Tag Archives: tax avoidance schemes

Attribution of Profits to Permanent Establishments

The BMG has made a Submission to the OECD on its consultation on revisions to the guidance on Attribution of Profits to Permanent Establishments.


This discussion draft (DD) deals with attribution of profits to a host country resulting from changes to the taxable presence requirement in the definition of a permanent establishment (PE) in BEPS project’s Action 7. Although generally clear and well reasoned, it is of limited usefulness in our view, for two main reasons. These comments explain these shortcomings and suggest how they could be corrected.

First, it applies only to the 2010 version of the OECD model convention, which introduced the ‘authorised OECD approach’ (the AOA) for attribution of profits to a PE. The AOA attempts to extend to PEs as far as possible the independent entity principle as applied to associated enterprises within a multinational enterprise (MNE). A number of OECD countries have not accepted the AOA, and it has also been generally rejected by developing countries. One reason for this is that the independent entity principle is especially inappropriate for a PE, which by definition is part of the same legal entity. Hence, few actual treaties are based on the AOA, and this is also true for most national tax law rules which would apply to entities resident in non-treaty countries. States, especially developing countries (whether or not they decide to join the Inclusive Framework for BEPS), should not be pressurised into adopting the AOA. Instead, the UN Committee of Tax Experts, in liaison with the OECD, should develop its own revisions to the commentary to the UN treaty model consequent on the changes to the PE definition introduced by Action 7. Further work is clearly necessary, by a wider range of countries, and adopting a broader approach, to produce guidance that would be of use to tax payers and tax authorities, especially in the bulk of cases where the AOA is not applicable.

Secondly, the examples provided in the DD adopt a very restricted approach, which assumes that all or most significant people functions take place in the non-resident entity, and hence attribute only limited profits to the PE. They include some illustrations of when aspects of inventory and credit risk management may take place in a PE, but significantly the examples include no discussion of other sales-related functions such as marketing and advertising, which are instead assumed to be controlled by the non-resident entity, with no relevant local input. Similarly, the examples are silent regarding core business functions conducted in host countries that are often found in modern MNE business models. These simple examples may be relevant to relatively small firms based almost entirely in their home countries, which employ a foreign sales agent.  But they are entirely unrealistic in relation to most large MNEs and their modern business models, which aim to be both global and local. No MNE can operate effectively by centralising virtually all its significant people functions and all its core business functions at a distance from its customers and suppliers, as is assumed in the examples provided here. Indeed, there are many well known examples of MNEs which employ significant staff in host countries engaged in both customer-facing and many core business functions. The failure of this DD to discuss such situations suggests a lack of consensus on how to deal with them, which may regrettably exacerbate the likelihood of conflicts even between OECD countries.

As the DD is now drafted with its focus on the AOA and its unrealistically simple examples, its effect is to strengthen the BEPS mechanisms used by many MNEs. This contradicts the mandate for the BEPS project, which is to align taxation and value creation.

Comments on BEPS Action 7: Revised Discussion Draft on
Preventing Artificial Avoidance of Permanent Establishment Status

Under international tax rules, whether a foreign company can be taxed on profits earned from activities in a country depends on whether it has a Permanent Establishment (PE). Devised a century ago, this concept has become easy to avoid, and is clearly inappropriate for the post-industrial age. The BEPS Action Plan proposed only a relatively modest reconsideration of some aspects of the rules, although it should also be considered under Action 1 relating to the Digital Economy.

The BMG has now published its comments on the OECD Revised Discussion Draft, the latest and final proposals under this action point.

Summary of BMG Comments

We are concerned that this revised discussion draft (RDD) seems to have given too much weight to the quantity of comments received on the initial draft, failing to take into account that since the vast majority came from the same community of MNEs and their paid tax advisers, it is hardly surprising that they tend to agree. In particular the RDD picks out the comments which defended ‘the fundamental concept of the independence of legal entities’, without mentioning our submission pointing out that it flies in the face of business reality to claim that associated entities within a multinational corporate group operate as independent parties, a view which is supported by economic theory and practice, and by most independent commentators.

We welcome that nevertheless a majority of the Working Party agreed to the proposed anti-fragmentation rule, although it has been given very limited scope. Indeed, the Working Party has interpreted its mandate very narrowly, focusing essentially on commissionaire arrangements and sales-related activity, so that its proposals will only deal with a few types of corporate fragmentation, those related to delivery of goods to customers. The proposals on commissionaire arrangements leave unclear whether they will apply even to activities such as marketing, while failing to deal with many other types of functional fragmentation which facilitate BEPS.

The RDD does not deal at all with the reality of the modern world in which real value is created through scientific research and the development and testing of products and services, in continuous processes of innovation and improvement. This is not just a ‘digital economy’ issue. Spending on innovation is key to the success of many businesses today. This must be reflected in Article 5 with sufficient nuance that MNEs will not continue to undervalue for source countries the value that is truly created within their borders.

The report also does not deal with the key issue of attribution of profits, which has been deferred to be dealt with after the G20 deadline for the BEPS project, perhaps in conjunction with the continued work on the Digital Economy. The weakness of these proposals is confirmed by the introduction by some OECD countries (e.g. Australia, UK) of unilateral measures to tax ‘diverted profits’. Developing countries should also take measures to protect their tax base, e.g. through withholding taxes on fees for services, but these are blunt instruments (applying to gross payments rather than profits). An internationally coordinated approach would clearly be far better both for business and revenue authorities.

The BEPS project is in our view seriously weakened by this failure to reconsider the permanent establishment concept to provide a definition of taxable presence more suited to the 21st century.

Mandatory Disclosure Rules

The BMG has now submitted its Comments on the proposals under Action Point 12 of the OECD-G20 BEPS Project on Mandatory Disclosure Rules.


Legal requirements for disclosure in advance of schemes for tax avoidance are a useful instrument for tax enforcement. However, in most countries where they have been introduced they affect mainly small and medium enterprises and wealthy individuals, and do not cover most avoidance by large multinational enterprises (MNEs). This is because they target standard schemes which are widely marketed by promoters, whereas MNEs generally use arrangements tailored to their specific needs, even if based on standard techniques. For example, it seems that the tax clearances arranged by PwC in Luxembourg over a period of eight years for 343 MNEs were not notified under the UK’s DOTAS requirements.

This DD mainly discusses standard schemes, but also includes some relevant proposals to adapt disclosure requirements to international corporate tax avoidance, which we support, with some suggested modifications. In our view, however, more needs to be done in this respect. Hence, we recommend extension of notification requirements to providers not only promoters, and put forward some hallmarks based on common international tax avoidance structures. In addition, we suggest that further specific hallmarks should be identified as part of the work on the other specific BEPS Action Plan points, to ensure that mandatory disclosure schemes can play a part in helping tax administration monitor compliance during the implementation phase of the BEPS project.

Like all methods of improving compliance, mandatory disclosure must balance deterrence with cooperation. However, there should be safeguards against the pitfalls experienced by some forms of ‘cooperative compliance’, which have led to public concerns about ‘sweetheart deals’. An important safeguard is greater transparency, and we recommend that the proposals should include (i) provisions for access to information derived from notification by a wide range of other tax authorities, and (ii) standards for reporting to the public of information and data from disclosure arrangements, to facilitate independent evaluation of the effects of such schemes.