UK and International Tax news
OECD And Proposed Changes To Commentary On Article 5
Wednesday 19th October 2011
On 12 October 2011 the OECD Committee on Fiscal Affairs released a discussion draft on the definition of “permanent establishment” in the OECD Model Tax Convention.
Article 5 of the OECD Model Tax Convention includes the definition of the treaty concept of permanent establishment, which is primarily used for the purpose of the allocation of taxing rights when an enterprise of one State derives business profits from another State.
Despite the long history of the concept of permanent establishment, its practical application raises a number of issues. The Committee on Fiscal Affairs, through a subgroup of its Working Party 1 on Tax Conventions and Related Questions, has examined various questions related to the interpretation and application of that definition.
The discussion draft includes proposals for additions and changes to the Commentary on Article 5 resulting from the work of that subgroup which have recently been presented to the Working Party for discussion. Given the practical importance of these proposals, the Committee has decided to invite public comments on the proposed changes before they are thoroughly discussed by the Working Party at its meeting at the end of February 2012.
The proposed changes appear in the order of the paragraphs of the current Commentary on Article 5 to which they relate. The Annex includes a consolidated version of paragraphs 1 to 35 of the Commentary on Article 5 that includes all the proposed changes.
This document is a discussion draft released for the purpose of inviting comments from interested parties on the proposals prepared by a working group. It reflects the majority views in the group on some issues on which there was no consensus. Given the preliminary nature of the proposals, the draft does not necessarily reflect the final views of the OECD and its member countries.
The Committee intends to ask the Working Party to examine these proposed additions and changes to the OECD Model Tax Convention for possible inclusion through the next update, which is currently scheduled for 2014. It therefore invites interested parties to send their comments on this discussion draft before 10 February 2012.
The draft contains 25 matters for consideration, in particular:
– the time requirement for the existence of a pe,
– the presence of foreign enterprise’s personnel in the host country,
– the meaning of ‘place of management’,
– does a development property consitute a pe,
– whether an individual’s home office would constitute a pe,
– the meaning of “to conclude contracts in the name of the enterprise”,
– the activities of fund managers.
Comments received will be examined at the next meeting of the Working Party. It is also intended that Working Party 6 on the Taxation of Multinational Enterprises will be invited to consider any potential issue related to Article 7 that may arise from the proposals included in the discussion draft.
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