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PERMANENT ESTABLISHMENT IN THE UNITED STATES: A VIEW THROUGH ARTICLE V OF THE U.S.-CANADA TAX TREATY

PERMANENT ESTABLISHMENT IN THE UNITED STATES: A VIEW THROUGH ARTICLE V OF THE U.S.-CANADA TAX TREATY

By Martin B. Tittle

About the book:

The last time someone wrote comprehensively about permanent establishment in the United States, the catchwords of the day were Mayaguez, Watergate, and Squeaky Fromme. At that time, there were only nine U.S. cases and thirteen revenue rulings addressing permanent establishment. Perhaps not surprisingly, over a third of those authorities addressed the U.S.-Canada tax treaty.

This book provides a fresh look at "PE in the U.S." using the U.S.-Canada treaty as a case study. It also illustrates a methodology that can be applied to the study of other treaty concepts.

Until September 2007, the treaty with Canada was fairly representative of late-twentieth-century U.S. tax treaties. The protocol signed on September 21 made it cutting-edge in many respects, and the creation of a new “services PE” was one of the innovative changes that Tittle explores in this book.

The book begins with a three-part introduction: first, a brief, general outline of the concept and scope of PE; next, an overview of the individual paragraphs in Article V; and finally, a comparison of the current PE provisions with those in the 1942 U.S.-Canada treaty, to illustrate the limitations presented by older cases and rulings.

Following the introduction are vignettes of ten aspects of U.S. taxation that either underlie the application of treaties or would apply in the absence of a treaty.

Next, every paragraph and subparagraph of Article V is analyzed from three points of view. First, each significant term in the text is defined. (For terms not defined by the treaty, possible definitions from domestic tax law are presented.) Next, the relevant parts of the two model tax treaty authorities – the OECD Commentaries and the U.S. model technical explanation – are reviewed and discussed. Finally, relevant cases, rulings, and secondary authorities are presented.

About the author:

Martin B. Tittle is an international tax attorney who practices in Washington, D.C. and Ann Arbor, Michigan. He graduated magna cum laude from the University of Michigan Law School and has written extensively on international topics for Tax Analysts, BNA, Inter-American Development Bank, Practicing Law Institute, International Bureau of Fiscal Documentation, and the U.S. Congress. His weekly newsletter “U.S. International Tax Outlook” is widely circulated.

Vandeplas Publishing: Tax Law Series 2
Library of Congress Control Number: 2007938464
Paperback, 436 pages

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SKU	SKU030-6
ISBN	978-1-60042-030-6
Author/Editor	Martin B. Tittle
Price:	$59.95

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Martin B. Tittle, Permanent Establishment in the United States:
A View Through Article V of the US-Canada Tax Treaty

(Lake Mary, FL: Vandeplas Publishing, 2007), 426 pages

The concept of “permanent establishment” is of fundamental importance in international taxation. Canadian tax treaties allow a source country to tax the business profits of a company resident in a treaty country only when the company carries on business through a permanent establishment in the source country. The Canada-us tax convention14 is no exception. Article v of the convention generally follows article 5 of the oecd model convention,15 which contemplates two types of permanent establishments: fixed place of business and dependent agents. While both the oecd commentary and the technical explanation provide some guidance on the interpretation of this concept, many issues remain unsettled. That is why Martin Tittle’s book is a welcome addition to the existing body of literature on permanent establishment. It is the only book devoted to article v of the Canada-us convention.

The book has two main parts: one concerns us taxation of foreign companies in the absence of a treaty, and the other provides an explanation and interpretation of article v. The first part discusses the key aspects of us taxation of foreign companies under the Internal Revenue Code: the meaning of the phrases “engaged in a u.s. trade or business” and “effectively connected income”; the role of agents (dependent and independent); and the special rules for partnerships, us subsidiaries, branches, and electronic commerce. In discussing each subject, the author not only explains the relevant us case law and administrative policies, but also reproduces key paragraphs of leading cases and pertinent government documents (such as committee reports, Internal Revenue Service (irs) rulings, and technical advice memoranda).

The other main part of the book is devoted to a detailed paragraph-by-paragraph analysis of article v. Tittle analyzes the meaning of treaty terms with reference to definitions in the treaty itself, domestic law, commentaries by the oecd and the us Treasury, and other secondary sources. For example, in discussing the new paragraph 9 of article v, the author begins with the definition of terms and phrases used in the paragraph (for example, “services,” “gross active business revenues,” and “connected project”), compares the language used in the oecd model and the Canada-us convention, and discusses relevant case law, including Dudney v. The Queen:1

Under Art. v(9)(a), Dudney might still not be taxed because there was no evidence that 50 percent of his “gross active business revenues consist[ed] of income derived from the services” he performed at PanCan. However, under Art. v(9)(b), the amount he received from PanCan for his services would be taxable because he worked more than 183 days in a twelve-month period in Canada on the PanCan project.2

At the end of the book, the author reproduces the primary sources of law on permanent establishment, including the text of protocols 1, 3, and 5, each of which makes changes to article v of the convention; the combined us Treasury technical explanation; and a 1984 competent authority agreement that addresses offshore us drilling rigs.

Tittle is an international tax attorney who practises in Washington, dc and Ann Arbor, Michigan. His book provides a fresh look at the concept of permanent establishment and is a useful reference for Canadian tax practitioners and students.

Review by Prof. Jinyan Li, professor at Osgoode Hall Law School of York University in Toronto as published in Canadian Tax Journal / Revue Fiscale Canadienne (2008) vol. 56, no 1, page 272

1 99 DTC 147 (TCC); aff ’d. 2000 DTC 6168 (FCA).
2 Ibid., at 215.

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