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BEPS - prevention of articifical avoidance of PE status

19 Mar 2014

Continued recessionary pressures and subdued economic activity have not only taken their toll on the scale and profitability of business operations but have also had an impact on the fiscal health of nations. Such subdued economic activities and lower profits have translated into lower tax collections and inevitable tightening of strings by the governments. Taxand India analyses Action Point 7 of the OECD BEPS Action Plan 'Prevention of the artificial avoidance of PE status'.

In their bid to explore alternative sources of funding, governments and tax administrators have toughened their stance on tax planning structures which entail shifting of profits from source jurisdiction to no or lower tax jurisdictions.

Action Point 7 of the BEPS Action Plan focuses on two principal aspects – measures to check artificial avoidance of permanent establishment (PE) status and related profit attribution issues. This part seeks to cover the first aspect ie artificial avoidance of PE status.

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Mukesh Butani
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Taxand's Take

The thrust on BEPS and Action plan 7 indicates a marked shift towards the ‘substance vs form’ principle. In the absence of statutory GAAR (Indian GAAR shall apply from 1 April 2015), Indian tax courts have had opportunities to test substance based on the facts of each case and articulate legal principles. The Indian legal framework has kept pace with such developments and has evolved over a period of time to expressly provide specific anti-abuse and substance based provisions within the statute. 

The Indian Tax Administration is expected to keep a close watch on the developments in the context of the artificial arrangements aimed at circumventing PE status and multinationals are advised to do the same.

Taxand's Take Author

Mukesh Butani
Taxand Board member

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