Definition of "Permanent Establishment"
Article 5 of the OECD Model Tax Convention includes the definition of the treaty concept of permanent establishment, which is primarily used for the purpose of the allocation of taxing rights when an enterprise of one State derives business profits from another State.
Despite the long history of the concept of permanent establishment, its practical application raises a number of issues. The Committee on Fiscal Affairs, through a subgroup of its Working Party 1 on Tax Conventions and Related Questions, examined various questions related to the interpretation and application of that definition.
The meaning of “permanent establishment” has such significant importance in the Model Tax Convention, from the perspective of both Article 7 and Article 15, that the efforts to provide further guidance on the term are welcomed immensely.
Taxand provides our global view in response to the OECD PE discussion paper. In general the feedback we received was positive and encouraging. With respect to Issues #10, 12, 14, 15, 16, 19, 22, 24 and 25, Taxand is in complete agreement with the OECD's proposed changes and no further comments have been provided. We have summarized our feedback by the Issue identified in the OECD PE Discussion Paper.
Taxand welcomes the proposed changes presented in the OECD PE Discussion Paper. We believe that these changes clarify the application and interpretation of certain OECD principles and guidelines for a number of contentious issues within the international tax community. These proposed changes, once implemented, should lead to the resolution of many outstanding cases and save much time and resources for taxpayers and tax authorities alike.
However, Taxand is of the view that there is still a need for further guidance on the issuance of “space at the disposal” in the context of both office in the home scenarios and sub-contract scenarios. We recognize that it is difficult to provide certainty or detailed guidance in the Commentary to every possible fact situation, but any additional clarification of these two common areas of PE exposure would be of great benefit to the international tax community.
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