UK and International Tax news

OECD Issues New Discussion Draft On BEPS Action 7 And PEs

Thursday 21st May 2015

The OECD has recently issued a further discussion draft on BEPS Action 7 and the artificial avoidance of permanent establishment [PE] status following consultation on the first discussion paper issued in October 2014.

The Action Plan stresses the need to update the treaty definition of 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, which has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor with “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.

In addition, the Report – “Addressing the Tax Challenges of the Digital Economy” has identified issues in the digital economy that need to be taken into account in the course of the work on Action 7, ensuring that core activities cannot inappropriately benefit from the exception from permanent establishment (PE) status and that artificial arrangements relating to sales of goods and services cannot be used to avoid PE status.

On 31 October 2014, the OECD released a first discussion draft on Action 7 which described a number of PE avoidance strategies and included a number of alternative options on how to deal with these strategies. Based on the comments that were received on that discussion draft and the interventions at a public consultation meeting held on 21 January 2015, the options included in the first discussion draft were reviewed in order to produce a specific preferred proposal with respect to each PE avoidance strategy previously identified.

The new discussion draft reflects the proposals that resulted from that work and on which comments are invited by 12 June 2015.

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