On 15 May 2015, the OECD released a revised discussion draft on Action 7. The revision is a follow-up to the discussion draft on Action 7 of 31 October 2014, which addressed a number of PE avoidance strategies and potential strategies to deal with these. The OECD has reviewed the options included in the first draft on the basis of the comments received, as well as the public consultation held thereon. The main objective of that meeting was to move from a series of alternative options to one specific preferred proposal per action item included in the discussion draft:
- Artificial avoidance of PE status through commissionaire arrangements and similar strategies
With the proposed changes to paragraph 5 and 6 of article 5 of the OECD Model Convention, the OECD aims to address situations where contracts are not formally concluded by the intermediary who is acting on behalf of the enterprise. In this respect, the OECD introduces the alternative test of an intermediary who concludes contracts or who negotiates the material elements of contracts.
- Artificial avoidance of PE status through the specific activity exemption
Auxiliary and preparatory condition
With the proposed changes all the activities currently listed in paragraph 4 of Article 5 of the OECD Model Convention are subject to the condition of being preparatory or auxiliary. As a result, activities (abroad) will constitute more often a permanent establishment.
Fragmentation of activities
The working party decided that it was essential to have an anti-fragmentation rule. The proposed rule applies where a cohesive business is fragmented: where the activities are carried on by two (or more) associated enterprises at the same location or by the same enterprise or associated enterprises at two different locations. Furthermore, these activities must be complementary functions that are part of a cohesive business operation. If this is the case, such activities may constitute a permanent establishment. Besides, if none of the places constitutes a permanent establishment itself, but the combination of the activities at the same place or at different places go beyond what is preparatory or auxiliary, this may also constitute a permanent establishment.
- Splitting up of contracts
The proposed change only addresses cases where the splitting-up of contracts is tax-motivated, thereby excluding situations where there are legitimate business purposes for the involvement of associated enterprises in the same project.
- Other items
Other specific topics that are discussed within the discussion draft are: insurance and issues related to the attribution of profits to permanent establishments. Furthermore, the interaction with the Action Points on Transfer pricing is taken into consideration.