Tax Treaty Series

ITQ T-

029

January 31, 2020

Question

ACo, a company resident in country A, conducts a business of selling its goods through its website. Under the sales contracts, ACo is required to deliver the goods to its customers' addresses. A critical success factor for ACo's business is its ability to deliver the goods to the customers, within a relatively short time period after the sale contract is made.

ACo has customers in several countries, including country B. To enable it to quickly deliver goods to customers in country B, ACo owns and operates a warehouse in country B. The warehouse contains stocks of ACo's goods. When a contract is made, ACo's head office in country A instructs ACo's employees who are based at the warehouse to select the relevant goods and deliver them to the customer's address in country B. Title in the goods passes to the customer upon delivery.

ACo's warehouse employees play no role in the marketing process or in concluding the sale contracts.

The A/B treaty is identical to the 2014 OECD model treaty. The MLI does not apply to the A/B treaty.

Does ACo have a PE in country B, under Art. 5 of the A/B treaty?

Answer

ACo's warehouse satisfies Art. 5(1).

But does an exception under Art. 5(4)(a) or (b) apply?

According to the 2017 OECD Comm., the words, "storage, display or delivery", should be interpreted as applying to any combination of storage, display and delivery. As ACo uses the warehouse solely for the purpose of storage and (arguably) delivery, and as title in the goods passes to the customers only upon delivery to the customers, the express words of Art. 5(4)(a) & (b) are satisfied.

But is there an implicit "preparatory or auxiliary character" (POAC) condition in the 2014 version of Art. 5(4)(a) & (b)? Due to the fact that quick delivery is a critical success factor for ACo's business, the use of the warehouse is probably not of a POAC.

The 2014 version of Art. 5(4) (in which POAC is mentioned only in paras. (e) & (f)) strongly suggests that such a condition is not implicit in paras. (a) & (b). The 2014 & 2017 versions of the OECD Comm. do not directly address this issue (but see para. 21 in 2014 version). However, some OECD member countries take the view that that condition is implicit in paras. (a) – (d).

This issue is addressed by Jacques Sasseville in chapter 1 of "New Trends in the Definition of Permanent Establishment" (IBFD, 2019). Based on the history of Art. 5(4), he concludes that the POAC condition is not implicit in paras. (a) – (d), prior to the 2017 changes. I agree!

Therefore, in my view, ACo does not have a PE in B.

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