TEI comments on revised OECD PE discussion draft.

• Position: Tax Executives Institute, Organisation for Economic Co-operation and Development, permanent establishment

On May 28, 2015, TEI submitted comments on the OECD revised discussion draft on BEPS Action 7: Preventing the Artificial Avoidance of PE Status. The Institute's comments focused on the need for certainty in the definition of a permanent establishment (PE) in double tax treaties so businesses can plan their operations with an accurate forecast of the amount of tax due. TEI also noted that the proposed changes to the PE definition will significantly broaden its scope and thus increase the compliance and administrative burden on taxpayers. TEI's comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Nick Hasenoehrl. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's comments.

On July 19, 2013, the OECD published an Action Plan on Base Erosion and Profit Shifting (hereinafter the Plan) setting forth fifteen actions the OECD will undertake to address a series of issues that contribute to the perception that individual countries' tax bases are being eroded or profits shifted improperly. Pursuant to Action 7 of the Plan, "Prevent the artificial avoidance of PE status," the OECD issued a public discussion draft on October 31, 2014, (hereinafter the October Draft). After receiving comments and holding a public consultation on the October Draft in January 2015, on May 15, 2015, the OECD released a revised discussion draft entitled BEPS Action 7: Preventing the Artificial Avoidance of PE Status (hereinafter the Revised Discussion Draft or Revised Draft). The OECD requested comments on the Revised Draft no later than June 12, 2015. On behalf of Tax Executives Institute, Inc. (TEI), I am pleased to respond to the OECD's request for comments.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has fifty-six chapters in Europe, North and South America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 3,000 of the largest companies in the world. (1)

TEI Comments

TEI commends the OECD for the substantial improvements of the proposed modifications to the definition of a permanent establishment (PE) in Article 5 of the OECD's model tax convention, as reflected in the Revised Discussion Draft. In particular, limiting the application of paragraph 6 of Article 5, regarding independent agents, to cases where the agent is "connected" to an enterprise ensures that there is a proper basis to impute the actions of the agent to the enterprise for purposes of creating a PE of the enterprise. Leaving in place the specific activity exceptions of paragraph 4, regarding activities that are generally of a preparatory or auxiliary nature, instead of eliminating one or more of them, is also welcome.

Even with these improvements, many of the changes proposed in the Revised Draft will regrettably lead to an increase in uncertainty and controversy over the tax consequences of entering new markets. The uncertainty will discourage cross-border business operations, whether they are conducted by a multi-national enterprise (MNE) entering a new market or a local company expanding internationally for the first time. As we discussed in our comments on the October Draft, (2) the tax consequences of inadvertently creating a PE are drastic and therefore any uncertainty regarding whether a PE exists is amplified and will result in a concomitant reduction in international business activity.

Revised Option B--Paragraph 5

Paragraph 5 of Article 5 of the OECD model convention addresses the circumstances when the use of a dependent agent by an enterprise within a state will give rise to a PE of that enterprise in that state. The Revised...