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BEPS Action 7How Impact on Indirect Tax?




Post BEPS WorldOECD BEPS Action 7Preventing the Artificial Avoidanceof Permanent Establishment


More and more Tax Authorities are challenging overseas companies regarding the presence in their jurisdiction of a Permanent Establishment (PE). The artificial avoidance of PE led to Plan Action 7 in the framework of the Organization for Economic Co-operation and Development (OECD)

The article number 5 regarding the definition of PE of the 2010 Transfer Pricing Guidelines (OECD Model Tax Convention which is widely used as a basis for negotiating International Tax Treaties) has been modified under the Base Erosion and Profit Shifting (BEPS)

Action 7

It is estimated that more than 85% of multinational companies work with some kind of centralized structure. During the last years corporations have moved from decentralized operating models towards to centralized models. Centralization brings several benefits to enterprises e.g. scale economies, lower cost, innovation, centers of excellence or management improvement.

Action Plans on Base Erosion and Profit Shifting (BEPS) are aimed at governments concern about multinational companies to reduce their tax liabilities through shifting income to no-tax or low tax countries. Typical countries in Europe for centralization with low tax or no-tax are UK, Ireland, Switzerland, Luxembourg or the Netherlands. The action 7 refers to the artificial avoidance of PE in the country (different one from the centralization country) in which the revenues are generated.


Valuable and strategic control functions and therefore key risks, are centralized (regionally or globally) in a given country which allows for profit allocation in that country, usually countries of low or no-taxation. This centralization leads to cross-border transactions between related parties where profit is shifted from the country of source to the country of centralization. Corporations use different operating models to maximize their benefits and create new revenues streams. For this purpose the risk of PE in the sourcing country should be eliminated or minimized in order to avoid corporate tax in that country.

During November 2015 Summit, the G20 leaders endorsed the OECD BEPS recommendations on Tax Policies .The G20 leaders also endorsed the OECD International VAT/GST Guidelines that representatives of more than 100 countries had endorsed.

Although BEPS are aimed at Corporate Tax, the direct impact on Indirect Tax it is much more than evident and it should not be underestimated. BEPS may impact on VAT, excise arrangements, customs and regulatory matters or vice versa.

International Tax treaties generally provide that the business profit of a foreign enterprise is taxable in a given country as far as this company has a PE in the state to which the profits are attributable.

Therefore the definition of PE included in Tax Treaties is crucial to determine whether a non-resident enterprise must pay income tax in another state. Plan action 7 final report was released on October 5th of 2015 by the OECD, providing a new definition of PE. The Guidance describes different situations in which certain structures or business models may trigger a PE.

The report introduces changes that are believed necessary in order to ensure that a group’s complex supply chain does not allow to artificially avoid a taxable presence in a local country.

After the modification of the definition of PE some operating models should be re-assessed.

From a VAT perspective the definition of PE (in VAT terminology Fixed Establishment "FE") is different from the definition of PE from a Corporate Tax point of view and therefore it should not be in principle directly impacted by BEPS. However any modification in the definition of PE from a Corporate Tax perspective creates a wider gap between both definitions, leading to some businesses facing challenges in their operating models.


Based on the different definitions, it is possible in some EU member states to have a PE for Corporate Tax purposes (e.g. the Netherlands or Belgium) without having a FE for VAT purposes.

However some EU countries do not accept the absence of an FE once a PE has been created, in other words, in some EU countries a PE triggers automatically a FE for VAT purposes (e.g. France or Spain) and therefore there is a risk that an increased number of FEs may arise. So or even companies move away from commissioner arrangements as we will comment later on or new compliance process from a VAT perspective may need to be set up.

On top of this not every EU member state has the same definitions of what should be deemed as FE.


It is important to note that a new definition of PE has been released by the new Union Customs Code (UCC) that entered into force on May 2016. No definition about what should be deemed as PE existed in the previous customs regulation. So three different definitions has to be taken into account.


