RBRT’s Comments on the Public Discussion Draft BEPS Action 7: Preventing the Artificial Avoidance of PE Status

By Robert Robillard - 13 January 2015

This blogpost originally appeared on rbrt.ca.

Comments on the Public Discussion Draft BEPS Action 7:  Preventing the Artificial Avoidance of PE Status

January 8, 2015

Mrs. Marlies de Ruiter
Head, Tax Treaties
Transfer Pricing and Financial Transactions Division
By email: taxtreaties@oecd.org


With the Holiday spirit still among us, we are pleased to briefly comment on public discussion draft BEPS Action 7: Preventing the Artificial Avoidance of PE Status (the paper) through the consultation taking place from October 31, 2014 to January 9, 2015.

This document may be posted on the OECD website. Full credit goes to Robert Robillard, RBRT Transfer Pricing. [1]

1. General comments

1.1. Contrary to the assertion in paragraph 10 of the paper, our professional practice, both in the public and private sectors, demonstrates that commissionnaire structures and similar arrangements may in fact be warranted by various commercial situations and circumstances.

1.2. In that light, like any other controlled transaction or arrangement, these structures should be considered with regard to the comparability analysis as per Chapter I of the OECD Transfer Pricing Guidelines, that is, the functional analysis.

1.3. Special attention should be given to the economic circumstances surrounding the transaction or arrangement which include, among other things, the regulatory environment.

1.4. Commissionnaire structures and similar arrangements help minimize in numerous cases the amount of investments required to penetrate a new market.
1.5. In other cases, they enable a significant lowering of the cost of capital of the firm.

2. General comments on options A-D

2.1. Options A to D in the paper (ref.: A. Artificial avoidance of PE status through commissionnaire arrangements and similar strategies) would not lead to an efficient resolution of the purported problem.

2.2. The design and implementation of business contracts are complex fields where commercial considerations must meet with legal and regulatory requirements.

2.3. As such, we fail to see how the suggested language changes in Article 5 of the OECD Model Tax Convention would enable any meaningful modifications in the reasoning of any domestic tax court.

3. Specific comments on option E

3.1. Option E in the paper (ref.: B. Artificial avoidance of PE status through the specific activity exemptions) proposes a set of a welcomed modifications.

3.2. There is indeed little doubt that the activities listed in Article 5(4) should be reviewed in light of the digital economy.

3.3. Activities which comprise the digital economy are much more than ancillary in nature for numerous businesses. For more than 20 years already, they have allowed small, medium and large businesses alike invaluable commercial opportunities.

3.4. However, the Authorised OECD Approach (AOA) included in the Report on Attribution of Profits to Permanent Establishments should also be updated [2]

3.5. This would help create greater certainty and consistency on the matter.

4. Conclusion

4.1. Apart from the proposed changes in the paper, let it be written that as long as countries will tax commercial transactions differently under their transfer pricing and customs regimes, a significant part of the alleged problem will remain in place.

4.2. Canada like most of the industrialized countries is a proud member of the “twin taxation club” as it pertains to transfer pricing and customs purposes.

4.3. The transfer pricing legislative provisions are, for the most part, included in section 247 of the Canadian Income Tax Act. But sections 44 to 56 of the Customs Act throw the proverbial wrench in any possible converging approach with its own “methods” and “rules” to determine the “transactional value”.

4.4. In the end, for the sake of taxpayers of all sizes and shapes, would it be too much to ask for rule-clarity and rule-cohesiveness before the implementation of “enhanced” rules?

Robert Robillard, CPA, CGA, MBA, M.Sc. Economics
Transfer Pricing Chief Economist, RBRT Transfer Pricing (RBRT Inc.)
Professor, Université du Québec à Montréal
January 8, 2015

[1] Robert Robillard, CPA, CGA, MBA, M.Sc. Economics, is the Transfer Pricing Chief Economist at RBRT Transfer Pricing (RBRT Inc.) and also Professor at Université du Québec à Montréal; 514-742-8086; robert.robillard@rbrt.ca. He is a former Competent Authority Economist and Audit Case Manager at the Canada Revenue Agency.

[2] OECD, Report on the Attribution of Profits to Permanent Establishments, 22 July 2010.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca

RBRT Inc. is all about transfer pricing. We specialize in transfer pricing, tax treaties and other international tax matters. Our services include transfer pricing documentation (transfer pricing policies and procedures, BEPS and C-doc), transfer pricing dispute resolution, tax treaty matters including double tax relief, tax treaty-based returns and waivers, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek tax advice and tax counsel from RBRT Inc. as required.