Sydney Law School

Legal Studies Research Paper

No. 11/01
January 2011

Travellers, Tax Policy and Agency Permanent

Establishments
Richard Vann
This paper can be downloaded without charge from the
Social Science Research Network Electronic Library
at: http://ssrn.com/abstract=1737995.

The article was first published in [2010] B.T.R. No.6, 2010 Thomson Reuters (Legal) Limited and
contributors, available via: www.westlaw.com

Travellers, Tax Policy and Agency Permanent

Establishments
Richard Vann

Abstract
This article analyses the policy, historical development and current application of permanent establishment
rules for travellers. It is readily accepted that pedlars and itinerant merchants do not give rise to permanent
establishments but after many years of the agency permanent establishment rules apparently requiring
that the agent have a fixed place of business in the country concerned, the OECD has recently concluded
to the contrary for travelling salesmen. The article argues that the OECD should have followed the
historical trend as that matches the OECDs proclaimed policies for adopting the permanent establishment
as the international threshold for taxing business income more closely.

John Avery Jones has been a great traveller for many years largely as a result of the
peregrinations of the annual congress of the International Fiscal Association and the associated
meetings of the international tax group, known to many of us as Avery Jones et al when
referring to the articles produced by the group which have too many authors to list in a footnote.
(Saddled by a surname beginning with V, this author usually lurks towards the end of the list.)
John has been fascinated for over 20 years by the agency permanent establishment (PE) but
not by the implications for a traveller like himself. Travellers provide a good example to test the
policy of the PE definition and the differences between fixed place of business and agency PEs,
as well as an opportunity to dive into tax treaty history which we both enjoy.
Tax policy and permanent establishments
The recent work of the Organisation for Economic Co-operation and Development (OECD) on
the attribution of profits to PEs has sought to base outcomes on an economic policy measure of
how much profit is produced by a PE. It does so by extending the functions, assets and risks
analysis for associated enterprise in a consistent and coherent way to the PE situation, not
constrained by either the original intent or by the historical practice and interpretation.1 Whatever
may be thought of the specifics of this approach, it is hard to quarrel with the use of a direct
economic policy measure of contribution to profit. That work makes clear, however, that its
approach does not impact on the question of whether there is a PE.2

Challis Professor of Law, Sydney Law School.

OECD, Report on the Attribution of Profits to Permanent Establishments, July 17, 2008, available at http://www
.oecd.org/dataoecd/20/36/41031455.pdf [Accessed July 30, 2010]. This comment is made more than once to make
sure it is understood, e.g. see the same phrase in OECD, Model Tax Convention on Income and on Capital, Condensed
version (Paris: OECD, 2008) Commentary on Art.7, para.6.
2
OECD Report, above fn.1, para.9.
1

538

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Travellers, Tax Policy and Agency PEs 539

What is the policy of using the PE as the basis for taxing business profits and hence of the PE
concept itself? The Commentary on Article 7 says that it is hardly necessary to argue here the
merits of the PE as the basis and defines the policy as:
participating in the economic life of the other State to such an extent that it comes within
the jurisdiction of that other States taxing rights.3
The Commentary on Article 5 which contains the PE definition only deals with the broad policy
in relation to agency PEs, saying:
[agency PE] treatment is to be limited to persons who in view of the scope of their authority
or the nature of their activity involve the enterprise to a particular extent in business activities
in the State concerned.4
Although not mentioned in either place until recently, this policy has both an economic and
administrative policy dimension.5 This is hardly much of a policy guide but it has ever been so
with PEs: they have been accepted as the building block of tax treaties from the beginning without
much policy elaboration.
In contrast to the attribution of profits, the stated policy is not implemented directly in the PE
test but rather through the proxies of the fixed place of business and agency rules. That the
proxies can deviate from the policy is admitted in relation to insurance in which case it is possible
to do large-scale business in a State without being taxed under these proxies.6 Divergence
between the stated policy and the proxy tests creates tension with the economic policy base of
the attribution rule. If there is a PE but nothing substantial occurring then little attribution of
profits occurs under the new attribution approach. If there is no PE but substantial functions,
etc. no profit attribution occurs because of the lack of a PE. This asymmetry has been the basis
of much business restructuring in the last 15 years.7
3

OECD Model, above fn.1, Commentary on Art.7, para.9.

OECD Model, above fn.1, Commentary on Art.5, para.32. The agency PE guidance needs to be treated with caution
as the reference to the nature of the activity is a mistaken historical hangover, see Vann, Writing Tax Treaty History
in Michael Lang and Ekkehart Reimer (eds), History of Tax Treaties (Baden-Baden: Nomos, forthcoming) at fnn.8
and 9 and text.
5
In seeking to establish the place which should as a matter of principle have the primary right to tax various kinds of
income, the four economists in their 1923 report for the League of Nations used enforceability as one of the criteria
and regarded it as important in the taxation of business income. The League of Nations material is collected in Joint
Committee of Internal Revenue Taxation, Legislative History of United States Tax Conventions (Washington: US
Government Printing Office, 1962) Vol.4, Model Tax Conventions (hereafter LHUSTC) available at http://setis
.library.usyd.edu.au/oztexts/parsons.html at item 3 [Accessed July 30, 2010]. For the discussion by the four economists,
see LHUSTC, 40334035. The OECD in 2008 provided a lengthy analysis on the policy of the PE concept for taxing
business profits in the context of introducing an alternative provision for a services PE, see OECD Model, above fn.1,
Commentary on Art.5, paras 42.1142.22 which emphasises economic penetration, administrability and the importance
of net basis taxation over gross basis withholding. This work in turn evolved out of OECD, Treaty Rules and
E-Commerce: Taxing business profits in the new economy in OECD, E-commerce: Transfer Pricing and Business
Profits Taxation (Paris: OECD, 2005) Pt II. This article accepts the OECD policy explanations and tests what they
indicate for agency PEs.
6
OECD Model, above fn.1, Commentary on Art.5, para.39, e.g. the recent Canadian Tax Court decisions in American
Income Life Insurance Company v R. [2008] TCC 306; 2008 DTC 3631; Knights of Columbus v R. [2008] TCC 307;
2008 DTC 3648.
7
The OECD is currently investigating restructures both as regards the transfer pricing issues and (just beginning) the
PE issues as part of another larger look at the PE definition.
4