The new definition of the UCC called PBE (Permanent Business Establishment) is far away from the corporate tax but has some similarities with the VAT definition of FE. In this sense it is interesting to recall the Welmory Case (EU Court of Justice, case law C-605/12) regarding a possible fixed establishment without "own presence"


Can a company have a PBE without having a FE or PE?

Until which degree the new BEPS rules may impact?

One of the introduced changes by Plan Action 7 refers to commissioners and similar arrangements like sales agents (quite common structure in multinational companies). Under a sales agent structure, a non-resident enterprise in a given country engages a related company resident in the source state, to act as sales agent. In this scenario, the sales agent does not hold title of the goods, being rewarded through a commission. The agent functions, risks and assets are limited to the function of acting as sales agent/selling company by only controlling its operational risk related to its business.


So much has been said regarding commissioners and the risk of PE for the Principal company based on commissioners arrangements. Lately Tax Authorities have been of the opinion that a sales agent acting on behalf of a Principal, entering into contracts (regardless if the contract is entered in the name of the Principal) that are binding on the foreign Principal company, triggers a PE in the country in which the sales agent is established. There are several court-cases in multiple jurisdictions in this sense like in Spain with the Roche case-law (TS 1626/2008).

The new definition of PE states that a sales agent or commissioner acting on behalf of a Principal, that habitualy concludes contracts or plays the leading role entering into contracts without material modification by the Principal, create a PE for the Principal in the sourcing country.

From a customs point of view the re-assessment of current operating models of MNE may have a direct impact on customs valuation and therefore on customs duties. If models move from commissioner arrangements to distributors the impact if not carefully analyzed may lead to higher customs duties.

Flash title sales under e.g. direct sales operating models are also increangsily scrutinized by Tax Authorities. They may also be impacted based on BEPS developments.

Another scenario that may trigger a PE under Action 7 is the use of warehouses facilities by a Principal foreign company for the purchase, storage and delivery of goods. The old article 5.4 of OECD MC specifically excluded the use of premises for the activities described above. Under the new definition of PE, in general terms those activities must be deemed as preparatory or auxiliary taking into account the overall business activities performed by the foreign entity.

It is important for MNE to check whether or not those activities performed in a foreign country may be considered as part of their main core business and therefore leading to a potential PE.

This risk of PE may even exists even though the inventory owned by the foreign entity it is held at a related party or at 3PL/4PL warehouse, provided that certain conditions are met e.g the foreign entity has unlimited access to the place where the inventory is stored for the purpose of checking or maintenance the stored goods and as previously commented the activities are not deemed as preparatory or ancillary.

At this respect it is important to mention the new anti-fragmentation rule that prevents companies from avoiding PE by splitting activities in order to align its business activities with the requirement mentioned above. The anti-fragmentation rules implies that the business must be considered as a whole in order to determine the existence of a PE.

Another scenario that may trigger a PE under Action 7 is the use of warehouses facilities by a Principal foreign company for the purchase, storage and delivery of goods. The old article 5.4 of OECD MC specifically excluded the use of premises for the activities described above. Under the new definition of PE, in general terms those activities must be deemed as preparatory or auxiliary taking into account the overall business activities performed by the foreign entity.

It is important for MNE to check whether or not those activities performed in a foreign country may be considered as part of their main core business and therefore leading to a potential PE.

This risk of PE may even exists even though the inventory owned by the foreign entity it is held at a related party or at 3PL/4PL warehouse, provided that certain conditions are met e.g the foreign entity has unlimited access to the place where the inventory is stored for the purpose of checking or maintenance the stored goods and as previously commented the activities are not deemed as preparatory or ancillary.

At this respect it is important to mention the new anti-fragmentation rule that prevents companies from avoiding PE by splitting activities in order to align its business activities with the requirement mentioned above. The anti-fragmentation rules implies that the business must be considered as a whole in order to determine the existence of a PE.

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