Interaction of national legal systems:modern forms and tendencies

Art. 5 of the OECD Model Convention / the UN Model Convention – Services Permanent Establishment

European-Asian Law Congresseighth session

Eugene Zakharov

Yekaterinburg, 22 May, 5-6 June 2014

Art. 5 of the OECD Model ConventionServices Permanent Establishment

The OECD Model Convention has no special provisions for services.

Commentaries of the Convention clarify conditions, which may result in creation of Service Permanent Establishment on the territory of a Contracting State:

Services are performed through one or more dependent individuals who are present and performing such services in that other State

Services must be performed on a regular basis Minimum time period in the source state Services must be rendered to a third party, not to the enterprise itself

Art. 5 of the OECD Model ConventionServices Permanent Establishment

Current questions:

1. The need to form the final concept of “Service PE”

Ways of reforming of the Article 5

Generalization

1. Common conditions both for companies and for individuals.

2. Laying down the “Service” definition in the Article or in the Commentaries.

Specification

1. Different conditions for companies and for individuals.

2. Clarification of services/groups of services which will lead to Service PE formation.

Art. 5 of the UN Model ConventionServices Permanent Establishment

UN Model Convention does not use the expression “service PE”.

Article 5(3)(b) of the UN Model Convention reads as follows:

The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose,

Activities of that nature continue (for the same or a connected project) within the Contracting state

For a period or periods aggregating more than 183 days in any 12-month period commencing or ending in the fiscal year concerned.

Number of DTAA - 29

According to the OECD model - 28 (Argentina, Austria, Belgium, Canada, Chile, Czech Republic, Slovakia, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, Norway, Peru, Philippines, Portugal, South Africa, Spain, Sweden, Ukraine)

According to the UN model - 1 (China)

Possibility of forming a permanent establishment by furnishing the services provided by athletes and artists can be found in agreements with: Argentina, Japan, Luxembourg

Brazil

Russia

Number of DTAA - 80

According to the OECD model - 58 (Australia, Austria, Azerbaijan, Albania, Armenia, Belarus, Belgium, Bulgaria, Great Britain, Hungary, Venezuela, Germany, Greece, Denmark, Israel, India, Iran, Ireland, Iceland, Ireland, Italy, Qatar, Kyrgyzstan, Korea, Latvia, Lebanon, Lithuania, Macedonia, Malaysia, Mali, Mexico, Morocco, Moldova, Mongolia, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Syria, Slovakia, Slovenia, USA, Tajikistan, Turkmenistan, Turkey, Uzbekistan, Ukraine, Finland, France, Croatia, Switzerland, Sweden, South Africa, Yugoslavia, Japan)

According to the UN model - 22 (Algeria, Argentina, Botswana, Vietnam, Egypt, Indonesia, Kazakhstan, Cyprus, China, North Korea, Cuba, Kuwait, Luxembourg, Malta, Namibia, Saudi Arabia, Singapore, Thailand, Philippines, Czech Republic, Chile, Sri Lanka)

Russia

“Bloomberg LP” Case (USA)

Decision of the Arbitration Court of Moscow of 17.12.2010 case N A40-94391/10-142-134

Conclusion of the court:

The court decided that activities of enterprise lead to a service PE, and it was liable to pay taxes in Russian Federation.

India

Number of DTAA - 84

According to the OECD model - 54 (Armenia, Austria, Bangladesh, Belarus , Belgium, Brazil, Bulgaria, Hungary, Vietnam, Germany, Greece, Denmark, Egypt, Israel, Jordan, Ireland, Italy, Kazakhstan, Kenya, Cyprus, Kyrgyzstan, Korea, Libya, Malta, Mauritius, Mongolia, Morocco, Myanmar, Netherlands, New Zealand, Oman, Poland, Portugal, Russia, Serbia, Singapore, Slovenia, Sudan, Tajikistan, Trinidad and Tobago, Turkey, Turkmenistan, Uganda, Uzbekistan, Ukraine, the Philippines, France, Montenegro, Czech Republic, Sweden, South Africa, Japan)

According to the UN model - 30 (Australia, Botswana, Britain, Georgia, Iceland, Indonesia, Canada, China, Kuwait, Lithuania, Luxembourg, Malaysia, Mexico, Mozambique, Namibia, Nepal, Norway, United Arab Emirates, Romania, Saudi Arabia, Singapore, Syria, USA, Thailand, Tanzania, Finland, Switzerland, Sri Lanka, Estonia, Ethiopia)

India

Concept of Service PE:

1.Services to be rendered by the employees or “other personnel” engaged by the non-resident enterprise;

2.Duration of services (time threshold);

3.Criterion of “permanence” is replaced by criterion of “minimum time required for the provision of services”;

4.Provision of services both for associate companies and third parties.