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540 British Tax Review

This article analyses the policy, historical development and current application of PE rules
for travellers. It is readily accepted that pedlars and itinerant merchants do not give rise to PEs
but, after many years of the agency PE rules apparently requiring that the agent have a fixed
place of business in the country concerned, the OECD has recently concluded to the contrary
for travelling salesmen. The article argues that the OECD should have followed the historical
trend as that more closely matches the underlying policies for adopting the PE as the international
threshold for taxing business income. Unlike the recent attribution of profits exercise, the
discussion is necessarily constrained in the first instance by both original intent, and historical
practice and interpretation.
League of Nations and treaty practice
Travellers have exercised the minds of the makers of tax treaty models from early times. One
issue is whether pedlars and itinerant merchants selling their own wares can have a PE which
depends on the fixed place of business test. The other issue which relates to a travelling salesman
who is an agent is whether it is necessary for an agent to have a fixed place of business in the
state (which generally excludes the travelling salesman from another state constituting a PE) or
whether the power to contract and its habitual exercise is enough (which does not prevent the
existence of a PE). In turn the latter issue prompts the question of why the agency test is adopted
for PEs.
One view sees the agency PE as an anti-avoidance gloss on the fixed place of business rule
(specifically, avoiding the requirement that it must be a fixed place of business of the enterprise
and not of someone else). Another policy view sees the agency test as an independent criterion
for testing penetration into the economic life of a state suggested by the OECD quote above.
The 1923 League of Nations Report of the four economists clearly assumed a fixed place of
business as the test in developing their policy arguments8 but the 1925 Technical Experts
Committee used the more neutral language in its resolutions of, a branch, an agency, an
establishment, a stable commercial or industrial organisation, or a permanent representative.9
Inclusion of an agency early on in the list among fixed places might suggest exclusion of the
travelling salesman while the addition of permanent representative at the end cuts both waysis
it including something that is not a fixed place or does the word permanent indicate the contrary?
In this period the main PE controversy was the treatment of independent agents. Nonetheless,
both the 1927 and 1928 models together with their commentary suggest the anti-avoidance view
of the agency PE. The 1928 definition, apart from the independent agent addition, is:
The real centres of management, branches, mining and oilfields, factories, workshops,
agencies, warehouses, offices, depots, shall be regarded as permanent establishments.10

LHUSTC, above, fn.5.

LHUSTC, above, fn.5, 4091. The comments on the resolutions are in terms of establishments, LHUSTC, above,
fn.5, 4073.
10
LHUSTC, above, fn.5, 4162. As to the independence issue, see John F. Avery Jones and David A. Ward, Agents
as Permanent Establishments under the OECD Model [1993] BTR 341, Sidney I. Roberts, The Agency Element
of Permanent Establishment: The OECD Commentaries from a Civil Law View (1993) Intertax 39, 488 and Richard
J. Vann, Tax Treaties: The Secret Agents Secrets [2006] BTR 345.
9

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Travellers, Tax Policy and Agency PEs 541

The commentary states:
The second paragraph gives a list of the establishments which are considered as permanent;
they are: real centres of management, branches, mines and oilfields, factories, workshops,
agencies, warehouses, offices and depots, no matter whether such establishments are used
by the traders themselves, by their partners, attorneys, or their other permanent
representatives.11
Although the vagaries of language mean that it is difficult to be dogmatic, contemporary treaty
practice points in the same direction. The elaboration in the commentary about who uses the
establishment seems to be closely based on the language of treaties of the time among central
European countries.12
The fixed place of business language used to describe the modern main PE test seems to
appear, in English at least, in early US treaties (1932 onwards) and the League drafts for transfer
pricing (from 1933 onwardsthe link is not surprising, given that Carroll from the US was the
main drafter of the League provisions).13 At this stage the language is a sweeping-up provision
coming at the end of a varying list of examples including agenciesother fixed places of
businessrather than a separately stated test. The outcome of the League work of 19291931
on agents described below immediately follows this wording in these transfer pricing drafts.
Other earlier and contemporaneous treaties which are not in English use a similar structure.14
There are also a slightly greater number of treaties which are closer to the modern OECD structure
for paragraphs 1 and 2 of Article 5 (that is, the basic fixed place of business principle followed
by examples/deemings, with the examples/deemings sometimes in a protocol and, just to confuse
matters, mostly followed by other fixed places or similar language).15 The treatment of agency
11

LHUSTC, above, fn.5, 4166. Emphasis added.

Austria-Czechoslovakia 1922, Austria-Germany 1922, Austria-Hungary 1924, Austria-Switzerland 1927,
Czechoslovakia-Germany 1921, Czechoslovakia-Hungary 1923, Czechoslovakia-Poland 1925, Danzig-Poland 1924,
1929, Germany-Hungary 1923, Germany-Poland 1923, Hungary-Poland 1928 (unusually including the permanent
representative as well, see below, fn.15); earlier tax treaties were the same, e.g. Austria-Liechtenstein 1901. A later
treaty to the same effect is Austria-Poland 1932. Not surprisingly treaties with this language did not generally list
agencies as one of the examples of places which constitute PEs though there are exceptions: Austria-Switzerland
1927, Danzig-Poland 1924 and 1929, and Germany-Poland 1923, though apart from Danzig-Poland 1929 this seems
to be an artefact of translation as apparently similar language in other treaties is translated as purchase and sales
offices; see also below, fn.15. The English versions of the treaties referred to in this article are sourced from the Tax
Analysts Worldwide Tax Treaties Database available by subscription from http://www.taxanalysts.org or www.lexis
.com; in turn, for the period to 1945, these seem to be based on League of Nations translations of the treaties which
were not in English as an original language.
13
See the draft provision produced by the League of Nations in 1933 LHUSTC, above, fn.5, 4246 and the final version
in 1935, 4255, and in treaties France-US 1932 and 1939, Sweden-US 1939, Canada-US 1942. The League 1933
version reads, The term permanent establishment includes real centres of management, branches, mines and
oil-wells, plantations, factories, workshops, warehouses, offices, agencies, installations, and other fixed places of
business.
14
See treaties above, fn.12, Belgium-France 1931, Belgium-Italy 1931, Belgium-Netherlands 1933, Czechoslovakia-Italy
1923, Denmark-Finland 1937, France-Saar 1921, Hungary-Netherlands 1938, Netherlands-Sweden 1935; see also
below, fn.15.
15
Austria-Italy 1922, Denmark-Sweden 1932, Finland-Sweden 1931, France-Switzerland 1937, Hungary-Sweden
1936, Romania-Yugoslavia 1933 (all not including other places), Belgium-Germany 1938, Bulgaria-Germany 1940,
Denmark-Germany 1938, Finland-Germany 1935, France-Germany 1934, France-Italy 1930, France-Romania 1942,
France-Sweden 1936, Germany-Italy 1925, Germany-Romania 1937, Germany-Sweden 1928, Germany-Switzerland
12

