PROPOSED REVISED DRAFT CHANGES TO THE COMMENTS SUBMITTED BY THE HUMAN CAPITAL SERVICE LINE OF ERNST & YOUNG

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PROPOSED REVISED DRAFT CHANGES TO THE COMMENTARIES TO ARTICLE 15 OF THE OECD MODEL TAX CONVENTION INCOME FROM EMPLOYMENT COMMENTS SUBMITTED BY THE HUMAN CAPITAL SERVICE LINE OF ERNST & YOUNG June 30, 2007 T 1

PRELIMINARY STATEMENT Dear Sir, Ernst & Young, ("E&Y") appreciates the opportunity to comment on the recently issued revised public discussion draft document regarding the interpretation of the second paragraph of article 15 of the OECD Model Tax Convention. Firstly, we would like to commend the OECD for their efforts to understand and integrate many comments offered by the business community to fine tune the text of the initial draft and to come to a more comprehensive guidance for the interpretation of article 15 of the Model Tax Convention. We especially welcome the clarification taking the form of a deletion of the factor pointing towards the entity bearing the cost of assignee s compensation from an economic perspective which could have been interpreted as an incitement to consider indirect corporate cost allocation as a relevant factor to point towards a deemed employment relationship in the State of source..as stressed in many occasions and forums, this would have created a radically different Treaty environment for cross border assignments which was not welcome by many stakeholders including a very large number of OECD members. We also seize this opportunity to reiterate the fact that no client has engaged E&Y to provide comments or recommendations or have any of our clients reviewed them before they were submitted. The comments and recommendations below have, however, been provided based on our experience which necessarily encompasses not only our technical knowledge but also real situations and experiences that E&Y professionals have come across in practice. The comments below were prepared by the E&Y Human Capital professionals globally and collected as well as summarized by Laurence Avram-Diday, Laurent Chevalier, Jean Nicolas Lambert and Michael Abdalian. T 2

OUR UNDERSTANDING OF THE AMENDMENT MADE TO THE INITIAL DRAFT We understand that the initial Draft was substantially amended to integrate a number of suggestions for clarification or improvement made by various interested parties including the business community. Among those amendments, the first substantial one in our view takes the form of a reiteration (Par.8.10) of the preference given to the State of source for the purpose of making a determination as to the existence of an employment relationship between a local enterprise and posted workers residing outside of that State. Paragraph 8.11. as amended by the revised draft prohibits any attempt by the source State to pursue concomitantly the taxation of an assignee under a deemed employment relationship with a local enterprise and the taxation of corporate profits of the formal employer located outside of that state through art 5 of the Model, thereby indirectly bringing to light the mutual exclusion of subparagraphs (b) and (c) of 2 of art 15 of the Model. It is indeed either (b) or (c) i.e. a local relationship with a local employer or a connection through a local PE of a foreign enterprise, not both at the same time. Another essential clarification is included in para. 8.13 where the revised draft explicitly prevents the source State from looking through outsourcing or contract manufacturing arrangements for the purpose of reviewing the substance of an employment relationship between a contract manufacturer or provider of outsourced services and their workforce. This is in our view logically aligned with the pre-eminence given to the integration test linked to the assumption that an employee s activities should normally form an integral part of the business activities carried on by his employer. It is therefore logical to assume that an employee bound to a contract manufacturer for example, performs duties which are an essential part of the core business of that enterprise as opposed to being integrated in the core business of their clients. The most welcome clarification in our view is associated with the light shed on the control test embedded in par 8.14 of the revised draft where the explicit reference to the entity bearing the cost of assignee s compensation from an economic perspective, has been removed to allow a stronger focus on the factors pointing towards the subordination link which constitutes the common grounds which all OECD jurisdictions would normally contemplate to characterize a dependent relationship. T 3

In addition, para 8.15 of the revised draft suggests that the integration of an assignee in the business environment of the source State, could transpire from a direct allocation of his assignment costs to the end user/receiving party whereas a service fee charged to such an end user in accordance with the arm s length principle would be a strong indication of the existence of a contract for services between the service provider and the user as opposed to the existence of a contract of services between the assignee(s) and the user. We view this as a confirmation of the fact that it is logical to assume that a contract for services would normally be compensated by the charge of a fee corresponding to the market value of the services rendered whereas under a contract of services, direct and identifiable compensation costs naturally belong to the employer who is technically the sole party who could account for those compensation costs as such. Finally, the revised draft deals with the specific instance of centralized support functions where we understand that para 8.26 and 8.27 account for modern business operating models which often involve schemes ranging from a complete in sourcing to a complete outsourcing model such as shared services centers or regional head offices where a number of functions are hosted to support a group of companies. Discussion of the proposed revised changes We understand that the objective of the new commentary is primarily to provide guidance and tools to prevent to the maximum extent possible situations where competing jurisdictions would enter into a conflict of qualification or conflict of interpretation around the localization of an employment relationship in a cross border context. We understand that this is the purpose of the reiteration of the predominant character conferred to the interpretation of a cross border relationship by the source State whose interpretation should normally prevail and entail an obligation for the State of Residency to provide double tax relief. Since the commentary however provides a framework to maintain the meaningful character of the exception contained in subparagraph 2 b), we do consequently expect conflict to arise between the State of residency and the State of source around the existence and/or location of an employment relationship in a cross border context. In spite of the possible upgrade of the mutual agreement procedure, we do expect the new commentary to create a certain level of increased uncertainty and turmoil for global organizations as a result of the potential for additional conflict of interpretation and/or qualifications implied by the new commentary. T 4

