handbook-tb

Adolfo Martín Jimenézcrucial for tax administrations and taxpayers since the threshold effectof the PE concept denotes whether a taxpayer obtaining business profitsis subject to tax (or not) in the source country. The conceptual difficultiesconnected with PEs and their evolution, and the attributionof profits thereto, have an important impact upon practical situations:lack of clarity and different interpretations of the same concepts meanthat there is a wide margin for conflict between tax administrationsand taxpayers, on the one hand, and the tax administrations themselves,on the other. Still, tax administrations in general, and those indeveloping countries in particular, should be able to identify when ataxpayer is conducting a relevant business activity within their territorywhile attempting to avoid the presence of a PE, and should knowhow to react in order to tax economic activity carried on within thesource State. For taxpayers, it is also critical to know when they mayhave a PE in a given jurisdiction so as to avoid disputes, manage taxrisk and, ultimately, pay the correct taxes that are due to every jurisdictionwhere economic activity is conducted.It is, therefore, crucial for tax administrations in developingcountries to understand that Action 7 will have an impact upon adomain that is extremely complex, and subject to scrutiny and discussionin the international tax arena, where there are controversial issuesthat have not been fully settled, and where, as a consequence, disputesmay often arise. In this context, it is difficult to speak about “artificialavoidance of PE status”: if the concept of PE, a central element ofinternational taxation, is not completely clear, it is hard to establish thecontours of artificial avoidance of PE status. Moreover, as this conceptworks mainly in favour of residence countries and, to a large extent,permits taxpayers to avoid source taxation even if relevant economicactivity is carried out in the source State, developing countries shouldconsider whether to focus on artificial avoidance or on plain avoidanceof PE status in order to recover (or keep) the right to tax activitiestaking place within their borders.These ideas form the basis of the present chapter. Before trying todefine what is abusive in terms of avoiding a PE, it is essential to discern,first, the scope and context of Action 7 in the OECD Action Plan onBEPS and the importance of PEs for tax administrations and taxpayers(see section 2 below, which attempts to answer the question why actionin this area is needed and what the extent of it may be). Second, as it is326