As previously reported (here), the Organisation of Economic Co-operation and Development (OECD) published a 15-point Base Erosion and Profit Shifting (BEPS) Action Plan that provided a set of recommendations for a coordinated approach intended to fight tax avoidance by multinational enterprises. The OECD’s prior articles addressed the initial elements of those recommendations as a series of Actions.
As part of the BEPS project, the OECD published on October 31 a discussion draft (Draft) entitled “BEPS Action 7: Preventing the Artificial Avoidance of PE Status” (available here). The Draft seeks public comments by January 9, 2015 on several proposals that would amend the definition of permanent establishment contained in Article 5 of the OECD’s model tax treaty (available here). The proposed amendments were influenced by the OECD’s report “Addressing the tax challenges of the digital economy” (available here).
Some of the proposed changes are designed to (1) address the use of commissionaire structures and similar arrangements used primarily for the purpose of eroding the taxable base of the state where the sales took place, (2) narrow the specific activity exemptions contained in Article 5(4) to apply to those activities that are preparatory or auxiliary, and (3) address issues involving splitting up contracts through the application of an anti-avoidance rule.
Clients with multi-national operations should review BEPS Action 7 to determine what potential impact any of these changes could have on their respective business models.