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OECD discussion draft on Action 7 (Prevent the Artificial Avoidance of PE Status)
On 31 October 2014, the OECD published a discussion draft which included proposals with respect to Action 7 (Prevent the Artificial Avoidance of PE Status) of the BEPS Action Plan. The Action Plan stresses the need to update the treaty definition of permanent establishment (PE) in order to prevent abuses of that threshold. Taxand is honoured to provide combined feedback from around the world on the discussion draft with respect to Action 7 (Prevent the Artificial Avoidance of PE Status) of the BEPS Action Plan.
The OECD notes that the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise, without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor. This has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor by “commissionnairearrangements” with a resulting shift of profits out of the country where the sales take place, without a substantive change in the functions performed in that country. The Action Plan also notes that multinationals may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and auxiliary activities.
Action 7 of the Action Plan indicates the need to address these issues. Taxand's response to this discussion draft deals with practical suggestions for improving the prevention of artificial avoidance of PE status while not negatively affecting the due neutrality of taxes, and reducing the complexity of such operations for multinationals.
Taxand's response is intended to be practical and experience-based, as well as constructive, in our responsibility as global tax advisors to contributing to a more comprehensive debate on the issues raised. Taxand is wholly committed to supporting the OECD Committee of Fiscal Affairs, alongside our gratitude for the opportunity to respectfully provide our comments on OECD matters, our recognition goes also to the work performed so far by the OECD.