On 22 January 2024, the OECD published comments on proposed amendments to the commentary to Article 5 in relation to an alternative provision on activities in connection with the exploration and exploitation of natural resources. The additional commentary would provide for the creation of a permanent establishment after a non-resident enterprise has operated in a contracting state for more than 30 days. The request for input published on 16 November 2023 proposed this alternative PE provision which would only cover activities connected with extractible natural resources (oil, gas and minerals).

The consultation document asked for comments on whether there is a case for extending the provision to also cover activities in relation to renewable resources such as hydroelectric, wind, wave, tidal or solar power. The document also asked if there are particular challenges for profit attribution to the short-duration PEs.

A suggested paragraph on capital gains would allow the aggregation of movable and immovable property for the purposes of triggering a rule modelled on Article 13(4) of the OECD Model. This provides that capital gains from the alienation of shares deriving more than 50% of their value from property situated in the other contracting state may be taxed in that state. The proposed paragraph of the alternative provision would include both movable and immovable property for this purpose.

Comments received

The Business and Industry Advisory Council (BIAC) commented that the proposed 30-day PE threshold is unworkable and would cause increased tax uncertainty. The low threshold could lead to a disproportionate administrative burden compared to that for activities outside the extractive sector. This could become a barrier to cross-border trade. Existing PE rules capture major investments in renewables and extractive operation, and therefore the policy rationale for a 30-day threshold that will capture lower value activities is unclear. The effect of the proposed rules would be to very narrowly targeted contractors that are peripheral to the extractive licence holder.

Deloitte noted that the proposed 30-day threshold for the creation of a deemed permanent establishment would create a significant number of permanent establishments with minimal profits attributed to them. Some businesses would have deemed permanent establishments in some fiscal periods but not others, creating practical difficulties.

The Institute of Chartered Accountants in England and Wales (ICAEW) considered that the existing PE rules are sufficient. The extractive activity of mining or oil and gas production is a longer-term activity and gives rise to a fixed place of business. The same would apply to alternative energy sources such as wind and solar. The existing anti-fragmentation rules would prevent multinationals from dividing activities among connected entities to avoid creating a PE. The proposals would affect the allocation of taxing rights of smaller providers of services to the extractive industry in an arbitrary way.

The Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) noted that the new provision is important because there are currently several risks to government revenues from the extractives sector. Mining subcontractors may avoid paying taxes in the source state by restructuring their activities so they do not exceed the time threshold for triggering a taxable presence. A PE is also important for employee taxation in the case of short-term activities where the 183-day rule of Article 15 of the OECD Model is not met, as employment income may then be taxed in the source state only if the salaries were borne by a permanent establishment of their employer.

Also, the taxation of offshore indirect transfers of mining assets, for example an extractive licence or any other right, interest, or asset, may generate considerable capital gains. A mine typically changes hands several times during the lifetime of the resource, and this can create a number of capital gains tax events. The proposed capital gains provisions could ensure revenue is collected by the source state.

Exclusion for ships and aircraft

The proposed alternative provision contains an exclusion for the operation of ships or aircraft designed or modified, and used, for the primary purpose of transporting supplies or personnel; or towing or anchor handling. The request for input asks if “designed or modified” is a useful extra condition, and if there would be any practical difficulties. It also asked if the correct vessels are included in the provision.

With regard to the exclusion for ships and aircraft, the ICAEW considered that there should not be a distinction between ships and aircraft on one hand and functionally similar land-based vehicles. Only ships, aircraft and vehicles carrying out core extraction activities should be included.

The Norwegian Shipowners Association commented that the requirement for vessels to be modified or designed to perform service activities is unnecessary, creating complexity without adding practical value.