Strategizing International Tax Best Practices – by Keith Brockman

OECD has released guidance on the BEPS Action Plan item 7: Preventing the Artificial Avoidance of PE Status.  Comments should be sent by 9 January 2015.  A link to the OECD guidance is attached for reference:

http://www.oecd.org/ctp/treaties/action-7-pe-status-public-discussion-draft.pdf

Key observations:

  • Commissionaire arrangements: 4 alternatives are provided re: PE avoidance
  • “Independent agent” activities: the independent agent must not act exclusively for one enterprise
  • Options to counter specific activity exemptions are introduced to counter artificial avoidance of PE
  • Two options are provided re: splitting up of construction contracts to avoid the 12 month rule, one of which is the Principal Purpose test general anti-abuse rule
  • Insurance agent PE proposals are introduced
  • Profit attribution concepts to PE are discussed

In summary, additional subjectivity rules are introduced while the current exemption definitions are narrowed.  These actions will tend to significantly increase tax appeals and the risk of double taxation.

All MNE’s should review the guidance to understand the trend for future PE guidance, while also identifying current structures that may be affected by the new rules.  Notably, countries may unilaterally develop legislation based upon this guidance without waiting for final guidelines to be issued, thereby introducing greater complexity and challenges in the determination of PE.

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