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542 British Tax Review

in these different forms of treaties also varies. The treaties referring to who uses the fixed place
do not generally refer to agencies in the list as that is covered by the list of users though there
are exceptions16; other treaties variously include agencies in the list, add permanent representative
or similar language after the description equivalent to other fixed places of business, or
sometimes both.17 It probably is significant that in all but a few cases the place test, whether
expressed as a sweeping-up provision or as the basic principle, also applies one way or another
to agencies indicating that an agent did not constitute a PE unless it had a fixed place of business.
In between the 1928 models and the 1933 and later transfer pricing models which had differing
PE definitions as explained above, the League was working on the agency PE issue as one of
the unresolved matters from the earlier work. In 1929 and 1930 it produced drafts and commentary
that highlight the issue of whether the agency PE test required a fixed place of the agent. In both
years (further confirmed in 1931) the conclusion on the general principle was the same:
When a foreign enterprise regularly has business relations in a country through an agent
established there who is authorised to act on its behalf, it shall be deemed to have a
permanent establishment in that country.18
The significance of this was spelt out in the 1929 commentary but did not appear in 1930 (the
entire 1929 commentary which went beyond the current issues disappeared in 1930 though not
the drafting of the principles):
The essential elements of the relationship between the agent and the foreign enterprise
which constitutes a permanent establishment are:
(1)
The authorisation given the agent to act for the foreign enterprise; and
(2)
The fact of his carrying out these transactions regularly; and
(3)
The fact of his carrying them out in an establishment.19
1934, Germany-Yugoslavia 1940, Hungary-Italy 1925, Hungary-Romania 1937 Hungary-Switzerland 1942,
Hungary-Yugoslavia 1928, Italy-Romania 1938 (all including other places). Hungary-Poland 1928, although one
of the treaties, above, fn.12, referring to who uses the fixed place, is the only one of them which also follows an OECD
type structure and to top it off adds permanent representatives separately as constituting PEs, see also below, fn.17.
16
See above, fn.12, which also lists the (mainly apparent) exceptions.
17
Treaties which include agencies in the list and do not refer to permanent representatives or agencies after the other
places are: Belgium-France 1931, Belgium-Germany 1938, Belgium-Italy 1931, Belgium-Luxembourg 1931,
Belgium-Netherlands 1933, Bulgaria-Germany 1940, Denmark-Sweden 1932, Finland-Sweden 1931, France-Saar
1921, France-Sweden 1936, France-Switzerland 1937, Hungary-Sweden 1936, Netherlands-Sweden 1935,
Romania-Yugoslavia 1933. Treaties which add permanent representatives or agencies after the other places and do
not include agencies in the list before the other places are: Bulgaria-Germany 1940, Denmark-Finland 1937,
Finland-Germany 1935, France-Germany 1934, Germany-Romania 1937, Hungary-Romania 1937, Hungary-Switzerland
1942, Hungary-Yugoslavia 1928. Treaties which include agencies in the list before other places but also add
permanent representatives or agencies at the end are: Austria-Italy 1922, Czechoslovakia-Italy 1923, France-Italy
1930, France-Romania 1942, Germany-Italy 1925, Germany-Poland 1923, Germany-Sweden 1928,
Hungary-Netherlands 1938, though in Germany-Poland 1923 and Germany-Sweden 1928 this again seems to be an
artefact of translation of the kind referred to above, fn.12 (instead of buying and selling offices).
18
LHUSTC, above, fn.5, 4198, 4206, 4231. Emphasis added.
19
LHUSTC, above, fn.5, 4198. In 1929 five presumptive PE cases follow the general principle, four of which require
the agent to have a place of business, the exception being, When the agent is an employee who habitually transacts
commercial business on behalf of the enterprise in return for remuneration. The rest of the text and commentary,
however, makes clear the necessity of a fixed place of business. In 1930 the presumptive cases are reduced to three,
including that just quoted from 1929 in slightly different words, but the presumptive cases are all prefaced by the
requirement, A permanent establishment will thus exist when the agent, being established in the country ,
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Travellers, Tax Policy and Agency PEs 543

In both 1929 and 1930 the following addition appeared:
Lastly, there cannot be held to be any permanent establishment in the case of commercial
travellers not coming under any of the above-mentioned categories.20
In 1929 it is relatively clear both from the text and the commentary that this is merely a
restatement of what follows from the principle (requiring an establishment of the agent) and
there is nothing to suggest a change in 1930. Earlier consideration of travellers by the League21
and early treaty provisions22 seem to be concerned with pedlars and itinerant merchants selling
in their own right. The travelling salesman (agent) was a general issue in treaty negotiations for
Hungary, Romania and Yugoslavia at the time together with pedlars but in respect of the
individuals income only.23 It is thus not clear why the League was moved to include the special
reference to the travelling salesman given that it merely confirms what goes before; it would not
seem to rank in importance with the other confirmatory provision that a subsidiary is not a PE
of its parent unless the PE tests are fulfilled in the normal way.
The language referring to agents established there and the exclusion of travelling salesmen
not otherwise covered continued through the development of the transfer pricing provisions to
the Mexico and London models whose commentary also used the same established there
language.24 Those models also contained a provision on pedlars and itinerant merchants which
had merely been a suggestion in the 1928 Commentary and left their tax treatment to domestic
law.25 The somewhat discursive language used in the League presumptions about agents was not
picked up in many treaties but the great preponderance of treaties in the period one way or another
nonetheless reflected the fixed place requirement for the agent.26
The policy statements in relation to agency PEs are thin on the ground in this as in other
periods. Carroll, in his report that led to the transfer pricing rules, explains the Leagues agency

