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10. This paragraph contains the central directive on
which the allocation of profits to a permanent
establishment is intended to be based. The paragraph
incorporates the view, which is generally contained in
bilateral conventions, that the profits to be
attributed to a permanent establishment are those which
that permanent establishment would have made if,
instead of dealing with its head office, it had been
dealing with an entirely separate enterprise under
conditions and at prices prevailing in the ordinary
market. Normally, these would be the same profits that
one would expect to be determined by the ordinary
processes of good business accountancy. * * *
13. Clearly many special problems of this kind may
arise in individual cases but the general rule should
always be that the profits attributed to a permanent
establishment should be based on that establishment’s
accounts insofar as accounts are available which
represent the real facts of the situation. * * * [Model
Commentaries to Article 7, paragraph (2) of the Model
Treaty; emphasis added.]
In her trial memorandum, respondent acknowledges: "[The
model] Commentar[ies] express[] a preference for an arm's-length
standard for the 'distinct and separate person' entity with
separate accounts". Respondent contends, however, that Article
VII permits either country to apply its domestic law in
determining the profits attributable to a permanent
establishment. In this regard, respondent relies upon the
Technical Explanation, prepared by the Treasury Department and
submitted to the Senate Foreign Relations Committee. The
Technical Explanation states in pertinent part:
Paragraph 7 provides a definition for the term
"attributable to". Profits "attributable to" a
permanent establishment are those derived from the
assets or activities of the permanent establishment.
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