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22/10/2013 - The OECD Committee on Fiscal Affairs, through the Focus Group mandated to carry on the work on Action 7 (Artificial Avoidance of PE Status) of the BEPS Action Plan, invites interested parties to send, before 15 November 2013, a short description of strategies that might be considered to result in the artificial avoidance of the PE status in relation to base erosion and profit shifting.
In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting (BEPS). The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.
Action 7 of the Action Plan, which deals with strategies that result in the artificial avoidance of permanent establishment status and that raise base erosion and profit shifting concerns, reads as follows:
(ii) Restoring the full effects and benefits of international standards
The definition of permanent establishment (PE) must be updated to prevent abuses. In many countries, 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. In many cases, this 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. Similarly, MNEs may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and ancillary activities.
ACTION 7 – Prevent the Artificial Avoidance of PE Status
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.
In accordance with the Action Plan’s suggestion that work on the various action items could be carried on through focus groups composed of a relatively small number of delegates, a Focus Group on Preventing the Artificial Avoidance of the PE Status has been set up to carry on the work required by Action 7. The Focus Group is composed of tax officials from various OECD and non-OECD countries.
The Action Plan also provided that “[t]he OECD’s work on the different items of the Action Plan will continue to include a transparent and inclusive consultation process” and that all stakeholders such as business (in particular BIAC), non-governmental organisations, think tanks, and academia would be consulted.
As part of that consultation process, the Focus Group mandated to carry on the work on Action 7 invites interested parties to send, before 15 November 2013, a short description of strategies (other than commissionnaire arrangements, which have already been identified in the Action Plan) that might be considered to result in the artificial avoidance of the PE status in relation to base erosion and profit shifting. The strategies identified in response to this invitation will be examined by the Focus Group when considering proposals for changes to the definition of permanent establishment.
The Focus Group wishes to stress the narrow scope of this invitation. At this early stage of its work, the Group merely wants to identify situations that may arguably result in the artificial avoidance of the PE status in relation to base erosion and profit shifting. It does not therefore, invite comments on whether work should be done in this area, on whether or not the strategies already identified in the Action Plan effectively result in the artificial avoidance of the PE threshold, on ways to address perceived difficulties with the definition of permanent establishment, on possible changes that should be made to that definition or on other aspects of the BEPS Action Plan. It is expected that responses to this invitation will be in the form of one or a few paragraphs describing each strategy that the Group would be invited to examine.
Comments on this discussion draft should be sent electronically (in Word format) by email to email@example.com and should be addressed to:
Tax Treaties, Transfer Pricing and Financial Transactions Division
Unless otherwise requested at the time of submission, responses to this invitation will be posted on the OECD website.