BEPS Action 7: Preventing the Artificial Avoidance of PE Status 2

In this blog we will discuss the final Report BEPS Action 7: Preventing the Artificial Avoidance of PE Status, more in particular, commissionaire arrangements and similar strategies involving agency PE status being avoided.

Final Report BEPS Action 7: Preventing the Artificial Avoidance of PE Status
The OECD, on 5 October 2015, published its final report under BEPS Action 7 on preventing the artificial avoidance of permanent establishment status. The OECD argues that ongoing technological developments have enabled a substantial number of commercial transactions to be carried out in high taxed jurisdictions without any need to conclude an on-site PE or agency PE. This Final PE Report contains proposals aimed at overhauling the PE concept, by targeting:
commissionaire arrangements and similar strategies involving agency PE status being avoided;
the application of the specific activity exemption enabling agency PE status to be sidestepped; and
the splitting-up of contracts to avoid construction PE status.

Commissionaire arrangements and similar strategies
MNEs frequently resort to commissionaire arrangements and similar strategies, involving a commissionaire in its own name seeing to the sale of commodities at the risk of and on account of its principal, the latter being the central group company. Pursuant to the Final PE Report, the test for dependent agents will be expanded and undergo the following changes:
the situation will be included of a representative who “habitually plays the principal role [within the source state] leading to the conclusion of contracts that are routinely concluded without material modification [by the principal]”, even where the domestic contract law of the said state provides that the conclusion of contracts takes place elsewhere;
the substantive approach to the requirement of a granted power of attorney will be going one step further by not insisting at all on any sort of formal power of attorney; it is the de facto acts and/or actions on the part of the representative that hint at the latter officiating on behalf of the principal that are crucial to deciding whether or not the scenario is that of an agency PE; and
the legal connotation of “binding” will be ignored by interpreting it in a more broad-based beneficial and/or de facto sense; what matters is whether or not the principal is under any sort of obligation vis-à-vis the customer to deliver to this customer whatever it may be that the commissionaire has sold to him.

The Final PE Report provides several clarifications and refinements with regard to the exemption for independent agents, with the result that the exemption is being narrowed. The amendments include:
that an agent cannot be regarded as “independent” where it operates “exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related”; the independent agent exemption will not be applied if (i) “one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other” or if (ii) another “possesses directly or indirectly more than 50 per cent of the beneficial interest in […] the person and the enterprise”; and
that the example of a broker and (general) commission agent ceases to apply – it being the independent status (or lack thereof) that is to be regarded as the basic criterion.

In the next blog we will discuss the final Report BEPS Action 7: Preventing the Artificial Avoidance of PE Status, more in particular, the application of the specific activity exemption enabling agency PE status to be sidestepped and the splitting-up of contracts to avoid construction PE status.

We invite you to reach out to us if you would like a copy of our article. Do not hesitate to contact us client.team@duijntax.com

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