The Organisation for Economic Cooperation and Development (OECD) today announced the release of a discussion draft under the base erosion and profit shifting (BEPS) Action 7, Prevent the Artificial Avoidance of PE Status.
The BEPS Action 7 discussion draft [PDF 144 KB] includes the preliminary results of the work carried on with respect to issues related to the artificial avoidance of permanent establishment (PE) status and includes proposals for changes to the definition of permanent establishment found in the OECD Model Tax Convention.
According to today’s OECD release, 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, which has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor by ‘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 BEPS 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.
Comments concerning the discussion draft are due by 9 January 2015.
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