The Organisation for Economic Co-operation and Development (OECD) has released a discussion draft on how to prevent the artificial avoidance of permanent establishment (PE) status for comment by 9 January 2015
The work on PE is point seven of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS), published in July 2013, which identified 15 actions to reduce tax evasion and avoidance by multinational businesses. Each action plan has been attributed a set deadline to implement relevant actions.
BEPS Action 7 addresses the need to develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of ‘commissionnaire arrangements’ and the specific activity exemptions.
The OECD Action Plan notes that the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor.
In practice, this has meant that multinationals have replaced arrangements under which the local subsidiary traditionally acted as a distributor by ‘commissionnaire arrangements’. As a result have shifted profits out of the country where the sales take place, without a substantive change in the functions performed in that country.
The Action Plan also notes that multinationals may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and auxiliary activities.
The discussion draft includes the preliminary results of the work carried on with respect to issues related to the artificial avoidance of PE status and presents proposals for changes to the definition of permanent establishment found in the OECD Model Tax Convention.
The Committee on Fiscal Affairs (CFA) invites all interested parties to comment on these options and is particularly interested to learn about specific examples of unintended effects that might result from the options as well as examples of possible avoidance that could result from each option.
The discussion draft is available at http://www.oecd.org/ctp/treaties/action-7-pe-status-public-discussion-draft.pdf