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advised and consented to the Canadian Convention and approved
section 842(b), believed that section 842(b) was consistent with
the Convention.
In our view, resolution of this controversy depends on the
interpretation given to article VII, paragraphs (2) and (5).
While article VII, paragraph (1) limits U.S. taxation of income
earned by a Canadian enterprise to the income "attributable" to
the enterprise's permanent establishment, article VII, paragraphs
(2) and (5) direct how those attributable profits are to be
determined. Article VII, paragraph (2) limits "attributable"
profits to those which a "distinct and separate person engaged in
the same or similar activities under the same or similar
conditions" would be expected to make (hereafter referred to as
the separate-entity principle or basis). Article VII, paragraph
(5) requires that profits be attributed by the same method each
year unless there is a good and sufficient reason to the
contrary. To satisfy the convention obligations of the United
States, the domestic rules of attribution must determine the
profits attributable to petitioner's permanent establishment
within the limits set forth therein. Our analysis begins by
considering how to measure the profits on a separate-entity basis
and whether section 842(b) determines minimum amounts of ECNII in
a manner consistent with those limits.
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