Tax Treaty Series

ITQ T-

030

February 7, 2020

Question

In year 1, XCo, a company resident in country X, formed a branch in country Y to act as a procurement office (PO) for it. The PO occupies leased premises and has 10 employees. The PO's employees (acting with XCo's express authority) identify potential suppliers of goods in Y, conduct due diligence on those potential suppliers, negotiate purchase contracts with the suppliers, and conclude those purchase contracts. All of the contracts require the suppliers to arrange, and pay for, insurance and freight of the goods to XCo in X. The PO's employees perform no activities in regard to payment of the suppliers.

For years 1 to 5, the PO performs the above-mentioned activities solely for XCo.

In year 6, in addition to the activities performed for XCo, the PO starts to also perform the same activities for XSub, which is a company resident in country X and is a 100% subsidiary of XCo.

The X/Y treaty is identical to the 2011 OECD model treaty. The MLI covers the X/Y treaty; however, Arts. 12-15 of the MLI don't apply.

Questions: (1) In year 5, does the X/Y treaty allow Y to tax XCo? (2) In year 6, does the X/Y treaty allow Y to tax XCo and/or XSub?

Answer

Question (1):

Art. 5(1): satisfied.

Art. 5(4)(d): All of the PO's activities (identification, due diligence, negotiation, contract conclusion) should fall within "purchasing" – although there is an alternative argument that identification and due diligence are not part of the "purchasing" function (the "purchasing alternative argument"). Thus, Art. 5(4)(d) should be satisfied. The "preparatory or auxiliary character" (POAC) condition does not apply to Art. 5(4)(d): see answer to ITQ29.

Thus, no PE.

Question (2):

(i) XCo:

The "solely" condition in Art. 5(4)(d) is not satisfied. Also, Art. 5(4)(e) & (f) are not satisfied, because (inter alia) of the services performed for XSub.

Thus, XCo has an Art. 5(1) PE in Y.

However, the profits attributable to the PE (which Y is allowed to tax) should be limited to the arm's length fee charged to XSub, less the costs of deriving that fee. No profits should be attributable to the PE in regard to the purchasing activities for XCo: Art. 7(5). Again, the purchasing alternative argument is relevant.

(ii) XSub:

Art. 5(5) is satisfied. The Art. 5(6) exception probably does not apply.

Thus, XSub probably has a PE in Y.

No profits should be attributable to the PE in regard to the purchasing activities for XSub: Art. 7(5). Again, the purchasing alternative argument is relevant.

ITQ Disclaimer

This International Tax Quiz (ITQ) contains general information only, and none of International Insights Pte Ltd, its employees or directors is, by means of this ITQ, rendering professional advice or services. You use the content of this ITQ strictly at your own risk. You should not rely on all or any part of the content of this ITQ in making decisions to take action (including inaction) in regard to tax or other matters. Before making any decision or taking any action (including inaction) that may affect your tax position, your finances or your business, you should consult a qualified professional advisor. None of International Insights Pte Ltd, its employees or directors shall be responsible for any loss whatsoever sustained by any person who relies on the content of this ITQ.