15 May 2015- The OECD Action Plan on Base Erosion and Profit Shifting, published in July 2013, identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.

The Action Plan stresses the need to update the treaty definition of permanent establishment (PE) in order to prevent abuses of that threshold. It notes that the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor, which has led enterprises to replace arrangements under which the local subsidiary traditionally acted as a distributor with “commissionnaire arrangements” with a resulting shift of profits out of the country where the sales take place without a substantive change in the functions performed in that country. The Action Plan also notes that multinationals may artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status for preparatory and auxiliary activities.

Action 7 of the Action Plan indicates the need to address these issues:

ACTION 7 Prevent the Artificial Avoidance of PE Status

Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionnaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.

Further, the Report Addressing the Tax Challenges of the Digital Economy has identified issues in the digital economy that need to be taken into account in the course of the work on Action 7, namely ensuring that core activities cannot inappropriately benefit from the exception from permanent establishment (PE) status and that artificial arrangements relating to sales of goods and services cannot be used to avoid PE status.

In October 2013, the OECD invited all interested parties to contribute examples of strategies that allegedly result in the artificial avoidance of PE status and that could therefore be Addressed as part of the work on Action 7. After discussing such strategies and ways of addressing them, the OECD released, on 31 October 2014, a first discussion draft on Action 7 which described a number of PE avoidance strategies and included a number of alternative options on how to deal with these strategies.

Based on the comments that were received on that discussion draft and the interventions at a public consultation meeting held on 21 January 2015, Working Party 1 on Tax Conventions and Related Questions (the subsidiary body of the OECD Committee on Fiscal Affairs that deals with tax treaty issues) met in March 2015 to review the options included in the October 2014 discussion draft. The main objective of that meeting was to move from a series of alternative options to one specific preferred proposal with respect to each PE avoidance strategy previously identified.

This new discussion draft reflects the proposals that resulted from that meeting and on which the Committee on Fiscal Affairs is now inviting comments. The discussion draft and the comments received on it will be discussed at the Working Party 1 meeting of 22-26 June 2015, when the Working Party will be asked to finalise the changes to the OECD Model Tax Convention that will be proposed as the result of the work on Action 7.

As part of the transparent and inclusive consultation process mandated by the Action Plan, the Committee on Fiscal Affairs (CFA) invites interested parties to send comments on the specific proposals included in this new discussion draft.

Comments should be sent by 12 June 2015 at the latest (no extension will be granted) and should be sent by email to in Word format (in order to facilitate their distribution to government officials). They should be addressed to Marlies de Ruiter, Head, Tax Treaties, Transfer Pricing and Financial Transactions Division, OECD/CTPA.

Comments should be kept as short as possible: commentators should note that the proposals in this second discussion draft were all included among the options that appeared in the October 2014 discussion draft on which extensive comments were submitted and on which a public consultation meeting was held on 21 January 2015. For the same reason, no public consultation meeting will be held on the proposals included in this second discussion draft.

Please note that all comments received regarding this consultation draft will be made publicly available. Comments submitted in the name of a collective “grouping” or “coalition”, or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting.

Although this second discussion draft includes specific proposals rather than alternative options, these proposals do not, at this stage, represent the consensus views of the CFA or its subsidiary bodies but are intended to provide stakeholders with substantive proposals for analysis and comment. (Source- OECD)

Download Revised OECD discussion draft on BEPS Action 7 (Prevent the Artificial Avoidance of PE Status)

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