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OECD Issues Discussion Papers On BEPS Actions

Wednesday 5th November 2014

The OECD has issued two discussion draft papers in respect of  Action 7 – preventing the artificial avoidance of PE status, and Action 10 – protection against common types of base eroding payments, including low value adding intra group services via management fees and head office expenses.

The BEPS Action Plan stresses the need to update the treaty definition of permanent establishment (PE) in order to prevent abuses of that threshold. It 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.  This has led to enterprises replacing arrangements under which the local subsidiary traditionally acted as a distributor with so called “commissionnaire arrangements” with a resulting shift of 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.

OECD’s recent report on Action 1 –  Addressing the Tax Challenges of the Digital Economy – identified issues in the digital economy that need to be taken into account in the course of the work on Action 7, namely ensuring that core activities cannot inappropriately benefit from the exception from PE status and that artificial arrangements relating to sales of goods and services cannot be used to avoid PE status.

Comments on this discussion draft paper have been requested by 9 January 2015.

With regard to the discussion draft paper on proposed modifications to Chapter VII of the Transfer Pricing Guidelines relating to low value-adding intra-group services, this  proposes an approach which identifies a wide category of common intra-group services commanding a very limited profit mark-up on costs, applies a consistent allocation key for all recipients, and provides greater transparency through specific reporting requirements.

Comments on this draft paper have been requested by 14 January 2015.

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