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III. EXAMINATION OF THE QUESTIONS LEFT OPEN BY THE GENERAL MEETING OF GOVERNMENT EXPERTS.

The Fiscal Committee continued at its second session the study of the various questions [?] the General Meeting of Government Experts in 1928 had not been able to go into sufficiently [?].

A. Definition of the Term “Autonomous Agent” in Relation to the Term “Permanent Establishment”.

The Committee examined on second reading the definition of the term “autonomous agent” in relation to the term “permanent establishment” which it had provisionally accepted at its previous [?] session, and adopted the following text:

In its endeavour to determine the principles which it might adopt as a guide in defining the terms “autonomous agent”note and “permanent establishment”, the Committee found that [?] criteria were employed in different countries.

(a) The first is a criterion of a legal nature, it being considered that the only agents dependent on [?] an enterprise are those having sufficient powers to conclude contracts binding upon that enterprise.

The Committee considered that this criterion was admissible, but was not applicable to every case.

(b) According to the second system, there is no “permanent establishment”, unless the agent has a fixed depot.

There are cases, however, in which the presence of an agent of an enterprise may connote, [?] that enterprise, the existence of a permanent establishment, although the enterprise undoubtedly has [?] no fixed depot; this is particularly the case with insurance companies and certain buying agencies.

(c) The third system takes into account the relations between the agent and the enterprise, the only agents regarded as not autonomous being those in receipt of fixed emoluments.

This may be a determining but it is not an indispensable factor in deciding whether there [?] is a non-autonomous agent, i.e., a permanent establishment.

(d) The fourth criterion is that of the continuity of the relations between the agent and the enterprise.

This criterion is not absolute and requires closer definition.

Taking the above systems into consideration, the Committee concluded that it would be advantageous to disengage a general principle governing the matter.

The fundamental principle is:

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.

A permanent establishment will thus exist when the agent, being established in the country:

  • (a) Is a duly accredited agent (fondé de pouvoir), who habitually enters into contracts on behalf of the enterprise for which he works;
  • (b) Is bound by an employment contract and habitually transacts commercial business on behalf of the enterprise in return for remuneration from the enterprise;
  • (c) Is habitually in possession, for the purposes of sale, of a depot or a stock of goods belonging to the enterprise.

As evidence of the existence of an employment contract under the terms of (b) may be taken. [?], the fact that the administrative expenses of the agent, in particular the rent of premises, the paid by the enterprise, or the fact that the latter's intervention is manifested by outward signs.

A broker who places his services at the disposal of an enterprise in order to bring it into touch with customers does not in his own person constitute a permanent establishment of the enterprise, even if his work for the enterprise is to a certain extent continuous or is carried on at regular periods.

Similarly, the fact that the commission agent (commissionnaire) acts in his own name for one of more enterprises, and receives a normal rate of commission, does not in principle imply the existence of a permanent establishment for any of those enterprises. This may not be the case, however, if he is required to devote the whole of his activities to a single enterprise.

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.

British Government Bill.

At this session Sir Percy Thompson, the British member of the Committee, communicated to his colleagues a clause (Appendix I) which the British Government had submitted to Parliament in the Finance Bill of the year in order that it might be possible for Great Britain to conclude international agreements for the avoidance of double taxation resulting from divergent definitions of the term “autonomous agent”.




  ― 5[4207] ―

The Committee noted Sir Percy Thompson's communication with great interest and thanked him for showing them this proof of confidence.

The contents of the clause do not differ materially from the conclusions adopted by the Fiscal Committee in the above report. The British clause would appear of a nature greatly to facilitate the conclusion of international agreements on the basis of the recommendations adopted by the Fiscal Committee.

B. Rules for Apportionment of Profits or Capital from Undertakings operating in Several Countries and Measures designed to avoid Double Taxation of International Trusts and “Holding Companies” note.

At its previous session the Fiscal Committee had framed a detailed questionnaire on this question which it had forwarded to all its members and corresponding members in order to obtain full information concerning the practices at present followed in the different countries.

The Committee received replies concerning some twenty countries. This copious and very important documentation has been summarised in a report prepared by Professor Adams (Appendix II).

The Committee has also received communication of the conclusions arrived at by the International Chamber of Commerce.

The Committee held an exhaustive discussion, which revealed the complexity of the question and the numerous obstacles which face any attempted solution. Nevertheless, while fully realising the difficulty of the task, the Fiscal Committee is of opinion that the moment has come to deal with the real substance of the question, since, until this is settled, one of the principal causes of double taxation will continue to exist.

