KPMG report: BEPS Action 7 discussion draft

KPMG report: BEPS Action 7 discussion draft

The Organisation for Economic Co-operation and Development (OECD) released a discussion draft pursuant to Action 7 (Preventing the Artificial Avoidance of PE* Status) of the base erosion and profit shifting (BEPS) project.

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Read the discussion draft BEPS Action 7 [PDF 144 KB] released October 31, 2014.

Comments are requested on the discussion draft by January 9, 2015, with a public consultation meeting to be scheduled in Paris on January 21, 2015.

*PE = permanent establishment


Action 7 of the BEPS Action Plan calls for the development of “changes to the definition of PE to prevent the avoidance of PE status in relation to BEPS through the use of commissionaire arrangements and the specific activity exemptions.”

The BEPS Action 7 discussion draft describes 13 options for amending Article 5 of the OECD Model Treaty. These potential amendments relate to four specific concerns with current Article 5:

  • The artificial avoidance of PE status through commissionaires and similar strategies
  • The artificial avoidance of PE status through the specific activity exemptions for preparatory and auxiliary activities
  • The splitting up of contracts to circumvent the time restrictions imposed under paragraph 3 of Article 5, relating to building, construction, and installation projects
  • The application of the dependent agent rules to insurance contracts

The BEPS Action 7 discussion draft notes that any amendments to the definition of a PE in Article 5 must consider how the amendments would interact with the attribution of profits to a PE under Article 7 of the OECD Model Treaty. However, the discussion draft concludes that while some additions or clarifications to the rules for attributing profits to a PE may be required under the options contained in the discussion draft, no substantial changes to the rules for the attribution of profits have been identified.

KPMG observation

The BEPS Action 7 discussion draft does not discuss the options from the September 16, 2014 deliverable on BEPS Action 1 (Addressing Tax Challenges of the Digital Economy) for creating a new definition for PEs based digital activity. The lack of such discussion presumably does not imply that the options were considered and dismissed.

Commissionaires and similar strategiesAccording to the BEPS Action 7 discussion draft, commissionaire and similar arrangements have been employed to exploit paragraph 5 of Article 5, under which the activities of a person may create a PE for an enterprise only if the person “…habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise.”

A commissionaire acts as an undisclosed agent. Because a commissionaire contracts with customers in its own name—and not in the name of the enterprise for which it is acting—a commissionaire may not be considered to be acting “in the name of the enterprise,” even though the commissionaire receives only a limited commission and any residual profits accrue to the enterprise the commissionaire represents.

Similarly, an enterprise may use a disclosed agent that operates for a limited service fee to solicit and negotiate contracts on its behalf and take the position that it does not have a PE because the enterprise executes all contracts outside the host country. In this case, the agent is not considered to exercise an authority to conclude contracts on behalf of the enterprise.

The BEPS Action 7 discussion draft contains four alternative options (Options A through D) that would amend the language of paragraphs 5 and 6 to cause the arrangements described above to create a PE—essentially by eliminating the requirement in paragraph 5 for the commissionaire or other agent to conclude contracts in the name of an enterprise if their activities directly result in the conclusion of contracts. The options would also amend paragraph 6 to restrict the exception for the activities of independent agents.

Specific activity exemptions

Paragraph 4 of Article 5 of the OECD Model Treaty contains exemptions from PE status for preparatory and auxiliary activities. Subparagraphs 4(a) through (d) lists specific activities that do not create a PE, while subparagraph 4(e) provides an exemption for any other activities that are of a preparatory or auxiliary nature.

One option (Option E) would be to make the specific activities listed in subparagraphs (a) through (d) subject to the condition that they must also meet a separate determination that they are preparatory or auxiliary.

KPMG observation

Existing subparagraphs 4(a) through (d) provide valuable safe harbors for taxpayers and tax authorities by identifying activities that are per se preparatory or auxiliary. Making these provisions subject to the additional enquiry of whether they are preparatory or auxiliary would erode their value.

Other options (Options F through H) of the BEPS Action 7 discussion draft would modify paragraph 4 on a more targeted basis by deleting portions of the specific activity exceptions—e.g., by no longer permitting the use of warehouses to deliver goods to qualify for an exemption.

Finally, the BEPS Action 7 discussion draft contains options that would require taking into account the activities of the same enterprise at different place or associated enterprises’ activities in the same or different places in the host country (Options I and J).

Splitting up contracts

The splitting of contracts among related entities in order to avoid the PE threshold is a concern for building, construction, and installation projects. It also is a concern in the case of treaties that contain a service PE provision.

The BEPS Action 7 discussion draft contains two options for dealing with this issue.

One option (Option K) would aggregate all activities of associated enterprises for purposes of applying the PE test.

A second option (Option L) would add a new example to the Commentary on the general anti-abuse rule proposed as part of the work on BEPS Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances).


The final two options identified in the discussion draft relate to the insurance industry.

  • One option (Option N) would create a PE in situations when an insurance company uses dependent agents who do not formally conclude insurance contracts.
  • The other option (Option M) would rely upon the changes to the dependent and independent agent provision in paragraphs 5 and 6, as discussed above.
For more information, contact a KPMG tax professional:
Thomas Zollo | +1 (312) 665-8387 |
Jim Sams | +1 (703) 286-8492 |
Brett Weaver | +1 (206) 913-6697 |

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