handbook-tb

Adolfo Martín Jimenéz3.5 Conclusion: standard for (artificial) avoidance of PEsin the OECD Model ConventionThe historical evolution of the PE concept shows that since its inception,it has comprised two opposing elements. It is a threshold permittingsource-State taxation, but it also encompasses limitations in favour ofresidence-State taxation. As a consequence, the PE has created a dissociationbetween the idea that a source State should tax “substantialparticipation” within its economic life and the taxation rights that canbe claimed upon that participation: if there is no fixed place of businessor dependent agent with authority to habitually conclude contracts,there will be no source taxation for business profits, regardless of thelevel of economic penetration in the source State. In an economy basedon immobile factors, there seemed to be more alignment between the PEtests and economic presence in the State of source; at the present time,however, changes in the economy, communication or business models(especially in the digital economy) have contributed to making the lackof alignment between economic presence and PEs more acute.Several conceptual assumptions contribute to a separation of“business presence” and taxation in the source country, leading to adistancing of PEs from the main goal of Action 7 in the OECD ActionPlan on BEPS (to end artificial segregation of taxes and business activities).First, there is the so-called per PE principle and the configurationof PEs and business presences of a taxpayer or a group of companies,horizontally (within the same country) and vertically (from the sourceto the residence country) independent of each other. The PE testsand application of the PE concept to a stream of income and not toa taxpayer make it possible to have a considerable economic penetrationin the source State without being taxed at source. This result canbe obtained as long as none of the streams meets the thresholds ofArticle 5 of the OECD Model Convention. The per PE principle andthe geographical (as well as the commercial coherence) test, as appliedespecially with regard to Article 5 (1), (3) and (4) (for the combinationof activities), maximize this effect. The legalistic interpretationof Article 5, on the possibility of combining different activities of thesame taxpayer or a group, as well as Article 5 (7), which enables a strictseparation of companies of the same group even if they are not in factindependent, has increased the residence bias.368