LHUSTC, 4206 [emphasis added]. The preceding general discussion of existing practice and principles in both years,
LHUSTC, 4197, 4206, seems to suggest that a fixed place may not be necessary for an agency PE but this view is
not taken up in the following statement of principles (and commentary in 1929).
20
LHUSTC, above, fn.5, 4198, 4206.
21
LHUSTC, above, fn.5, 4130, 4167; in the commentary on the taxation of employment income under the original
models it is stated, Nevertheless, special clauses may be inserted to meet the case of persons working in the vicinity
of the frontier or engaged in any itinerant occupation, employment or trade. This clearly goes beyond employment
and would cover pedlars and the like.
22
Austria-Czechoslovakia 1922, Austria-Germany 1922, Austria-Hungary 1924, Austria-Poland 1932,
Austria-Switzerland 1927, Czechoslovakia-Germany 1921, Czechoslovakia-Hungary 1923, Czechoslovakia-Poland
1925, Danzig-Poland 1924, 1929, Germany-Hungary 1923. The tax consequences vary: in some cases the result is
residence only taxation while in other cases the pedlar is excluded from the treaty and domestic legislation applies.
The treaties refer variously to hawking or peddling and other itinerant trades.
23
Hungary-Romania 1932 and 1937, Hungary-Yugoslavia 1928, Romania-Yugoslavia 1933; the provisions apply to
the income of the individual and not the business (in the case of employees) and give source taxing rights over the
income.
24
LHUSTC, above, fn.5, 4336, 43944397. As in 1929 the introductory words for the presumptions do not include
the word established but it is still in the general principle.
25
LHUSTC, above, fn.5, 44044405 referring to pedlars, inland shipping, touring shows and other similar occupations,
compare above, fn.21.
26
Treaties which use the League language more extensively mainly involve Romania: Germany-Romania 1937,
Hungary-Netherlands 1938, Hungary-Romania 1937, Italy-Romania 1938. The general trend of treaty practice in the
period is described above, fnn.12-17, and text.
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544 British Tax Review

PE rules at a number of points, agreeing with them but without providing any real policy analysis.
He is clear about the need for a fixed place of business of the agent:
The fact that the enterprise might have a travelling salesman or a representative in the
country who merely supervises the activities of independent dealers or distributors and
directs that goods be delivered from the warehouse to them for sale to customers, should
not be viewed as constituting a permanent establishment within the country. If, however,
the representative of the company has an office in the country and negotiates contracts for
the sale of goods which are filled out of the stock, the enterprise might be regarded as having
a permanent establishment within the country, even if the contracts were confirmed at the
head office in another country.27
The overall impression of this period is that the agency PE is viewed as an anti-avoidance
protection of the fixed place of business principle rather than an independent test.28 The special
concerns about travellers suggest that administration issues were partly the basis for the structure
of the agency PE rules in requiring a fixed place for the agent, just as they were for the basic
principle itself.
OEEC and treaty practice
What may be the initial shift to a new policy on the agency PE occurs in the UK-US treaty of
1945. John Avery Jones has noted that the permanent establishment definition was not one of
the critical issues in that landmark tax treaty.29 The US was already using the 1930s League of
Nations language in relation to the list of fixed places and was following the UK-inspired language
for agents with authority to contract (though referring to agents established in the other state)
and independent agents. The UK had its own special brand of agency treaties that picked up the
language of its 1930 enabling statute in relation to contracting and delivery of goods and of its
1925 legislation to resolve the controversy that had arisen over its threats to tax firms using
independent agents in the UK.30 The PE definition in the treaty read in part as follows:
The term permanent establishment when used with respect to an enterprise of one of the
contracting Parties means a branch, management, factory or other fixed place of business,
but does not include an agency unless the agent has, and habitually exercises, a general
authority to negotiate and conclude contracts on behalf of such enterprise or has a stock of
merchandise from which he regularly fills orders on its behalf. An enterprise of one of the
contracting Parties shall not be deemed to have a permanent establishment in the territory
of the other contracting Party merely because it carries on business dealings in the territory
27

Mitchell B. Carroll, Taxation of Foreign and National Enterprises, Vol. 4, Methods of Allocating Taxable Income
(Geneva: League of Nations, 1933) para.647, available at http://setis.library.usyd.edu.au/oztexts/parsons.html at item
5 [Accessed July 30, 2010].
28
Which in turn explains the independence exception to the agency PE testthe agent is only regarded as a PE if
integrated into the firm like the employees of a branch, Vann, above, fn.10.
29
John F. Avery Jones, The History of the United Kingdoms First Comprehensive Double Taxation Agreement
[2007] BTR 211, 240241.
30
FA 1930 s.17, Avery Jones and Ward, above, fn.10, John F. Avery Jones et al., The Origins of Concepts and
Expressions Used in the OECD Model and Their Adoption by States [2006] BTR 695, 727728.
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Travellers, Tax Policy and Agency PEs 545

of such other contracting Party through a bona fide commission agent, broker or custodian
acting in the ordinary course of his business as such.31
The main changes from previous League and US practice are that agencies are removed
from the list which precedes the other fixed place of business description and the agency
contracting/delivery provision seems to be expressed as an exception (unless) to an exception
(but does not include). On the more literal reading of an agent with power to contract or deliver
goods as a true exception to an exception, a fixed place is still required for an agency PE. Further,
the second case of an agency PE that is given, the delivery PE, of necessity requires a fixed place
where the agent maintains the stock of goods. On the other hand, given the deletion of agencies
from the list, it may be a less than elegant way of drafting a deeming provision for agency PEs
and removing the requirement for the agent to have a fixed place.
This 1945 treaty form became standard UK and US drafting for the next decade when they
were the two countries most active in negotiating tax treaties.32 The (unnecessary) travelling
salesman provision did not appear in UK and US treaties. It is unlikely that travelling salesmen
were in the minds of the negotiators in 19441945, notwithstanding the start of commercial
transatlantic flights in 1939 and the high-speed passenger liners which plied the routethey
were understandably a preoccupation of mainland Europe. The League style provisions for
travellers seem, however, to have disappeared more generally from treaty practice (whether
travelling salesmen or pedlars and itinerant merchants).33 This is likely the case because the
driving countries of tax treaty negotiation were now the UK and the US and their practice was

31

UK-US 1945, Art.II(1)(l).

