Profits, preparations, and perennial efforts: TEI comments on OECD attribution of profits, prepares for Canadian liaison meetings, addresses Virginia legislative proposals.

The efforts of TEI, its members, committees, and chapters are perennial in every sense of the word. Not only do these efforts continue year-round, but they have a persistent and enduring quality. This fall is no exception: TEI filed comments on the OECD's draft commentary on attribution of profits, Virginia legislative proposals, and a GST policy statement. The Institute also submitted the agendas for four annual liaison meetings with Canadian government officials.

OECD Attribution of Profits

On October 12, TEI responded to a request for comments by the Organisation for Economic Cooperation and Development (OECD) on a revised Discussion Draft on the Attribution of Profits to a Permanent Establishment--Part I (General Considerations), which was published in August. While commending the organization for its commitment to collaboration and improving the clarity of the Commentary to the OECD Model Income Tax Treaty, TEI suggested the proposed rules would significantly increase the risk of double taxation, as well as increase the number of disputes between taxpayers and taxing authorities and between the taxing authorities themselves.

TEI's letter explained that two broad interpretations of Article 7(1) of the Model Treaty are currently used by OECD Member countries: The "relevant business activity" approach and the "functionally separate entity" approach. The discussion draft proposes to adopt the "functionally separate entity" approach as the authorized OECD approach because it is "simpler, more administrable, and more consistent with the understanding of the arm's length principle."

The Institute expressed concerned that the discussion draft may be interpreted to lower the threshold for determining source-country taxation of non-resident companies. The Institute recommended that rules be embedded in the OECD Model Treaty to ensure that when taxpayers follow the administrative rules, the courts will respect the results. It also recommended that, where practicable, the rules should align with common business practice by respecting the taxpayer's books and records.

TEI cautioned that the concepts set forth in the discussion draft should apply only in respect of the attribution of profits of a permanent establishment (PE) under Article 7, and only after a PE has been established under Article 5. TEI also recommended that the effective date of the proposed rules be delayed until there is greater clarity concerning their application and a greater understanding of their effect on multinational companies and government revenues.

The Institute's letter was prepared by a working group headed by Vincent Alicandri of Hydro One Networks, Inc. and coordinated with the Canadian Income Tax Committee, whose chair is David V. Daubaras of General Electric Canada; the International Tax Committee, whose chair is John J. Herson of Neenah Paper, Inc.; and a working group from the European Chapter chaired by Peter H. Taylor of DuPont de Nemours International.

TEI's comments to the OECD appear in this issue beginning on page 494. Note: The OECD recently announced that it will defer making a final decision on the discussion draft. (See the separate article elsewhere in this issue.)

Canadian Liaison Meetings

On December 7 and 8, TEI met with representatives of the Canadian Department of Finance and the Canada Revenue Agency (CRA) on pending income tax and excise tax issues. TEI President Judith P. Zelisko, together with Vice President for Canadian Affairs David M. Penney of General Motors of Canada Limited, led the Institute's delegation, which includes Mr. Daubaras and Sherrie Ann Pollock of Royal Bank of Canada, chair of TEI's Canadian Commodity Tax Committee.

The first meeting on December 7 with CRA addressed income tax issues. Later that day, there was a separate meeting with CRA on excise tax issues. The following day, TEI met separately with the Department of Finance on income and excise tax issues.

According to Ms. Zelisko, the organization has held regular liaison meetings with Canadian officials for more than three decades. "Not only have the meetings fostered a cordial working relationship between TEI and Canadian tax officials," she explained, "they have also been extremely practical and productive--as the agendas demonstrate."

All four agendas are reprinted in this issue, beginning on page 502. CRA and Finance have again agreed to provide written responses to TEI's questions and comments. When final, the responses will be posted on TEI's website.

Virginia Chapter Advocacy

For the second year, TEI's Virginia Chapter has spearheaded an effort for the Institute to comment on legislative proposals developed by Virginia's Department of Taxation. On October 21, TEI critiqued proposals that would authorize the Tax Commissioner to eliminate paper requests for an extension of time for filing income tax returns and increase the penalty for failing to pay at least 90 percent of the tax by the original due date from 0.5 percent to 3.0 percent per month.

TEI's letter, signed by Virginia Chapter President Herbert M. Smith, suggested that the proposed six-fold increase in the penalty rate represented unsound tax policy. Mr. Smith noted that the Commonwealth is already fairly compensated for late payments, because taxpayers pay interest on any taxes not remitted by the original due date in addition to the current penalty, if applicable. In TEI's view, the equivalent of a 36-percent annual rate is usurious, and, at the very least, a penalty so harsh should contain a reasonable cause exception.

The Virginia Chapter's letter is reprinted in this issue, beginning on page 501.

GST/HST Policy Statement P-208R

On October 26, TEI submitted comments to the Canada Revenue Agency on the revised GST/HST Policy Statement P-208R--Permanent Establishment to the Excise & GST/HST Rulings Directorate of CRA. The revised policy attempts to simplify the determination whether a Canadian non-resident does, in fact, have a permanent establishment for GST purposes and is thus required to register. The Institute applauded CRA's efforts to clarify the permanent establishment issue and provided specific suggestions in respect of the examples contained in the policy to enhance clarity. The comments were prepared by the Institute's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of Royal Bank of Canada.

The Institute's submission on Policy Statement P-208R appears in this issue, beginning at page 500.

TEI ADVOCACY AT A GLANCE

* Comments on the OECD's Revised Discussion Draft on the Attribution of Profits to a Permanent Establishment--Part I (General Considerations), page 494.

* Agenda for TEI-CRA Liaison Meeting on Canadian Income Tax Issues, page 502.

Agenda for TEI-CRA Liaison Meeting on Canadian Excise Tax Issues, page 508.

* Agenda for TEI-Department of Finance Liaison Meeting on Canadian Income Tax Issues, page 517.

* Agenda for TEI-Department of Finance Liaison Meeting on Canadian Excise Tax Issues, page 526.

* Comments on Legislative Proposals Being Considered by the Virginia Department of Taxation for the 2005 General Assembly, page 501.

* Comments on Revised GST/I-IST Policy Statement P208R: Permanent Establishment, page 500.