The OECD has published its discussion draft on the Preventing of Artificial Avoidance of permanent establishment (PE) Status. This publication follows the BEPS (Base Erosion and Profit Shifting) timeline.
A fundamental change to the existing PE rules, with a potentially wide impact on many structures currently in use by MNCs, are proposed in the OECD discussion draft on BEPS Action Step 7 (Preventing the Artificial Avoidance of PE Status). Although one of the shortest papers so far released, the various options proposed in the draft, which include widening the dependent agent provisions and narrowing both the independent agent exemptions and the specific activity (e.g., warehouses, etc.) exemptions, go beyond the PE areas identified for review under Action 7 in the original BEPS Action Plan. It seems clear that the broad reach of many of the options reflects the concerns raised in the BEPS Report on the Digital Economy regarding the ability of companies to market products and services in a host country without a meaningful physical presence.
There are five separate areas in which the OECD is proposing change:
- Commissionaire arrangements and similar strategies
- A variety of issues relating to the specific activity exemptions, including the operation of the “preparatory or auxiliary” test and the ability of companies to fragment activities
- Rules to counter the splitting up of contracts
- Specific insurance sector PE proposals
- PE profit attribution issues
For further information, we refer to our Tax Insights newsletter.
The OECD discussion draft can be found on the website of the OECD.