BEPS 2015: OECD overhaul of permanent establishment (PE) rules

The use of permanent establishments (PE) to profit shift and reduce tax liability is set to be overhauled under the final recommendations from the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) to prevent the use of certain common tax avoidance strategies that are used to circumvent the existing PE definition, particularly through the use of commissionaire arrangements and the tax status of storage facilities, reports Sara White

The OECD has been a stern critic of arrangements whereby taxpayers replace subsidiaries that traditionally acted as distributors by commissionnaire arrangements, with a resulting shift of profits out of the country where the sales took place without a substantive change in the functions performed in that country.

OECD director for the Centre of Tax Policy & Administration, Pascal Saint Amans said: ‘On permanent establishment (PE), commissionaire agreements will be over thanks to this new drafting and if you have storage in one or two countries, this will no longer provide a tax exemption.’

The definition of Permanent Establishment has been modified to better reflect today's business reality and avoid widespread circumvention of the principle that underlines it (as outlined in BEPS Action 7).

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