BEPS: fixing the Permanent Establishment problem will not be easy, warns Moore Stephens
Prague, 30. 3. 2015: The OECD and the G20 may face an uphill task in tackling tax avoidance through artificial manipulation of permanent-establishment status, says professional services network Moore Stephens.
The OECD’s BEPS Action Plan 7 aims to recommend treaty-based amendments to prevent international companies operating in a country from artificially avoiding having a permanent establishment there, thus limiting their liability to corporate tax in that country.
According to a survey in leading developed countries recently carried out by the Tax Faculty of Moore Stephens Europe, the main obstacles to the OECD Action Plan are as follows:
- Lack of a common definition of what constitutes a permanent establishment (PE) in the first place, even given long-standing and detailed OECD Guidelines on this point
- The United States does not even have the concept of a PE in its domestic tax law, but the concept is variously (and non-uniformly) defined in its tax treaties with other countries
- No consensus over the minimum time requirement for a PE to be created (some countries define no minimum period; others use 30 days, 6 months or 12 months, for example)
- For the purposes of value added tax (VAT), there is the different but similar concept of a ‘fixed establishment’. We found that for the same fact pattern, a VAT fixed establishment can exist but not a PE, and vice versa
- A lack of consensus whether the existence of the following can give rise to a PE: a dependent agent, a server hosting a web page, an employee working from home, a subsidiary company
- Where a PE does exist, how profits are to be allocated for tax purposes between that PE and its home office (parent entity) in another country
“Given these differences,” says Věra Jankovcová Tax Partner of Moore Stephens, “even if the OECD, the G20 and the EU are able to reach unanimous agreement in their professed attempt to create fairer taxation of multinational transactions, it will take a very long time for the necessary changes to be implemented. Furthermore, there would even in that event be no guarantee that all mismatches and planning opportunities would disappear or even that new discrepancies would not be created.”
— End of press release —
Launched in 2013, the BEPS (Base Erosion and Profit Shifting) Action Plan of the OECD (Organisation for Economic Development and Cooperation) aims to tackle tax avoidance and mitigation by multinational companies and to ensure a fairer allocation of tax revenues between the countries in which these companies operate, and is backed by the G20 and the European Union.
For more details, consult the Moore Stephens Tax Faculty report (in English, on request).
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