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Action 7 feedback downplays OECD’s progress and hints at unravelling of universal approach

Comments on Action 7 of the OECD’s base erosion and profit shifting (BEPS) project show the draft has done little to clarify permanent establishment (PE) issues with many countries considering national measures to tackle profit shifting

The discussion draft, BEPS Action 7: Preventing the Artificial Avoidance of PE Status, was released on October 31 2014.

The draft stressed the need to update the treaty definition of PE to prevent abuses of the threshold through commissionaire agreements and specific activity exemptions.

Positive comments, submitted by interested parties (taxpayers, NGOs and advisers), welcomed the OECD’s shift away from stubborn adherence to the separate entity principles and voiced support for the need to amend specific activity exemptions.

While comments acknowledged and applauded the OECD’s efforts, concerns appear to outweigh the positives.

Minimalist proposals with maximum ambiguity

The general reaction to the OECD’s discussion draft on Action 7 is that the OECD has taken a cautious, minimalist approach.

The draft fails to sufficiently distinguish between BEPS and the allocation of taxing rights between the source state and residence state.

The BEPS Monitoring Group said: “The proposals in the discussion draft are minimalist, and would deal only with specific types of abuse.”

Both corporates and advisers have brought up the OECD’s failure to reduce the ambiguity surrounding PEs and to provide solid arguments as to why a commissionare structure should be deemed an “artificial” mechanism.

The draft considers commissionaires to be structured primarily to allow MNEs to erode tax bases but fails to provide analysis to back up this argument.

The Tax Executives Institute (TEI) said: “There is no discussion, however, of the commissionaire as a legitimate business arrangement often used by unrelated parties to conduct their retrospective enterprises.”

In some cases a commissionaire approach is the best reflection of the relationships in place within an MNE and is put in place for legitimate business reasons such as defining and delegating responsibilities, reducing compliance costs and avoiding tax volatility.

Judging from this feedback, it is clear the OECD will have to make significant efforts to clarify its plan of action and elaborate on the reasoning behind its view on commissionaires.

Compliance burdens, double taxation and disputes

The draft’s broad proposals would result in a significant growth of PEs. Any rules that make it easier to establish the presence of a PE are likely to increase the administrative costs of cross-border business.

Creating additional redundant costs, including expensive allocation and compliance requirements that produce little to no tax, is clearly undesirable for both taxpayers and tax authorities.

A proliferation of PEs within an MNE’s operations will complicate analysis when determining the proper amount of remuneration between a PE and the rest of the enterprise.

TEI addressed the potential for creating “drastic tax consequences” including double taxation. Just as MNEs strive to avoid double taxation in transfer pricing matters, it is likely they will also do everything to avoid creating a PE in particular jurisdictions.

“In the experience of TEI’s members, some countries go so far as to assert a PE to force MNEs to settle on unrelated transfer pricing matters. The OECD should recognise that it indirectly encourages tax authorities in these endeavours by introducing unnecessary uncertainty into the PE definition while also lowering the PE threshold.”

In its comments, Volvo reiterated the vagueness of the draft’s proposals and expressed concerns that changing the PE definition by introducing “additional subjectivity and unclear PE tests” would lead to an “unsecure tax environment and increase risk of double taxation, disputes and undue administration.”

The feedback, across the board, stressed that without clarification, the risk for compliance burdens, disputes and double taxation is far too high.


It is likely the OECD shied away from more ambitious proposals because of the challenges that come with reaching a broad consensus. While this is understandable, the OECD could well be shooting itself in the foot and prompting member countries to take things into their own hands. Thus, contradicting efforts to create a universal approach to tackle profit shifting.

“Countries would still be able to adopt their own preferred solutions. The UK has now proposed a Diverted Profits Tax, which would attribute a PE if any activities take place in the UK “in connection with” the supply of goods and services there, in a way which it is “reasonable to assume” is designed to ensure that no PE is created. This clearly goes beyond limited proposals in the current discussion draft,” said the BEPS Monitoring Group.

Alternatives to deal with contract manufacturing that go beyond the limited proposals in the OECD’s discussion draft are already underway in countries such as Australia and Spain.

“Wearing my BIAC hat, I do worry about the precedent this might set for other countries in terms of jumping the gun on the BEPS proposals. I do think that the principle that “nothing is decided until everything is decided” gives the BEPS project the greatest chance of success. Wearing my CBI hat, however, I am glad that the government is prepared to consider changes to the legislative language to narrow the scope more narrowly to the aggressive planning that they are targeting. I think, given the importance of this provision, it is very important to get the legislative language (and not just the guidance) right,” said Will Morris, Chair of the BIAC and CBI Tax Committees.

It seems the OECD will have to bite the bullet and adopt a more ambitious approach or watch as member states unravel their holistic approach in favour of their own preferred methods.

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