handbook-tb

Preventing avoidance of permanent establishment statusthe concept of PE or, rather, by the artificial avoidance of PE status.Artificial avoidance of a PE may deprive a country of taxing rightsover income derived from substantial activities which are carried outin its jurisdiction.However, in the OECD Report on Addressing Base Erosion andProfit Shifting 8 the issue of artificial avoidance of PE status was notdirectly mentioned, there being only some general references to theproblems of PEs. 9 Artificial avoidance of PEs arose, therefore, to someextent as a new issue — although not surprisingly — in Action 7 inthe OECD Action Plan on BEPS, which explained and proposed thefollowing:The definition of permanent establishment (PE) must beupdated to prevent abuses. In many countries, the interpretationof the treaty rules on agency-PE allows contracts for thesale of goods belonging to a foreign enterprise to be negotiatedand concluded in a country by the sales force of a local subsidiaryof that foreign enterprise without the profits from thesesales being taxable to the same extent as they would be if thesales were made by a distributor. In many cases, this has ledenterprises to replace arrangements under which the local subsidiarytraditionally acted as a distributor by “commissionairearrangements” with a resulting shift of profits out of the countrywhere the sales take place without a substantive change inthe functions performed in that country. Similarly, MNEs mayartificially fragment their operations among multiple groupentities to qualify for the exceptions to PE status for preparatoryand ancillary activities.ACTION 7 - Prevent the artificial avoidance of PE statusDevelop changes to the definition of PE to prevent the artificialavoidance of PE status in relation to BEPS, including through8OECD, Addressing Base Erosion and Profit Shifting (Paris: OECD, 2013),available at http://www.oecd.org/tax/beps-reports.htm.9Ibid., at 35 (on the need for adequate international tax rules in a worldof changing business models and increasing advances in technology andcommunications) and at 84 (on the connection between BEPS-related workand the previous work of the OECD on PEs).329