The OECD has just released its revised proposals on the Permanent Establishment (PE) rules in Article 5 of the OECD Model Tax Treaty.
The new proposals update the earlier OECD discussion draft on artificial avoidance of PE status from October 2014, including specific recommendations on changes to various aspects of the PE rules.
Key revisions within the revised proposals include:
• A pre-requisite for activities of a fixed place of business to be preparatory or auxiliary in character to be exempt from PE treatment;
• An expansion of the PE definition to include an employee or agent that 'habitually concludes contracts or negotiates the material elements of contracts';
• An 'anti-fragmentation' rule that will allow tax authorities to look at combined activities of any connected enterprises in one jurisdiction and apply the 'preparatory or auxiliary' test to the combined activity;
• A clear independent agent exemption with a 10 per cent threshold for exclusivity (e.g. if more than 90 per cent of the business is with one connected party it would not be possible to use the exemption);
• A 30 day physical presence test rule for connected enterprises.
Commenting on what the revised treaty provisions and commentary mean for Channel Islands businesses, Debbie Payne, Tax Director at PwC Channel Islands said: "One thing to note is that the OECD plans to try to implement these changes across all (or most) of the tax treaties globally via a multi-lateral instrument soon after the paper is finalised in September 2015. While the feasibility and timeline for implementation of this multi-lateral instrument remains unclear, the revised rules are already changing tax authority behaviour.
"Where there is no treaty in place, which is the case for many jurisdictions where Channel Islands’ companies conduct business, the impact of these changes is likely to be felt soon and we anticipate an increasing number of challenges from tax authorities in this area. The UK Diverted Profits Tax already goes further than the OECD proposals so it remains to be seen how the UK will react to this."
Although no public consultation meeting will be held on the proposals included in this second discussion draft, the OECD has invited public comments by 12 June 2015. These comments will be considered before finalising the Action 7 guidance before the end of 2015.