On 21 January 2015 the OECD held a public consultation on the artificial avoidance of permanent establishment (PE) status. This is action 7 of the action plan on base erosion and profit shifting (BEPS).

The OECD Model tax treaty permits the host country to tax profits of a non-resident enterprise when it is considered to have a permanent establishment in that country. The definition of a PE therefore is crucial to the question of whether the enterprise will be taxed in the host state. Tax administrations have found that multinational groups use artificial tax avoidance schemes to avoid having a PE in a particular state and therefore to avoid being subject to taxation in the host state.

The BEPS action plan therefore envisages updates to the OECD Model to combat this avoidance. In particular the rules relating to a dependent agent PE must be strengthened so that they cannot be artificially avoided using commissionaire arrangements that are purely legal and contractual but do not change the functions performed by the enterprises concerned. Tax administrations are also concerned that groups can split their activities and allocate them to a number of enterprises to take advantage of the exceptions to PE status included in Article 5 of the OECD Model.

The discussion draft issued by the OECD in on 31 October 2014 therefore set out options for strengthening aspects of Article 5 to combat this perceived artificial tax avoidance.

At the public consultation meeting on 21 January 2015 the general introduction of BEPS action 7 and the discussion draft issued in October 2014 was given by the Chair of the OECD’s Focus Group on Artificial Avoidance of PE Status, and this was followed by comments on behalf of the business and industry advisory committee to the OECD (BIAC).

Sessions were then held in which speakers discussed the proposed options presented in the discussion draft for changes to Article 5 of the OECD Model in respect of exceptions to a permanent establishment and in respect of the dependent agent permanent establishment. Further speakers discussed the anti-fragmentation rule to prevent taxpayers taking advantage of the PE exceptions by fragmenting their business and the anti-splitting rule for Art 5 (3) which defines with a PE in respect of a construction or assembly or installation project.

Further sessions were held on the special rule for insurance; and issues arising from the options presented in the discussion draft that would have an effect on the attribution of profits to the PE.