In the period 19451957, the UK and US each negotiated 18 treaties with independent countries while the UK also
negotiated 49 treaties with its colonies (counting the Palestine-UK 1947 treaty which was continued with Israel in
1950 as one colonial treaty). The other most active countries in the period seem to be Sweden and Canada. A full,
but not complete, selection of 62 treaties between independent countries in the period 19451957 (that is, excluding
all the UK and some other colonial treaties) has been used to examine treaty practice in the period. They are:
Australia-Canada 1957, Australia-UK 1946, Australia-US 1946, Austria-Germany 1954, Austria-UK 1956, Austria-US
1956, Belgium-Sweden 1953, Belgium-UK 1953 , Belgium-US 1948, Canada-Denmark 1955, Canada-France 1951,
Canada-Germany 1956, Canada-Ireland 1954, Canada-Netherlands 1957, Canada-New Zealand 1948, Canada-South
Africa 1956, Canada-Sweden 1951, Canada-UK 1946, Ceylon-Sweden 1957, Denmark-Netherlands 1957,
Denmark-Norway 1957, Denmark-UK 1950, Denmark-US 1948, Finland-UK 1951, Finland-US 1952, France-Norway
1953, France-UK 1950, Germany-Greece 1950, Germany-UK 1954, Germany-US 1954, Greece-UK 1953, Greece-US
1950, Honduras-US 1956, Indonesia-Netherlands 1954, Ireland-UK 1949, Ireland-US 1949, Italy-Netherlands 1957,
Italy-Sweden 1956, Italy-US 1955, Japan-Sweden 1956, Japan-US 1954, Netherlands-Norway 1950,
Netherlands-Sweden 1952, Netherlands-UK 1948, Netherlands-US 1948, New Zealand-Sweden 1956, New Zealand-UK
1947, New Zealand-US 1948, Norway-Sweden 1947, Norway-Switzerland 1956, Norway-UK 1951, Norway-US
1949, Pakistan-UK 1955, Pakistan-US 1957, South Africa-Sweden 1955, South Africa-UK 1946, South Africa-US
1946, Sweden-Switzerland 1948, Sweden-UK 1949, Switzerland-UK 1954, Switzerland-US 1951, UK-US 1945. The
preferred UK and US PE provisions had some deviations from each other. The UK did not include custodians in the
list of independent agents and stuck with the language of its 1925 statute while the US usually included custodians.
The UK preferred to break the definition down into paragraphs while the US generally kept to a single paragraph.
Although both countries added specific provisions on purchasing offices and subsidiaries after the part of the definition
quoted in the text, the US often included before the agency material an exclusion for the casual and temporary use
of merely storage facilities while the UK did not use this language.
33
Travellers appear in a few treaties but never in the PE context: Belgium-Sweden 1953 Art.22, Netherlands-Sweden
1952 Protocol to Art.2.
32

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546 British Tax Review

replicated in nearly all treaties of the period even if they were not a party to the treaty and the
treaty was not in English.34
During this period some countries such as Germany and Norway were apparently seeking to
use language that accords more with the current OECD Model stating the fixed place of business
principle and then giving examples.35 Similarly there are some treaties, mainly involving Germany,
that use a deeming form of drafting for agency as occurs in the current OECD Model.36 In the
Germany-UK 1954 treaty, Germany accepted the list followed by other fixed places of business,
though even here the treaty is a halfway house as there are examples both before and after the
other fixed places of business language.37 The main quid pro quo for Germany seemed to be
that the UK accepted the German deeming form of drafting of the agency provision.
That treaty thus probably represents the first stage in the reversal of the dominant UK and US
practice in favour of the German practice and it may also be the next stage of separation of the
agency PE from the fixed place of business:
The term shall also be deemed to include
An employee who is permanently retained by an enterprise of one of the territories
to work in the other territory, whether or not that enterprise has a fixed place of
business in the other territory, if he is engaged in activities carried on with a view
to obtaining profits for the enterprise in that other territory, and
In the United Kingdom an agent, in the Federal Republic a Handelsvertreter or
other selbstandiger Vertreter, who has and habitually exercises a general authority
to negotiate and conclude contracts on behalf of an enterprise of the other territory,
or maintains a stock of merchandise belonging to that enterprise from which he
regularly fills orders on its behalf.38
34

There were some deviations from UK and US practice. Australia may have thought the deletion of agencies from
the list was significant as it retained the previous form of including them so that agents clearly required a fixed place
but it also adopted the exception to the exception style of drafting for agency: Australia-UK 1946, Australia-US 1953,
Australia-Canada 1957. Australias domestic law PE definition, originally adopted in 1959 and still in operation in
the Income Tax Assessment Act 1936 s.6, refers to, a place where the person is carrying on business through an
agent. The difference between the language of the domestic definition and the current OECD Model is noted by
Gzell J in Unisys Corporation v FCT [2002] NSWSC 1115; (2002) 51 ATR 386, paras 6263. By way of contrast,
South Africa used the two different versions in its 1946 treaties with the UK (agencies not in list) and the US (agencies
in list) and it is not clear that any significant difference was intended. Australia was not quite alone in this practice:
see Norway-Sweden 1947, Norway-Switzerland 1956; Germany continues to use the term permanent in relation
to agencies suggesting the same: Austria-Germany 1954, Germany-Greece 1950. There are similar indications of the
agent requiring a fixed place in some other treaties: Belgium-Sweden 1953, Canada-France 1951, Denmark-Norway
1957.
35
Austria-Germany 1954, Denmark-Norway 1957, Germany-Greece 1950, Italy-Sweden 1956, Norway-Sweden 1947,
Norway-Switzerland 1956.
36
Austria-Germany 1954, Canada-Germany 1956, Germany-Greece 1950, Italy-Netherlands 1957, Japan-US 1954.
Though Germany is the only country attempting to use equivalents of modern drafting for both the fixed place of
business and agency PE, in the case of the latter its treaties suggest that the agent required a fixed place of business,
see above, fn.34.
37
This was a not uncommon practice during the period with the additions after other fixed places of business usually
having to do with natural resources and agriculture: Austria-UK 1956, Canada-Denmark 1955, Canada-Netherlands
1957, Canada-Sweden 1951, Ceylon-Sweden 1957, Finland-UK 1951, Greece-UK 1951, Netherlands-Sweden 1952,
New Zealand-Sweden 1956, South Africa-Sweden 1955. Canada, Sweden and the UK are the main users.
38
Germany-UK 1954, Art.II(1)(l). Note that Germany insisted on the use of German technical terms for agents; the
same applies to the exclusion for independent agents in the treaty. This may suggest that Germany understood
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Travellers, Tax Policy and Agency PEs 547

The Organisation for European Economic Co-operation (OEEC) began its tax work in 1956
and, when the Fiscal Committee was established, its first important action was to appoint Working
Party 1 to deal with the PE definition.39 Significantly that Working Party consisted of delegates
from Germany and the UK.40 In its very first draft of the PE article the reversal of the dominant
and somewhat incoherent approach of the UK and the US in favour of the more logical German
approach occurred:
1.
4.

