BEPS Action Plan: Action 7 – Permanent establishment (PE) status

More countries have recently been challenging overseas companies on the presence in their jurisdiction of a Permanent Establishment (PE) — so it is no surprise that the OECD would choose to pursue this area in its BEPS Action Plan. Commentary and links to content on action 7 follow.


 

Updates

Read our response to the latest discussion draft

 

15 June 2015

Our response below is one of 60 comment letters published by the OECD on the 15 May BEPS discussion draft.

 

10 June 2015

In our response to the revised Discussion Draft of 15 May, we urge the OECD to take account of the progress on the work on improving the effectiveness of dispute resolution under Action 14...

If the Action 14 work does not deliver the intended solutions identified in the Action Plan, this suggests that a cautious approach should be adopted in any expansion of the scope of the threshold PE rules (especially where this is achieved using new concepts and thresholds) given the widespread concerns relating to incremental double taxation from the Action 7 proposals.

Our particular comments include:

  • The Commentary on the Dependent Agent test will leave room for agents to be regarded as falling within the rule when their activity would fall well short of a substantive role in the process for the conclusion or negotiation of contracts.
  • The independent agent test should be directed to address whether the agent is carrying on the business of the principal, not the relationship between agent and principle (i.e. whether or not connected).
  • In the anti-fragmentation rule, further clarification would seem to be necessary of the intended scope of the test and we would suggest further examples would be helpful.
  • Disengaging the work on the profit attribution will make it harder to address concerns that lowering the existing PE threshold will lead to the creation of multiple PEs where there is no additional profit at stake, compared a transfer pricing approach.

 

15 May 2015

The OECD has now released its revised proposals which replace the alternative approaches to a number of significant PE issues with...

a set of definitive proposals which are largely focused on expanding the scope of the dependent agent rule (including narrowing the scope of the independent agent rule) and narrowing the scope of the specific activity PE exemptions.

An important element of the package is a proposed anti-fragmentation rule intended to prevent abuse of the PE rules by segregating activities across associated entities. Taken together, the proposed rules will clearly expand the scope of existing PE rules.

 

13 January 2015

A consolidated document setting out the 100 letters of comment on the November 2014 Discussion Draft, including our response, is...

available on the OECD website:

Published responses to the discussion draft on preventing the artificial avoidance of PE status (Action 7) (PDF, 13MB)

The input will be discussed during a public consultation at the OECD Conference Centre on 21 January 2015, at which PwC will be represented by Richard Collier. Registration for this event has now closed. This meeting will be broadcast live on the internet - no advanced registration is required for this internet access.

 

3 November 2014

Although one of the shortest papers so far released, various options proposed in a discussion draft today include…

fundamental changes to the existing PE rules, with a potentially wide impact on many structures currently in use by MNCs.

They include widening the dependent agent provisions and narrowing both the independent agent exemptions and the specific activity (e.g., warehouses, etc.) exemptions, and go beyond the PE areas identified for review under Action 7 in the original BEPS Action Plan.

There are five separate areas in which the OECD is proposing change:

  • commissionaire arrangements and similar strategies (broadening the current recognition of the conclusion of contracts to include wider negotiations and extending it beyond those carried out in the name of the enterprise to those on the account and risk of the enterprise, with exclusions for independent agents only where they act for a wider group of people)
  • a variety of issues relating to the specific activity exemptions, including the operation of the “preparatory or auxiliary” test and the ability of companies to fragment activities
  • rules to counter the splitting up of contracts
  • specific insurance sector PE proposals
  • PE profit attribution issues (the discussion draft seems to proceed largely on the basis of an expectation of an increase in profits to such PEs but the precise reasoning is not included).

Unlike some of the earlier OECD papers that have been released, the general approach of the PE discussion draft is to offer alternative approaches to deal with the issues identified.

It is inevitable that the proposed changes would lead to a material shift towards source-based taxing rights. There would also be a material increase in uncertainty given the greater use of subjective tests in what is proposed. The existing strained dispute resolution system would come under increasing pressure and alternative means of preventing and resolving disputes and audits should be given a high priority.

Responses are requested by 9 January 2015 with a public meeting to follow in 21 January 2015.

 

17 January 2013

The OECD has now published the only response received following its 22 October 2013 request for examples of PE avoidance strategies …

It is perhaps interesting that the only response was from an Indian chartered accountant in his personal capacity and that no Civil Society Organisations took the opportunity to submit comments.

It will give the OECD working party covering the artificial avoidance of PE status something to think about at its next meeting.

 

22 October 2013

The OECD Committee on Fiscal Affairs, through the BEPS PE Focus Group (working party) invited interested parties to send …

by 15 November 2013, a short description of strategies that might be considered to result in what it calls “the artificial avoidance of the PE status in relation to base erosion and profit shifting”.

 

2 September 2013

It may be difficult to address the dependent agent rule with a view to hitting the target of abusive commissionaire arrangements alone…

It seems more likely that, in pursuing these issues, the OECD will be drawn into a complete re-think of the terms not just of the dependent agent rule in Art 5(5) but also the independent agent rule in Art 5(6).

 

19 August 2013

The OECD has indicated it will be considering the current specific activity exemptions from the PE rule in Art 5(4) which deals with certain situations…

involving storage of goods etc. and business situations which are ‘preparatory and auxiliary’. This is on the basis that multinationals may artificially fragment their operations among multiple group entitles to qualify for these exemptions from PE status. However, as a practical matter we are not aware of any indications that there actually has been any particular widespread abuse in this area.

 

5 August 2013

More countries (e.g. France, Italy, Norway, Spain, UK) have recently been challenging overseas companies as regards the presence in their jurisdiction of a PE…

Discussion recently at the OECD on the Model Treaty Commentary on article 5 already featured heavily the 'economically bound' concept that can be used to challenge commissionaire arrangements (on the basis of an interpretation of the dependent agent PE test) so it is no surprise that the OECD would want to pursue this area.

Permanent establishment (PE) status archive

19 July 2013

The Plan identifies two specific areas which are of concern to the OECD in relation to the PE test …

First, commissionaire arrangements where there may be, as the Plan notes, a shift of profit from one country to another, in circumstances where there is no substantive change in the functions performed in the first country. Second, it is noted that MNCs may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and auxiliary status. Both areas are to be the subject of work to address artificial avoidance of PE status. This means that the OECD will work on amending the dependent agent test in Article 5(5) of the Model Treaty and the provisions dealing with the preparatory and auxiliary activities in Article 5(4) of the Model. It is noted that work on these issues will also address the related profit attribution issues. This work on changes to the Model Treaty is to be completed within two years.



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