handbook-tb

Protecting the tax base of developing countriesjurisdiction must be distinguished from the narrower question of howto deal with structures that are “artificially” set up to avoid permanentestablishment status while at the same time giving the taxpayer substantialeconomic presence in the taxing jurisdiction. Action 7 in theOECD Action Plan on BEPS is clearly focused on the latter issue; itsmandate is to develop changes to the definition of PE to “prevent theartificial avoidance of PE status.” 14Developing countries are of course concerned with the “artificial”avoidance of PE status and with establishing mechanisms todeal with such avoidance. However, they are also concerned with theappropriateness of the PE definition generally and the extent to whichit unduly restricts source-based taxation of activities that involve substantialeconomic activity in the domestic jurisdiction. The issue arisesmost importantly in the context of the taxation of the digital economyand the taxation of services, and is discussed subsequently in sections5 and 9 below. The focus here is principally on dealing with structuresthat can be viewed as “artificial” regardless of the basic PE definition. 154.2 Commissionaire arrangementsIn recent years, a number of companies have reorganized their internationalstructures by centralizing a number of functions dealing withintangibles, product promotion, inventory management and the likein individual companies, often located in low-tax jurisdictions, andconverting sales subsidiaries that had previously handled all aspectsof the purchase and sale of goods in the source country into so-called“low risk” distributors. In many cases, these business restructuringshad the effect of reducing substantially the amount of revenue attributedto the source jurisdiction. Under the prior structure where the“full-fledged” distribution subsidiary bought the goods from a related14OECD, Action Plan on Base Erosion and Profit Shifting, supranote 2, at 19.15The two issues discussed here are related. A broader definition of PEwould eliminate the possibility of “artificially” avoiding the narrower definition.Thus, a PE definition that treated the maintenance of a stock of goodsfor delivery as a PE would respond to some of the issues raised by commissionairearrangements.17