in question; it is sufficient that they are permanently available
to this person for the purpose of his business.

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