Tax Treaty Series

ITQ T-

090

June 11, 2021

Question

ACo, a company resident in A, is an engineering company.

ACo wins 2 contracts in regard to construction projects in B. One contract is with BCo1 and the other is with BCo2. BCo1 and BCo2 are both resident companies in B, but are unrelated.

Both contracts require ACo to send a senior engineer (employed by ACo) to the respective project site in B, to oversee important aspects of the construction work. The engineer will not be seconded to BCo1 or BCo2. The engineer will be in B for a total of 9 months: the first 2 months focusing on BCo1's project, the next 2 months on BCo2's project, then the next 3 months on BCo1's project, and then the final 2 months on BCo2's project.

The A/B treaty is identical to the 2017 UN model treaty.

Does the treaty allow B to levy income tax on ACo in regard to the engineer's services?

Answer

Art. 12A / Art. 7(1)
1. Art. 12A will apply to allow B to levy tax of x% on the gross fees paid to ACo, unless the engineer's activities cause ACo to have a PE in B (see below): Art. 12A(4).
2. If ACo does have a PE in B, Art. 7(1) will allow B to tax the profits attributable to the PE.
Art. 5(1)
1. Threshold issue: is Art. 5(1) limited by Art. 5(3)(a) or (b)? IMHO: no.
2. Two possible PEs: BCo1 site and BCo2 site. In regard to each site, all of the Art. 5(1) conditions (other than the time condition) are satisfied.
3. In regard to the time condition, the engineer’s time at each site, from start to finish (including time spent at the other site), aggregates to 7 months – which is just over the 6 months "indicative test" set out in the OECD Comm (and repeated in the UN Comm), if the "recurrent" principle is applied.
4. IMHO: Each site is a borderline case, but on balance I would conclude that each site is an Art. 5(1) PE.
Art. 5(3)(a)
1. The engineer's activities should be "supervisory activities". Those activities need to be considered in regard to each project separately.
2. Do those activities "last more than six months"? IMHO: in measuring time for the BCo1 activities, the time spent on the BCo2 activities should not be counted, and vice versa.
3. Thus, IMHO: the BCo1 activities lasted for 5 months, and the BCo2 activities for 4 months – neither would be a PE under Art. 5(3)(a).
Art. 5(3)(b)
1. Threshold issue: does Art. 5(3)(a) "cover the field", to exclude Art. 5(3)(b)? IMHO: no. This view is supported by the 2017 OECD Comm on Art. 5: see para. 147.
2. Art. 5(3)(b) was amended in the 2017 UN model to remove the "same or connected project" condition.
3. The engineer spent a total of 9 months in B performing the services. The time test in Art. 5(3)(b) is "more than 183 days in any 12-month period commencing or ending in the fiscal year concerned". IMHO: only days on which services were performed are counted. Thus, if the engineer did not perform services on weekends or public holidays, or if he took annual leave in B during the 9 months, those days should not be counted. That said, it’s likely that the 183 day test is satisfied.
4. IMHO: Likely PE.

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