The OECD on October 31 released a discussion draft on the artificial avoidance of permanent establishment (PE) status, addressing commissionaire structures, the avoidance of PE status through specific activity exemptions, and other issues.
The draft responds to Action 7 of the OECD/G-20 Action Plan on Base Erosion and Profit Shifting (BEPS), issued July 2013. BEPS Action Item 7 mandates that the OECD, “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. Work on these issues will also address related profit attribution issues.”
To address commissionnaire structures, the draft proposes four different alternatives to modify Article 5 (5) and (6) of the OECD Model Tax Convention. The draft states that each option reflects the policy that a foreign enterprise will have taxable nexus in a country when activities performed by an intermediary in the country are intended to result in the regular conclusion of contracts to be performed by the enterprise, unless the intermediary is performing the activities in the course of an independent business.
To prevent artificial avoidance of PE status through the specific activity exemptions of Article 5(4) of the Model Tax Convention, the draft adds the requirement that all the listed activities be “preparatory or auxiliary.” Alternatively, the term “delivery” in Article 5(4)(a) and (b) should be deleted so that use of a facility for delivery of goods could give rise to a permanent establishment, and the exemption for “purchasing activities,” and possibly also the exemption “collecting information” should be deleted, the draft states.
The draft provides two alternatives to prevent MNEs from artificially fragmenting their operations among related group entities to qualify for the exceptions to PE status for preparatory and auxiliary activities. The document also recommends changes to address the splitting up of contracts to avoid PE status, and offers two alternative approaches to deal with BEPS concerns related to the artificial avoidance of the PE threshold in relation to insurance activities.
Regarding the BEPS Action Plan item 7 mandate to address issues of profit attribution to PEs, the draft notes that the most significant BEPS concerns, besides digital economy issues, involve situations where one member of an MNE group has physical presence in a country but is allocated limited profits and another member avoids a PE by technical operation of the rules and is allocated a large share of profit. Addressing these issues will involve work of other action plan items, in particular Action 9 relating to risks, the draft notes.
The document does not represent the consensus views of the CFA; rather, it is intended to provide stakeholders with a basis for analysis and comment.
Comments on the draft are due January 9, 2015.
See,
- OECD Public Discussion Draft, BEPS Action 7, Preventing the Artificial Avoidance of PE Status
- OECD release,
- OECDAction Plan on Base Erosion and Profit Shifting
UPDATE: OECD to hold January 21 consultation on draft rules to stop avoidance of PE status: Requests to attend or speak are due January 9.
