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BEPS: OECD Publishes Revised Discussion Draft on Avoidance of Permanent Establishments


As part of the ongoing work of the OECD to combat base erosion and profit shifting (BEPS) a revised discussion draft on the artificial avoidance of permanent establishments (PE) has been published. The revised discussion draft proposes specific preferred options with respect to each of the PE avoidance strategies identified. The chosen proposals reflect comments received on the series of alternative options proposed in the first discussion draft published on 31 October 2014.

Comments are invited on the revised draft before 12 June 2015 after which time the OECD will finalise the proposed changes to the text relating to PEs in the OECD Model Tax Treaty.

The following are some of the issues addressed in the revised draft:

Commissionaire structures

The first draft proposed amendments to the wording in the Model Tax Treaty relating to agency and “authority to conclude contracts in the name of” so as to address the problems arising from the implementation of “commissionaire structures” in order to erode the taxable base in the State where the sales in question are taking place.

The revised draft focuses on arrangements whereby the activities of an intermediary exercised in a country are intended to result in the regular conclusion of contracts being performed by a foreign enterprise; in such circumstances the OECD believes that the enterprise should be considered to have a sufficient taxable presence in that country unless the intermediary is performing these activities in the course of an independent business. It was agreed to include additional commentary and guidance on these amendments.

It is important to highlight that it was agreed that issues relating to low risk distributor agreements will not be dealt with under this Action and will be dealt with under Action 9, “Risks and Capital”.

Use of the specific exemptions to artificially avoid PE status

The OECD is concerned that the specific exemptions from creating a PE contained in the current Model Tax Treaty (e.g. warehousing) are being abused by companies so as to ensure that no PE is deemed to exist. The revised draft contains a condition that all of the specific exemptions will be restricted to activities which are “preparatory/auxiliary” in nature. In addition, the revised draft contains additional commentary on the meaning of “preparatory/auxiliary”.

Despite strong objections to the proposal, an anti-fragmentation rule is contained in the revised draft in order to address BEPS concerns on the use of subsidiaries to fragment related activities so as to maintain a preparatory/auxiliary character and avoid a PE.


The revised draft clarifies that no specific rule will be applicable to insurance companies and that the general rules on PEs will apply.

Contributed by Sonya Manzor.

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