The Committee decided to concentrate chiefly on this point. It feels that for the same reason the grant of the Rockefeller Foundation (see hereafter) should be employed primarily for this object.

The Committee requested a Sub-Committee composed of M. BLAU, M. BORDUGE, Professor DORN, Professor Dr. FLORÈS DE LÉMUS and Sir Percy THOMPSON to prepare the discussion for the next session.

C. Study of the Principles for the Avoidance of Double Taxation of Author's Rights and Patents.

As in the case of the preceding question, the Committee had forwarded to all its members a questionnaire on authors' rights and patents. The replies received have been summarised in a report drawn up by M. Clavier (Appendix III).

The General Meeting of Government Experts, which was held at Geneva in October 1928, suggested that the Fiscal Committee should endeavour to discover a method for the avoidance of double taxation levied on the income derived from authors' rights and patents. At its first session, the Fiscal Committee made a preliminary study of this subject.

Certain members were of opinion that the régime had been fixed by Article 9 of the draft 1a, drawn up by the Government experts (document C.562.M.178.1928.II). This article is worded as follows:

“Annuities and income from other sources not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income.”

Other members pointed out that, at previous meetings, no decision had been take either with regard to authors' rights or the income derived from patents. This appeared to be confirmed by the fact that the Government experts' report recommended the Fiscal Committee to study the question.

Certain members of the Committee also observed that the above-mentioned Article 9 contained a printer's error, since the word “sources” should have been “créances”. In support of this argument, they advanced the following reasons:

  • 1. In all previous documents the word “créances” had always been employed (document F. 212, page 32, litt. H. document C.216.M.85.1927.II, pages 11 and 16);
  • 2. The text of Article 9 had been taken from the above documents and had been adopted without alteration by the General Meeting of Government Experts;
  • 3. The last part of the article refers to creditors (“créanciers”) which implies the existence of a “créance”;
  • 4. The commentary on this article twice employs the expression “créances”, but makes no mention of “sources” (document C.562.M.178.1928.II, page 13);
  • 5. Article 8 of draft 1c, based on the Article 9, referred to above, also contained the word “créances” (document C.562.M.178.1928.II, page 20), so that, if the word “sources” is maintained in Article 9, draft 1a, the provisions of draft 1c would differ from those of draft 1a, which would be contrary to the intention expressed by the Government experts.

Lastly, certain members thought that, in certain cases, the income derived from authors' rights or patents might come under Article 5 of draft 1a, which refers to industrial, commercial or agricultural undertakings and any other trades or professions carried on in the person's own place of residence.

Without wishing to offer any opinion on the text of Article 9 of draft 1a adopted by the Government experts, the Fiscal Committee, at its first session, came to the conclusion that, before any decision was reached as to the method of avoiding double taxation on authors' rights and patents, it would be advisable to enquire into the fiscal systems at present applicable to them in the various countries. It accordingly drew up a questionnaire which was sent to the regular and corresponding members of the Fiscal Committee.




  ― 6[4208] ―

During the present session, the Fiscal Committee has considered the replies received to this questionnaire and which have been summarised by M. Clavier (Appendix III). On the basis of these data the Committee has adopted in first reading the following conclusions:

The Committee did not wish to offer any opinion on the drafting of Article 9, as it appears in draft 1a, which is incorporated in the Government experts' report.

The Committee was of opinion that, without going into these questions, one could solve the problem by determining the category in which income derived from authors' or inventors' rights should be placed for the purpose of the application of the model conventions.

This would obviously make it possible to bring such income under the system contemplated for income of a similar nature in the model conventions, and it would thus have the effect of preventing such income from being taxed simultaneously in more than one country.

The examination of the replies received from Governments led to the following conclusions:

(a) Fees collected by the Author or Inventor himself.

In most countries, when the fees are collected by the author or inventor himself, they are treated as professional earnings (with a few exceptions, particularly in one country, where income of this kind is regarded as income derived from movable capital).

The Committee considered that this system was fair and consistent with the economic nature of income of that kind.

That amounts to saying that in the international sphere the income will follow the rule laid down in the model conventions for professions carried on in the person's own place of residence when he has no permanent establishment abroad, and will consequently always be taxable in the country of the author's or inventor's domicile.

(b) Fees collected by the Heirs or Assigns (Legatces, Donees, etc.) of the Author or Inventor.