5.

The term permanent establishment means a fixed place of business in one of the
territories in which the business of the enterprise is wholly or partly carried on.
An agent acting in one of the territories on behalf of an enterprise of the other
territory other then an agent of an independent status to whom paragraph 5
applies shall be deemed to be a permanent establishment in the first-mentioned
territory if the agent:
(a)
has and habitually exercises a general authority to negotiate and enter into
contracts on behalf of the enterprise
An enterprise in one of the territories shall not be deemed to have a permanent
establishment in the other territory merely because it carries on business dealings
in that other territory through a broker, general commission agent or any other
agent of a generally independent status where such persons are acting in the ordinary
course of their business as such.41

Specifically, the list followed by other fixed places of business has disappeared in favour of
the statement of principle followed by a list of examples. Further, the agency provision is a clear
deeming provision and is detached in a drafting sense from the fixed place of business test. In
contrast to the League of Nations position, a literal reading now suggests that an agent does not
require a fixed place of business to constitute a PE. But was that the intention?
Travellers, who are the test case on this issue, disappear at this point in model treaties, never
to reappear. There is, however, discussion of their position in the various documents produced
by the OEEC. On pedlars and itinerant merchants there was a proposal to include a special

something of the differences between the civil law and common law of agency, see articles above, fn.10, and was not
prepared to give up its long-developed domestic law view of the PE.
39
In 1956 the OEEC Council summoned an ad hoc meeting of tax experts which led to the establishment of the Fiscal
Committee. At its first meeting the Committee appointed five working parties to look at particular articles of tax
treaties. The documents from the OEEC archives are available at http://www.taxtreatieshistory.org [Accessed July
30, 2010]. See in relation to these events OEEC documents C(56)49 and FC/M(56)1.
40
Each Working Party during this period was formed by delegates from only two countries. The US at this point was
not a member of the OEEC although it sent representatives to meetings as did Canada. Germany was appointed the
corresponding member of Working Party 1 which suggests that it was responsible for initial drafting.
41
OEEC document FC/WP1(56)1, 3-4. The rest of the Article was also close to its modern form and followed German
practice more closely. The difference in numbering for the agency provisions arose from building sites being one of
the examples in para.2 of the draft, which remained the position until 1977. The major change between this draft and
the final version was the inclusion of delivery out of a stock of goods in the agency PE provision as para.4(b) in
accordance with both UK and German practice. This was omitted during the development of the draft. Because we
do not have the documents leading up to this draft in the OECD archives, we do not know how the German and UK
delegates reached agreement of what was mainly the German form of drafting. Perhaps the general preservation of
the UK agency language emanating from its 1925 and 1930 statutes was sufficient for the UK.
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548 British Tax Review

provision but this was rejected by Working Party 1 and confirmed by the Fiscal Committee
whose published report states:
During the drafting of the permanent establishment Article a good deal of consideration
was given to the question whether it should contain some special provision for itinerant
merchants, pedlars and watermen. After careful consideration it was decided that in such
cases there should only be deemed to be a permanent establishment if there is a fixed place
of business. Itinerants of this kind are, in general, subject to tax in the country of residence.
A special provision to deal with these people seems unnecessary because their income will,
in general, be small and it is likely to be most difficult to tax them in any country except
the one in which they reside. Moreover, any loss of tax which a country may suffer through
giving up its right to tax itinerants from other countries is likely to be more or less
compensated by the fact that it will have the sole right to tax itinerants residing within its
own borders. It may be, of course, that countries with common frontiers will regard this
problem as of sufficient importance to merit some special provision.42
It will be noted that the policy justification avoids the issue of economic penetration into the
other state. Instead it stresses administration difficulties, the small amount of revenue involved
and the balance argument, to the effect that if flows between countries are in balance giving up
source taxation does not affect overall tax revenue of either country.
In relation to travelling salesmen, it is not clear whether they are discussed. Initially there was
draft commentary from Working Party 1 which may have suggested that it was no longer necessary
for an agent to have a fixed place of business. In the comments on the first draft produced by
Working Party 1, it was said:
it seems necessary in conformity with the international practice hitherto followed to treat
certain groups of agents as permanent establishments on account of the nature of their
business activities, even though they may not have a fixed place of business.43
During development of the article and commentary the last phrase remained as it was right up
to publication of the report at which point it was changed to even though the enterprise may
not have a fixed place of business.44 This phrase remains in this form in the Commentary to this
day.45 Whether this was seen as clearing up an ambiguity in the original draft and implying that
the agent requires a place of business, or whether it was simply avoiding the expression of any
view on whether agents had to have a place of business, is not clear. Nonetheless as least since