India

Possibility of forming a permanent establishment by furnishing the services provided by athletes and artists can be found in agreements with: Bangladesh, Zambia

The following type of services also can lead to permanent establishment formation:

Provision of services or facilities in connection with, or supplies plant and machinery on hire used for or to be used in the prospecting for, or extraction or exploitation of mineral oils in that State

IndiaMorgan Stanley’s Case

DIT v. Morgan Stanley, [2007] 292 ITR 416 (SC)

The case changed the concept of permanent establishment, factually stated the “Service PE” concept.

MS and Co., Inc. (Parent company, USA) outsourced some of its functions to MSAS (Indian subsidiary)

MS and Co., Inc. also provided some personnel who were overseeing the outsourced activities and they were also providing managerial services.

Conclusion of the Court:

Court noted that employees deputed by Morgan Stanley & Co. Inc would attract Service PE in India and thus Morgan Stanley Advantages Services Pvt. Ltd. would be the Service PE for Morgan Stanley Inc in India.

China

Number of DTAA - 94

According to the OECD model - 24 (Algeria, Bahrain, Bosnia and Herzegovina, United Kingdom, Venezuela, Georgia, Greece, Iran, Ireland, Qatar, Laos, Latvia, Lithuania, Macedonia, Mexico, Moldova, Nigeria, Pakistan, Syria, Tunisia, Uzbekistan, Estonia, Ethiopia, Yugoslavia)

According to the UN model - 70 (Australia, Austria, Azerbaijan, Albania, Armenia, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Brazil, Brunei, Hungary, Vietnam, Germany, Denmark, Egypt, Zambia, India, Israel, Iceland, Indonesia, Spain, Italy, Kazakhstan, Canada, Cyprus, Kyrgyzstan, Korea, Jordan, Kuwait, Luxembourg, Malaysia, Mauritius, Malta, Mongolia, Morocco, Nepal, Netherlands, New Zealand, Norway, Oman, Papua New Guinea, Poland, Portugal, Romania, Russia, Saudi Arabia, Seychelles, Singapore, Slovenia, Sudan, United States, Tajikistan, Thailand, Turkey, Turkmenistan, Ukraine, Philippines, Finland, France, Croatia, Czech Republic, Switzerland, Sweden, Sri Lanka, South Africa, Jamaica, Japan)

China

The UN model was taken as a basis in determining “Service PE”.

Circular of the State Tax Administration (Guoshuifa [2010] 75 or Circular 75) (Explanations to an agreement with Singapore) provides some clarifications/explanations of the terms used to define a Service PE:

1. “Employees or other personnel engaged by the enterprise” is defined as employees of the enterprise and other individuals controlled by and receiving instructions from the enterprise;

2. “Services” refer to professional activities such as engineering, technology, management, design, training and consulting services. ;

China

3. “Connected projects” factors:

Are the projects covered by a single master contract?;

Where the projects are covered by different contracts, were these contracts concluded with the same/related person; and is the execution of one project a prerequisite to another?;

Is the nature of work the same under different projects?;

Are the services under different projects performed by the same group of people?

China

Method of calculating the time required for the formation of a permanent establishment:

6 months (Circular Guoshuihan [2007] No. 403):1.The provision of services in China for a single day in a month is

considered a provision of services for that entire month.2.The start of the calculation period is triggered the month the

expatriate first arrives for the purpose of implementing the service, until the month that the expatriate leaves upon the completion of the service.

3.If no expatriate is in China to perform the relevant services for 30 consecutive days, one month will be deducted.

183 days (Circular 75):The 183 days is counted from the date on which the employee(s) of the

non-resident enterprise first arrive(s) in China to provide the services, until the date on which the services are completed and delivered;

South Africa

Number of DTAA - 73

According to the OECD model - 39 (Ghana, Malawi, Mauritius, Sierra Leone, Tunisia, Uganda, Zambia, Zimbabwe, Australia, Austria, Belgium, Brazil, Cyprus, Denmark, Finland, France, Germany, Grenada, Hungary, India, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Netherlands, Norway, Poland, Portugal, Romania, Russia, Singapore, Slovakia, Spain, Sweden, Switzerland, Taiwan, Turkey)

According to the UN model - 34 (Algeria, Botswana, the Democratic Republic of Congo, Egypt, Ethiopia, Lesotho, Mozambique, Namibia, Nigeria, Rwanda, Seychelles, Swaziland, Tanzania, Belarus, Bulgaria, Canada, China, Croatia, Czech Republic, Greece, Indonesia, Iran, Kuwait, Malaysia, Malta, Mexico, New Zealand, Oman, Pakistan, Saudi Arabia, Thailand, Ukraine, United Kingdom, United States of America)

Suggestions

For OECD model:

Determination and laying down the rules of the “Service PE” both for organizations and for individuals directly in the text of the Convention, as it will remove the uncertainty in the interpretation of the article.

For UN model:

Clarification of further definitions:“Connected project” and “Other personnel”