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Respondent asserts that Article VII, paragraph (2) permits
the use of formulas in determining the taxable profits under
limited circumstances. In support, respondent relies upon
paragraph 23 of the Model Commentaries to Article 7, paragraph
(3) of the Model Treaty, which states in pertinent part:
23. It is usually found that there are, or there
can be constructed, adequate accounts for each part or
section of an enterprise so that profits and expenses,
adjusted as may be necessary, can be allocated to a
particular part of the enterprise with a considerable
degree of precision. This method of allocation is, it
is thought, to be preferred in general wherever it is
reasonably practicable to adopt it. There are,
however, circumstances in which this may not be the
case and paragraphs 2 and 3 are in no way intended to
imply that other methods cannot properly be adopted
where appropriate in order to arrive at the profits of
a permanent establishment on a "separate enterprise"
footing. It may well be, for example, that profits of
insurance enterprises can most conveniently be
ascertained by special methods of computation, e.g. by
applying appropriate co-efficients to gross premiums
received from policy holders in the country concerned.
Again, in the case of a relatively small enterprise
operating on both sides of the border between two
countries, there may be no proper accounts for the
permanent establishment nor means of constructing them.
There may, too, be other cases where the affairs of the
permanent establishment are so closely bound up with
those of the head office that it would be impossible to
disentangle them on any strict basis of branch
accounts. Where it has been customary in such cases to
estimate the arm's length profit of a permanent
establishment by reference to suitable criteria, it may
well be reasonable that that method should continue to
be followed, notwithstanding that the estimate thus
made may not achieve as high a degree of accurate
measurement of the profit as adequate accounts. Even
where such a course has not been customary, it may,
exceptionally, be necessary for practical reasons to
estimate the arm's length profits.
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