Certain countries take the view that the personality of the heirs and assigns is a continuation, in a sense, of the personality of the author or inventor, and that the nature of the rights in question [?] not modified by their [?] transfer. They therefore consider that income derived from authors' [?] and patents is in the nature of professional earnings in the case of heirs or assigns, just as much as in the case of authors and inventors.

Another group of countries hold that the transfer of authors' rights or patents to heirs or assigns modifies the nature of the rights and makes them similar to rights the income from which is taxed, as income from movable capital. This argument is strengthened by the fact that on the transfer a succession or donation duty is collected, similar to that imposed in like circumstances on transfers of movable capital.

Whether the income in question is regarded as professional earnings or income from movable capital in the international sphere, by following the rules laid down in the model conventions one always find, that the right of taxation belongs to the country in which the heir or assign is domiciled.

(c) Authors' or Patents' Fees collected by Grantees.

The same problem arises when copyright or patent fees are collected by grantees.

In this case, however, it should be observed that the income received by the grantee is entirely different in nature from that received by the author himself or his heirs or assigns. The income received by the latter, whether in the form of a transfer fee paid once for all or in the form of royalties or shares, follows the rules for the income from authors' rights referred to under (a) and (b) above, and is therefore taxable in the country in which the intitulee is domiciled. The income received by the grantee, on the other hand, will always be in the nature of industrial or commercial income, and will be taxed as such in the international sphere, according to the rules established for the taxation of the income of undertakings operating in the territory of one or more countries. In most of these cases the authors' rights and patents become part of the assets of the grantees' undertaking and the income derived therefrom cannot be separated from the aggregate income of the undertaking. This applies, for example, in the case of a publisher who buys a writer's work in order to publish a book and place it on sale; and it applies also to a manufacturer who buys a patent to use it in manufacturing his goods.

There are also cases, however, in which income from authors' rights and patents is distinguishable from the grantee's other income. We may mention the case of a publisher who buys [?] the copyright of a musical composition in order to sell the performing rights to theatre and concert managers, or the case of a trader who buys patents from different inventors in order to sell them or lease the right of exploitation to a manufacturer or manufacturers.

As we have already observed, however, in both cases the income is industrial or commercial and should in principle be taxed as such.

(d) Authors' or Inventors' Fees collected by Persons or Bodies (Authors' Societies, Inventors' Societies, etc.) specially entrusted with the Collection of such Income.

1. The person or body entrusted with collection, whether he receives a commission or takes it share in the income from the authors' rights or patents, will only be taxed on his own profits and by the country in which he carries on business, while the income received by the author or inventor is taxed by the country in which the latter is domiciled.


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2. Where special bodies exist for the purpose of collecting authors' fees or patent fees (authors' societies, inventors' societies, etc.), certain countries impose a flat-rate tax on the society which collects the fees in the capacity of the author's or inventor's agent, and this applies even if the author or inventor is resident abroad. Inasmuch as the latter pays income-tax in the country in which he is domiciled, it is undeniable that this system may give rise to double taxation. Such is the case if the amount of the flat-rate tax imposed on the body which acts on the author's or inventor's behalf exceeds the tax that would be payable on the commission actually drawn by that body. The Committee is of opinion that, in order to avoid this double taxation, the country in which the body is domiciled should limit itself to taxing only the commission actually drawn by the body.

From what has been shown in the foregoing report, the conclusion may be drawn that income from authors' rights or patents, which is characteristically such and does not fall into the class of industrial or commercial income, should always be taxed by the country in which the intitulee is domiciled.

D. The Question of Reciprocity and of the Most-favoured-nation Clause as they affect the Problem of Double Taxation.

The General Meeting of Government Experts had recommended that this question should be examined by the Fiscal Committee. The latter arrived at the following conclusion:

In view of the fact that the bilateral or multilateral agreements on double taxation are based on the principle of reciprocity, that is to say, involve reciprocal treatment for the nationals of the contracting parties, the Fiscal Committee, while not wishing to give an opinion on an exceedingly difficult point of international law, considers that the application of the most-favoured-nation clause to the nationals of a country which had not acceded to the said agreements would constitute a treatment of those nationals contrary to equity and to the spirit of the clause.

Nevertheless, in order to prevent this point from arising, it is desirable that in commercial or establishment treaties concluded in the future it should be made clear that the most-favoured-nation clause in its application to fiscal matters does not extend to special provisions for the avoidance of double taxation.

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