The OECD has published comments received in respect of the revised discussion draft on proposed changes to Article 5 (permanent establishment) of the OECD Model Tax Convention. The revised discussion draft was issued on 19 October 2012 and interested parties were given until 31 January 2013 to submit comments.

The discussion draft included further modifications of the commentary to Article 5. An important issue is the consideration of whether a location may be considered to be at the disposal of an enterprise, and therefore constituting a place of business through which the business of the enterprise is wholly or partly carried on in a particular jurisdiction. The new draft commentary clarifies that this depends on the enterprise having the effective power to use the location (e.g. through legal possession of the location) as well as the extent of its presence at the location and the activities that it performs there. A location would also be considered to be at the disposal of an enterprise where the enterprise is permitted to use a specific location that belongs to another enterprise or that is used by a number of enterprises and performs its activities at that location continuously for an extended period of time.

The OECD has also proposed the inclusion of a paragraph in the commentary to Article 5 to clarify that the question of the existence of a permanent establishment at a location is independent of the question of whether there has been a business restructuring. The proposed addition to the commentary clarifies that the existence of a permanent establishment in a certain period must be determined on the basis of the circumstances applicable during that period.

The question of the time period required for the existence of a permanent establishment is also a matter covered in the discussion draft. A place of business requires some permanency to be considered a permanent establishment, but this is a subjective measure that the commentary attempts to clarify. This may include situations where activities are of a recurrent nature. A business that is present in a place for periods of less than six months (e.g. an Antarctic drilling station) owing to the nature of the business activities, but where operations in total continue for a much longer period, could be considered to have a permanent establishment at the location. The time requirement for a permanent establishment could for some businesses be met by even shorter time periods if they recur frequently, depending on the facts and the nature of the business.

Another issue concerns the position where a contractor subcontracts all aspects of a contract to other parties who perform the work in a particular jurisdiction. For a permanent establishment to exist, the subcontractors would need to perform the work at a fixed place of business that is at the disposal of the enterprise that is the contractor. The proposed commentary clarifies that in the absence of employees of the enterprise in that location it will be necessary to show that the place is at the disposal of the business on the basis of other factors showing that the business has the power to use that site, for example because the business legally owns the site and has the power to control access to and use of the site.

The draft considers the question of additional work performed on a construction site, after delivery of the building or facilities to the client, and whether this should be included in the time period required for the creation of a permanent establishment. The period when a building is being tested would normally be included in the time period during which the construction site exists, but the proposed commentary clarifies that the delivery of the building or facilities to the client would usually represent the end of the period of work, provided that the contractor or subcontractors no longer work on the site after its delivery to complete its construction.

Other matters clarified in the revised discussion draft include circumstances in which a home office may be considered a permanent establishment and the meaning of “place of management” in the context of a permanent establishment. Also covered is the application of Article 5 to a construction site where there are joint venture or partnership activities and, although the activities continue for more than twelve months, no taxpayer is present for that length of time.

The OECD has received 29 responses to the revised discussion draft and these are available on the OECD website. The comments are to be considered by Working Party 1 of the OECD’s Committee of Fiscal Affairs at its February 2013 meeting.