42

OEEC, [First] Report of the Fiscal Committee: The elimination of double taxation (Paris: OEEC, 1958) also available
in LHUSTC, above, fn.5, 4491 (the OEEC reports are at item 4 on the webpage referred to in that note). The issue
was raised at the third meeting of the Fiscal Committee, OEEC document FC/M(57)1, 3 and dealt with in more or
less identical terms in the third draft of Working Party 1, FC/WP1(57)2, 8 and its final report, FC/WP1(57)3, 8. This
material appeared in the Commentary to the 1963 Draft Model but disappeared from the Commentary to the 1977
Model and thereafter.
43
OEEC document FC/WP1(56)1, 9. Emphasis added.
44
OEEC Report in LHUSTC, above, fn.42, 4494. Emphasis added.
45
OECD Model, above, fn.1, Commentary on Art.5, para.31.
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Travellers, Tax Policy and Agency PEs 549

the early 1990s, learned authors have read the agency provisions in a literal sense as a separate
PE test and as not requiring that the agent have a fixed place of business.46
OECD 2002 discussion
After the OEEC work, tax treaties quickly converged on the language that had been adopted.
Attention shifted to the development of the OECD Commentaries but little happened in relation
to travellers until recently. The OECD returned to the question whether an agency PE required
a fixed place of business of the agent in 200247 during a study of several issues surrounding the
PE definition. It amended the Commentary in 2003 by an addition as follows:
Persons whose activities may create a permanent establishment for the enterprise are
so-called dependent agents i.e. persons, whether or not employees of the enterprise, who
are not independent agents falling under paragraph 6. Such persons may be either individuals
or companies and need not be residents of, nor have a place of business in, the State in
which they act for the enterprise.48
The OECD discussion of the addition provides the first extended treatment of the issue and
the underlying policy. It starts off with the example of the travelling salesman and notes that
arguably the economic link in such cases is more tenuous than that envisaged in the PE definition.
It then asks whether a technical (that is, literal) reading of the agency PE definition to produce
a PE in this case produces a paradox, namely that a traveller does not constitute a PE if contracting
as principal, but does constitute a PE if contracting as agent.
Apparently the OECD has two cases in mind as the arguments debated in relation to the
paradox are that: (1) if an enterprise contracts through employees they are not agents of the
enterprise but rather an emanation of the enterprise (in other words they are the enterprise) and
so cannot constitute an agency PE of the enterprise; and (2) some countries have been moved
to deal with the paradox by treating sole traders as in effect the agents of the business that they
own. It is easy to dismiss the first argument. It has always been clear that the agency rules in the
models cover employees from the very earliest times to the present day. The positive argument
is that the requirement that the agent act habitually and has power to bind the enterprise generally
ensures that the enterprise does sufficiently participate in the economic life of the other state to
justify taxation there. Not surprisingly the second argument has not found much acceptance.49
A mysterious conclusion then follows. First, it is recognised that the real policy of the agency
rule is an anti-avoidance one. Secondly, it is accepted that normally an agent will have a fixed
place of business in the state (taxable presence on his own account). Thirdly, if the agent
does not have a fixed place of business in the state, the enterprise will not in practice be taxed
in the state for administrative reasons. Fourthly, there may be untoward revenue consequences
46

Arvid A. Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (Deventer: Kluwer, 1991) 463 (though
his position is more nuanced, see below, fn.53), John Huston and Lee Williams, Permanent Establishments (Deventer:
Kluwer, 1993) 82, Klaus Vogel on Double Taxation Conventions 3rd English edn (London: Kluwer, 1997), 333.
47
OECD, 2002 Reports Related to the OECD Model Tax Convention (Paris: OECD, 2002) 101103.
48
OECD Model, above, fn.1, Commentary on Art.5, para.32. Emphasis added to indicate the addition.
49
Jacques Sasseville and Arvid A. Skaar, Is There a Permanent Establishment - General Report in International
Fiscal Association, Cahiers de Droit Fiscal International Vol 94a (The Hague: SDU, 2009) 17, 50.
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550 British Tax Review

(apparently through exemption in the home state). Fifthly, the travelling salesman is yesterdays
problem and not common in current commercial practice.50 Taking the first three matters together,
they collectively point to requiring the agent to have a fixed place of business as that will prevent
the avoidance of the fixed place of business test by using agents, will be administrable and will
not lead to rules that are generally ignored.
The concern about revenue consequences is not clearly explained. In regard to the source
country it is stated in the earlier discussion that the contrary view would mean that extensive
business could be carried out in the source country without exposure to taxation there (in language
very reminiscent of that used in relation to insurance where the OECD does not find the argument
convincing).51 The conclusion makes clear that the source tax will rarely be collected under the
interpretation adopted. For the residence country the concern about factual double exemption is
an argument against, not for, the interpretation adopted. If there is no agency PE (as would be
the case under the rejected view), there will be no exemption of the enterprise in the residence
country under treaties in OECD Model form. The factual double exemption arises because,
according to the interpretation adopted by the OECD, the source country does not factually
enforce its taxing rights and the residence country which can enforce taxing rights is legally
required to grant an exemption (assuming the treaty or domestic law is operating an exemption
system for PE profits).52
The view that the problem no longer arises is contradicted by the fact that the OECD felt it
necessary to deal with it at some length. Some of those working in the real world are also very
aware of the issue as a live problem. That there is a paradox in not taxing pedlars or itinerant
merchants who sell as principals but taxing enterprises that use travelling salesmen is clear.
Adoption of the view that an agency PE requires a fixed place of business of the agent removes
the paradox and solves problems in the real world.
One country at least has been troubled by the OECD conclusion. Germany, which is the origin
of the permanent establishment concept and, as has been argued above, the modern expression
of it in the OECD Model, has recorded an Observation on the addition to the Commentary. While
accepting the view now adopted, Germany:
attaches increased importance to the requirement of minimum duration of representation
of the enterprise under Article 5 paragraph 5 of the Model Convention in the absence of a
residence and/or fixed place of business of the agent in the source country.53
50

OECD 2002 Reports, above, fn.47, 102103.

See above, fn.6 and text.
52
Another mystery is that the double exemption concern seems to be over the taxation of the agent but the context is
clearly the taxation of the principal; compare this kind of crossover in the early 1930s, above, fn.23 and text.
53
OECD Model, above, fn.1, Commentary on Art.5, para.45.9. Although Skaar, above, fn.46, supports the later OECD
view that a PE of the agent is not necessary, he does consider that some level of presence above travel in and out (or
fly in, fly out in modern times) is required at 485:
The problem of residence versus habitual abode and transient presence is not discussed in the commentaries to
the OECD Model treaty. Clearly, mail-order activities do not constitute a PE. Moreover, disqualification of
salesmen who travel in and out of the country as agency PEs must also apply under tax-treaty law, even if the
visits are regular and frequent. However, the presence of travelling agents whose visits last for a substantial
period of time, for example more than 6 months each time, cannot be considered transient in this respect.
On the other hand, residence is not a practical requirement, because it would be too easy to circumvent. A
habitual abode in the country is sufficient de lege lata. This requirement will probably always be complied with
51

