Analysing BEPS Action 7 in the Context of Agency PEs

Abstract

This article considers whether the revisions to the dependent agent permanent establishment (DAPE) provisions in the OECD Model Convention (as a result of BEPS Action 7) provide a framework for solving the problem of artificial avoidance of DAPE status. It argues that the ‘avoidance’ was not so much the use of artificial structures but the lack of guidance over the appropriate interpretational approach to be adopted in applying the provisions. Solving the problem then required redrafting them in order to provide substantial interpretative guidance on adopting a substance-based interpretational approach. An analysis of the redrafted provisions and an examination of the interpretational issues arising from them shows that the larger problem of avoidance of DAPE status is not truly addressed because they continue to privilege legal concepts rather than commercial concepts. The result is that the changes to Article 5(5) do effectively address the specific problem of commissionnaires, but they fail to provide enough guidance to adjudicators to adopt a substance-based approach towards handling newer structures that will undoubtedly be devised by tax advisors. At the same time, the changes to Article 5(6) appear to draw some boundaries on the ability of multinational groups to avoid DAPE status; however, this is again not a solution that appears to be justified in principle. Ultimately, by adopting a patchwork of solutions to tackle specific problems, the BEPS rewrite may perhaps have missed an opportunity to clarify the underlying interpretative approach and cannot be truly said to have solved the problem of artificial avoidance of DAPE status at a more general level. Permanent establishments, dependent agent PEs, BEPS Action 7, independent agents