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.


Read our response to the latest discussion draft

9 September 2016

Our response is one of 52 included in a two-part consolidation published by the OECD on its website – click here to view.


5 September 2016

In our submission to the OECD, we say the paper provides helpful guidance but …

feel that the complexity of these issues is potentially hidden through the use of overly simple examples in this paper where a number of the difficulties we find in practice have been assumed away.

The guidance will be helpful in evaluating inter-company arrangements in light of BEPS Action 8-10 and in understanding what additional profit, if any, would be allocated to PEs arising following a lowering of the PE threshold.

We agree that the lowering of the PE threshold under BEPS Action 7 does not modify the nature of a deemed PE and that in many cases the additional profits which would be attributable to new PEs would be minimal.

We see areas of significant subjectivity within the existing AOA where further guidance would ensure better uniformity of application between tax authorities and recommend that this paper should not be seen as the conclusion of the OECD’s work on profit attribution.  We suggest that there be an ongoing process of discussion and work to ensure greater guidance and clarity on a number of areas of the AOA within a timeline which allows careful consideration of the issues.

We made a number of comments on points on the detail and in response to the questions.

Visit our BEPS submissions page


19 July 2016

Our Insight from Transfer Pricing on the PE attribution draft notes that the paper considers five examples — four relating to Dependent Agent PEs (DAPE), and one relating to Fixed Place of Business PEs in the context of warehousing (FPOB PE).  For each of these examples, we look at how it provides suggested guidance and asks for comments.

Read more.


5 July 2016

After the finalisation of BEPS Action Point 7 concerning the PE threshold, the OECD …

undertook to examine whether the OECD’s 2010 rules on attribution of profits to PEs, or Authorized OECD Approach (AOA), require updating. The OECD published a Public Discussion Draft on this area on 4 July 2016.


6 February 2016

The European Commission is published a proposed EU Recommendation as follows:

“Member States are encouraged, in tax treaties which they conclude among themselves or with third countries, to implement and make use of the proposed new provisions to Article 5 of the OECD Model Tax Convention in order to address artificial avoidance of permanent establishment status as drawn up in the final report on Action 7 of the Action Plan to address Base Erosion and Profit Shifting (BEPS).”

See further our Tax Policy Bulletin of 5 February 2016.


28 January 2016

The current status is that the changes to the Model Tax Treaty Article and Commentary are more or less final with...

only minor changes to the Commentary, if any, expected in 2016. 

It is likely that there will be widespread adoption of the revised Article 5 with possibly some local modification. Absent any change in the treaties to date, there has already been significant behavioural change by some tax authorities in the interest in and interpretation of the new draft Article and Commentary in local markets. The impact of this has been an “accelerated” implementation of the new BEPS PE approach as for example, with the signature of revised tax treaties and associated protocols on 12 November 2015 between Australia and Germany; on 2 December 2015 between Chile and the Czech Republic; and on 21 January 2016 between Chile and Japan.

The focus on PEs has also begun to manifest itself through an increased focus on fixed place of business PEs by a number of tax authorities absent any technical changes to the threshold test. This is particularly the case when allied with the new anti-fragmentation rules. 

In terms of the changes to the redrawn dependent agent rule, the uncertainty about the breadth and reach of some of the fundamental concepts in the new test remains, as discussed in our Tax Policy Bulletin of 28 January 2016.

The revised independent agent test will likely have a significant impact particularly with respect to the financial services and banking sectors. Given the higher threshold of providing independent agent status particularly with respect to economic independence, we would expect that there are likely to be more pronounced incidents of deemed dependent agent PEs particularly when allied with the uncertainty and lower dependent agent PE threshold. 

Finally, one of the areas where the OECD will carry out some limited work in 2016 will be on attribution. This is not expected to be a wide-ranging exercise but should focus on clarifying the approach to attribution to PEs in cases of commissionaire agents, etc.


23 October 2015

The marked changes in the finalised (October 2015) paper represent some relatively late adjustments to the agreed consensus. The main implications are…

the framing of the revised dependent agent rule now

  • leaves open a number of questions as to the scope of the test (e.g., the criteria for assessing whether the “principal role” test is met and what is meant by “material modification”) and the revised commentary is of limited assistance
  • raises concerns where both principal and agent play a role in the process which leads to the conclusion of the contract, or where standard form contracts are involved - a particular concern will be whether, and in what circumstances, client relationship functions which involve introducing new business to a client (covering potentially a very broad spectrum of agency activity), are caught
  • has clarified that it will not be applicable where an intermediary acts in a principal not agency role (as might be so in the case of certain low-risk distributor structures)

the specific activity exemptions

  • may or may not be subject to an overall “preparatory or auxiliary” requirement - despite what seemed to be an earlier agreement to do just this, an alternative option is now incorporated into the final PE report which allows states to maintain the approach in the current version of the article
  • are now clarified insofar as there is an explanation of the terms “preparatory” (emphasising the short-term duration of the relevant activity) and “auxiliary” (being an activity “to support, without being part of, the essential and significant part of the activity of the enterprise as a whole”) supported by a number of new examples designed to illustrate the intended operation of these terms.

The finalised PE paper also confirms the OECDs decision to defer consideration of the relevant profit attribution arrangements and interaction with transfer pricing. That work will therefore not be addressed until next year. This means these issues are not appropriately taken account in the framing of the threshold PE test.  Coupled with the very significant increased focus on PE issues, this is likely to mean that tax authorities will often end up pursuing PE attacks in circumstances when there is nothing to be gained, i.e., because there are no attributable profits beyond the measure of profit already taxed under the corresponding transfer pricing arrangements.

See further our Tax Policy Bulletin of 26 October 2015.


5 October 2015

The final PE report is broadly in line with the earlier proposals in BEPS and therefore proposes…

  • a widening of the dependent agent test;
  • a narrowing of the independent agent exemption;
  • a tightening of the specific activity exemptions from PE status for facilities used for storage, display or delivery of goods, etc. (including an anti-fragmentation test to prevent activities being split across separate legal entities); and
  • certain measures to prevent abuse of the 12 month building site PE rule. 

As had already been disclosed, the earlier proposal to develop a special PE rule for the insurance sector is not being progressed.  It has also been re-confirmed that further work on the allocation of profits to PEs, which had originally planned for completion with all these other measures, will not be addressed until 2016.

The major difference in these finalised PE proposals is that the OECD has backed away from extending the scope of the dependent agent PE rule so that it expressly includes certain contract negotiation activities (the previous proposal encompassed "negotiating the material elements of contracts").  However, the new test is arguably only a little less open-ended given that it focuses on agency activities that involve concluding contracts or playing "the principal role leading to the conclusion of contracts that are routinely concluded without material modification [by the principal]".  The relevant proposed guidance on what these tests amount to is somewhat unclear, probably because of the last minute nature of the agreement reached for this new approach. This explains why the OECD has indicated the guidance will be reviewed in 2016. 

It seems likely that these finalised PE rules will lead to significant dispute in practice.


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.

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.