Saturday 27 / April / 2024
Muscat: As part of KPMG’s initiative to provide critical insights to the taxpayer community in Oman on various tax issues through a fortnightly series of articles in the Times of Oman, we had, in our previous article in this column, shared an overview of the recent global developments relating to Action plan 15 of the Base Erosion and Profit Shifting (BEPS) package and signing of the Multilateral Instrument (MLI), which took place in Paris in June 2017. In this article, we extend our analysis of MLI to delve deeper into specific aspects dealing with Permanent Establishment (PE) issues.
MLI incorporates provisions to implement the recommendations outlined in the BEPS Action Plan 7, which deals with artificial avoidance of PEs. As Action Plan 7 is not a minimum standard, the signatories to MLI are free to opt out or selectively adopt the provisions relating to PEs in the MLI.
The existing dependent agent PE provisions typically cover only the conclusion of contracts that are “in the name of” or “binding on” the principal. MLI expands the standard for dependent agent to include situations in which the dependent agent “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the foreign enterprise.”
It also covers contracts for the transfer or use of property of the principal, or for the provision of services by the principal. Adoption of this change would create PEs for principals that distribute products and services through commissionaires and other dependent agent arrangements. In addition, the MLI provides that an agent is not considered independent if that agent works exclusively or almost exclusively on behalf of one or more closely related enterprises.
Changes to the application
The current model treaty by the Organisation for Economic Co-operation and Development (OECD) specifically identifies certain activities that may be carried on at a location in the source country without creating a PE of the foreign enterprise in such source country. To address concerns about the use of these exemptions to “artificially” avoid a PE, the MLI provides several options for modifications in the availability of these exemptions.
One option is to limit the availability of such exemption to the activity of a “preparatory or auxiliary” character. The other option, which was included as an alternative to the first option for countries that preferred to ensure greater certainty about the application of these exceptions, is to make it explicit that the specific activity exceptions are per se exceptions and are not subject to an overall condition of preparatory or auxiliary character.
MLI also provides an anti-fragmentation provision under which the specific activity exemptions would not apply when a foreign enterprise or its closely related enterprise carries on business activities in one or more places in the same State, and either one or more such places constitute a PE for one such related enterprises, or the overall activity resulting from the combination of activities in such places is not of a preparatory or auxiliary character.
MLI further aims to prevent artificial avoidance of a PE through splitting up of contracts. It provides for aggregation of time spent at a building site or construction or installation project by the enterprise and connected activities carried out by closely related enterprises at the same building site or construction or installation project during different periods of time.
Conclusion
MLI provisions pertaining to BEPS Action Plan 7 on artificial avoidance of PE are critical provisions to address the widely misused PE clauses under the treaty. These provisions on PE may affect the global tax positions of some of the multinational companies, which currently may not constitute a PE in the other state/s, based on the current treaty language.
Companies should start reviewing their existing structures to evaluate whether they may trip the Dependent Agent PE threshold, based on the modified treaty language and also ascertain if any of their specific activity-based exemptions may get affected.