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Travellers, Tax Policy and Agency PEs 551

In other words the permanent representation or agency which was emphasised in its pre-OECD
treaties is alive and well and usually leads to the same result as requiring the agent to have a
fixed place of business. Surprisingly, Germany has a mutual agreement with the Netherlands
entered into in 2002 and still operative to the effect that travelling salesmen from the Netherlands
offering flowers in Germany from the backs of trucks on behalf of their employers have a PE in
Germany. This agreement has been criticised and one wonders whether Germany or the
Netherlands collect much revenue from this source.54
The OECD itself recognised that its conclusion shifted the policy issue elsewhere and did not
solve a great deal but it considers the problem is confined to the meaning of habitually in the
agency PE rule.55 That view is doubly unfortunate. Shifting a problem to another word is not a
sensible policy solution, especially when a much better solution is readily available. Moreover,
it mistakes the nature of the problem created. Testing economic penetration into another state is
not only a question of frequency, indeed that would seem the lesser question, but also a question
of the significance in an economic sense of the operations in the state and whether power to
contract provides a reliable test of, or proxy for, that significance. Cross-border pedlars can sleep
peacefully but the (employers of the) modern travellers in the commercial world will not derive
much comfort from the OECD conclusion that while the rules may apply, no-one enforces them.
More recently the OECD has apparently assumed the opposite view that the agent should have
a fixed place of business in a state for an agency PE to exist. In the addition to the Commentary
discussing the services PE in 2008 it said:
Also, the source taxation of profits from services performed in the territory of a Contracting
State by an enterprise of the other Contracting State that does not have a fixed place of
business in the first-mentioned State would create difficulties concerning the determination
of the profits to be taxed and the collection of the relevant tax. In most cases, the enterprise
would not have the accounting records and assets typically associated with a permanent
establishment and there would be no dependent agent which could comply with information
and collection requirements.56
A puzzle: in the name of
Fortunately John Avery Jones need not worry. As a traveller, he does not constitute an agency
PE in the many countries he visits, even if habitually, as he is not contracting on behalf of others.
when the permanence test is met. The agent constitutes an agency PE even if he is merely travelling around,
provided that he has his habitual abode in the country.
The problem of required connection to the country also applies to companies representing another enterprise.
No problem exists if the agent company has its place of effective management in the country where the business
is conducted. The agent is then a resident of the country under OECD-based treaties. A sufficient connection
also exists when the agent company has a PE through which it represents the principal enterprise. In the case
where the agent company does not have a PE, habitual abode of an employee will suffice for an agency PE.
In turn his view seems to be influenced by German history and learning on PEs.
54
For the German-Netherlands mutual agreement, see (2002) I Bundessteuerblatt 957, and for criticism, J. Ldicke,
Lasst Blumen sprechen! Zur fahrenden Vertreterbetriebsttte (2003) 10 Internationales Steuerecht 164. The author
thanks Jrgen Ldicke and Jan de Goede for this information.
55
OECD 2002 Reports, above, fn.47, 103.
56
OECD Model, above, fn.1, Commentary on Art.5, para 42.13.
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552 British Tax Review

Or should that be in the name of others? The international tax group experienced its only major
division of opinion in relation to the differences between common law and civil law agency
associated with the significance of the words in the name of in Article 5(5) of the OECD
Model.57 The release of the OEEC archives allows us to look behind these words and how they
came to be used in the Model instead of on behalf of which make more sense to a common
lawyerbut at the end we are still left hanging tantalisingly close to the objective but not quite
reaching it.
The first draft of Article 5 by Working Party 1 used at both relevant points in the agency rule
on behalf of in English and pour le compte d[e] in French, while already having
commissionnaire and courtier in the agency exception in French. At this point both provisions
worked the same way in both languages in the sense that commissionnaires could be within the
agency PE rule as they can act for the account of another.58 This drafting remained throughout
into the Working Partys final draft in English and in the text of the article agreed by the Fiscal
Committee.59 The French version introduced the language au nom de at the second point in
the agency rule in the second report of Working Party 1.60 As the original document was in
English, one suspects that it was not the UK and German delegates constituting the working
party who were responsible for the change but rather the translator (or one of the French-speaking
countries).
When the drafting committee set up to deal with use of consistent terminology, including
across languages, looked at the drafts, it proposed to change the French text: Instead of au nom
de, read pour le compte de.61 In other words it noticed the change in language in the French
version which did not occur in the English (on behalf of used at both points in the agency
rule). The French version in the revision of the draft report following the meeting of the drafting
committee instead used au nom de at both points which was reflected in the English version
of the document by in the name of being used twice.62 It should be noted that the original
language of the draft reports was French so possibly the person in the Secretariat drafting the
report made this change to the French version of the Article rather than doing as directed by the
drafting committee to conform the French to the English. On the other hand the drafting committee
documents are shown as originals for both the English and French versions.
At the meeting of the Fiscal Committee where this revised draft was discussed, it is reported
that the Committee, instructed the secretariat to incorporate certain drafting changes in the final
text without indicating what the changes were.63 The available Council documents all reflect
the change to the current Model language in English and French,64 so even with the archives we

57

Avery Jones and Ward, Roberts, above, fn.10.

Avery Jones and Ward, above, fn.10, 350, fn.60.
59
After its 6th meeting as recorded by a note of the Secretary, OEEC document FC(58)1, which was approved at the
7th meeting, see TFD/FC/25 for the final version as approved.
60
OEEC document FC/WP1(57)1, 5. In the first draft of the report, FC(58)2, February 13, 1958, that became the
OEEC Report in LHUSTC, above, fn.42, the position remained the same in the English version and the French version.
61
OEEC document TFD/FC/32(Revised), March 10, 1958.
62
OEEC document FC(58)2(1st rev), April 10, 1958. The author thanks Jacques Sasseville for clearing up what was
in an obscured version of the document on the tax treaties history website.
63
OEEC document FC/M(58)3, 3, May 57, 1958.
64
OEEC documents FTD/FC/41, C(58)118.
58

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Travellers, Tax Policy and Agency PEs 553

cannot be sure whether it was just translation issues that produced on behalf of in the name
of, or something more substantial.

Agents; Foreign travel; OECD; Permanent establishment; Tax principles; Travellers

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