Reform of the Criteria for Taxable Presence (Permanent Establishment)

The BMG has published its comments on the OECD proposals on Preventing Artificial Avoidance of Permanent Establishment Status, under Action 7 of the BEPS Project, which deal with the criteria for taxable presence of a foreign company.

Summary of BMG Comments

We welcome the move away from the independent entity principle, which allows and encourages multinationals to create complex corporate structures, fragmenting functions among different affiliates to avoid tax. Regrettably, however, these proposals are limited to (i) situations where a multinational selling in a country has an affiliate or agent involved with conclusion of contracts; and (ii) a proposed anti-fragmentation rule which only covers pre-sales-related activities, and not e.g. delivery or customer support. Many countries already have stronger rules, or are introducing them, notably the UK’s new Diverted Profits Tax. To avoid increasing conflicts, multilateral agreement is needed on a broader rule.

We suggest revision of Article 5(7) of tax treaties to reverse the presumption that the fact that two companies are under common control shall not ‘of itself’ create a taxable presence for the multinational as a whole. To align income from sales with expenses, greater use should be made of the profit split method in transfer pricing, or the apportionment approach which is still allowed for a PE in most treaties, especially with developing countries.

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