Tax Treaty Series

ITQ T-

050

July 17, 2020

Question

XCo, a company resident in X, manufactures goods in X for a global market.

XCo employs Mr A as its regional sales director in a region of the world. Mr A lives in Y, but frequently travels to other countries in the region, including Z. Mr A has been employed in this role for 10 years.

Under his employment contract with XCo:

Mr A is required to frequently visit existing and prospective customers in the region, to obtain purchase orders from them (with prices set according to XCo's then current price list)
When Mr A obtains purchase orders, he must send the orders to XCo head office in X, for its consideration and acceptance (if considered appropriate, after the head office performs a credit evaluation of the customer). If the order is accepted, XCo sends a written confirmation to the customer (with a copy to Mr A)
Mr A does not have the authority to accept purchase orders on behalf of XCo
Mr A does have the authority to allow volume discounts to the customers, within parameters set by XCo head office from time to time

For many years, XCo's head office has accepted 100% of the purchase orders which Mr A has sent to it.

The X/Z treaty is identical to the 2014 OECD model treaty.

Does XCo have a PE in Z, under the X/Z treaty?

Answer

Is Art. 5(5) satisfied?

1. "exercises…an authority to conclude contracts"

i. By virtue of the employment contract, Mr A does not have actual authority, either express or implied, to conclude contracts on behalf of XCo.

ii. However, does Mr A have apparent (or ostensible) authority to do so? Apparent authority is recognised in the agency law of common law jurisdictions and also in some civil law jurisdictions. But before considering the facts, there is a threshold issue: which agency law should be applied (X law, Z law or perhaps even Y law)?

iii. The facts hint that apparent authority could be an issue: Mr A is the regional sales director; he has been in that role for 10 years; for many years, XCo head office has accepted 100% of the purchase orders which Mr A has sent to it; he has authority to offer discounts; and there is no indication that XCo has alerted the customers that Mr A does not have actual authority.

iv. XCo probably has no idea what Mr A says to customers during meetings. It is possible, particularly in the context where Mr A offers a volume discount, that he says to the customers: "If you give me the order for x units, I'll give you a 10% discount. I'll get the formal paperwork done at head office, but if you give me that order by the end of the month, it’s a done deal!". There is a history of XCo head office always accepting Mr A's purchase orders. It could be reasonable for the customers to believe that Mr A has actual authority.

v. If Mr A does have apparent authority, he might be seen to accept the customers' orders – for example, by saying or emailing to them that the order has been accepted and that formal paperwork will follow from head office in a few days. That first contract would then probably be superseded by the formal written contract sent by XCo head office.

2. "habitually exercises in a Contracting State"

The facts state that Mr A frequently travels to Y. This test is likely satisfied.

3. Art. 5(6) exception

Not applicable – Mr A is an employee and therefore cannot be legally independent of XCo.

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