We furthermore understand that the basic premise of the revised draft is to help distinguish between a contract of services and a contract for services. Most OECD jurisdictions would accept the idea that a key differentiator between the two would be linked to the concept of entrepreneurial risk of which an employee is relieved. An enterprise suffers the investment burden required to operate the business and concomitantly endorses the opportunity for profit or loss which includes -inter alia- the need to endorse the risks and responsibilities for the work produced by its workforce. We are wondering to what extent it is worth spelling this differentiator out in the commentary and to further elaborate on the intricacies of the risk and responsibility element to help distinguish notably between the functional beneficiary and the ultimate beneficiary of dependent services and to clarify whether specific risk limitation clauses included in intercompany contractual arrangements should be taken on board in the risk and responsibility assessment or whether it is only the natural as opposed to the contractual burden which is relevant. In addition, we do believe that in most OECD member States, the control test encompassed in para 8.14 of the draft takes precedent over the integration test (i.e. risk and responsibility assessment ) which is the focus of para 8.13. The revised draft seems however to imply that the integration test is not only key but seems also prominent because on the one hand, it is a prerequisite to eventually apply the control test and it seems to be predominant not to say the sole consideration in the first 4 examples listed in the draft as an illustration of the methodology adopted by the draft. Since there seems to be a certain degree of contradiction between the hierarchy accepted by most OECD members between the control and the integration test and because in our view the integration test is more relevant to validate intra-group corporate costs allocations than to point towards an employment relationship, we suggest to either change the implicit hierarchy of the revised draft and apply the control test as a starting point or even one step further and remove the reference to the integration test from the provisions of the commentary dealing with the concept of employer in order to leave this where it belongs, i.e. in transfer pricing considerations. The additional benefit of such an abandonment of the reference to the level of integration would be to prevent the possible inclination of setting up a de minimis threshold which would de facto replace the natural threshold contained in art 15 2, that is to say the 183 days threshold. Indeed, in the jurisdictions applying such an integration test, we have typically experienced an inclination towards setting up a de minimis quantitative threshold rather than going through the hurdle of a qualitative integration analysis and we therefore wonder whether it is not preferable to put a stronger focus on the control test. T 5

o Clarification of the examples Example 6 added to the revised draft deals with centralized support functions and includes a list of functions which we consider as non exhaustive. It would in our view be ideal to confirm that the list is not exhaustive and if possible to tie it back to other concrete milestones available in the OECD commentary such as possibly para 7.14 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995-1999) or provisions illustrating the concept of activities of preparatory and ancillary nature or a combination of those. It is indeed in our view preferable to provide -to the maximum extent possible- additional indications clarifying what type of support functions are encompassed by the commentary and whether all support functions would fall within the scope of the framework of example 6. o Additional example Among the various types of possible intra-group assignments, there is one specific type possibly combining the developmental need of the assignee with the group s interest in sharing know-how. In such an instance where an assignment is structured either to meet the developmental need of an assignee and/or to accomplish a transfer of technology, processes and know how in general, it is in our view often difficult to determine whether the functional benefit of such an assignment is derived by the home or host entity or both and/or the parent company. We are consequently of the opinion that an additional example dealing with those instances would therefore be welcome. Similarly, there are instances where the specific skills of a senior executive are called in at a subsidiary level to deal with and manage a crisis. We would also welcome a specific example dealing with the trouble shooter type of assignee where again it is difficult to point towards one single entity as the exclusive functional beneficiary of such an assignment except if one were to consider that such an assignment necessarily corresponds to a stewardship activity. CONCLUSION We appreciate that it is fairly late in the process for the OECD to consider additional amendments or clarifications while we welcome on the other hand the amendments made so far which in our view significantly help to clarify the new OECD environment for short term assignments if and when the draft is finally adopted. We however still wanted to offer a couple of suggestions which in our view would further help to make the amendment to the commentary even more comprehensive and accessible. HC Knowledge Art 15 REVISED OECD comments 300607 - FINAL T 6