Regarding attribution to a permanent establishment, there are two

attribution to a permanent establishment, there are two different approach, one
adopted by the OECD model so-called the capital and labor export neutrality
(CLEN) approach as opposed to a capital and labor import neutrality (CLIN)
approach of the U.N. model. CLEN is a concept by which an investor has
neutrality, he pays the same total tax regardless of whether he earns the
income from a domestic or foreign source. On the other hand, CLIN is a concept
of neutrality by which capital funds originating in various jurisdictions
should compete at equal terms in the capital markets if any country, therein giving
every nation a right to tax equally any income earned within its territory1.


The force of attraction rule can be seen as an
extensive application of CLIN of the U.N. model, in which the rule has been
retained to support source-based taxation2. The intent
of the rule is to prevent avoidance of profit that should be attributed to the
PE through tax structuring. The force of attraction rule was justified by the
view that when an enterprise established a permanent establishment, it had
brought itself under the other state’s taxing jurisdiction to an extent which
was qualitatively different from the invisible or casual presence of
enterprises without a permanent establishment3.
Moreover, the similar sales or business activities approach of the rule are considered
a guide to identify the business transaction for the purpose of attribution.4

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India is a country that underscores source-based
taxation in the ITA, which give the right to tax non-residents who has the
business within India. Under the Indian domestic law, it mainly focuses on the
concept of business connection which is broader than the concept of permanent
establishment. Moreover, if we take a look at ITA, the provisions of section 9,
we will see that the income derived from technical service by non-resident is
subject to tax in India so long as they are utilized in India. This provision
is reaffirmed through the amendment of the Finance Act, 2010, that the services
need not to be rendered through permanent establishment and need not be
rendered in India to be taxable. Any income derived by non-resident that has an
Indian connection will be taxed by India. This amendment along with another
amendment clarifies the position of India’s source-based approach.


Hence, it might be concluded that the term like “indirectly
attributable” in the treaties invite the force of attraction rule, that is, to
promote source-based taxation. Since India
has a very stringent source-based taxation, non-resident might try to avoid the
broad nature of tax authorities by establishing permanent establishment in
India. From this point of view, the upheld in Linklaters is justified since
this seem to be the only logical intent of the governments in negotiating the

Charles E. McLure, Hans-Werner Sinn, and Peggy B. Musgrave, “Influence of Tax
Differentials on International Competitiveness,” Proceedings of the VIII Munich
Symposium on International Taxation (Kluwer Law and Taxation Publishers 1990).

Eric Kemmeren, Principle of Origin in Tax Conventions: A Rethinking of Models
92 (Pijnenburg 2001).

Arvid Skaar, Permanent Establishment: Erosion of a Tax Treaty Principle (Kluwer
Law Int’l, 1995).

Michael Kobetsky, International Taxation of Permanent Establishments (Cambridge
Tax Law Series 2011).