U.K. Won’t Adopt OECD’s Permanent Establishment Definition

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By Ben Stupples

The U.K. is preparing to reject new guidance from the OECD designed to stop multinational companies from avoiding tax through changes to the definition of a fixed place of business, according to the British government.

The U.K. won’t adopt the OECD’s changes for the definition of a fixed place of business outside of companies’ home countries, otherwise known as a permanent establishment, according to a Dec. 12 presentation from Her Majesty’s Treasury and H.M. Revenue and Customs seen by Bloomberg BNA.

The move risks upsetting other countries that have committed to adopting the Organization for Economic Cooperation and Development’s revised definition of PE.

“The reason I think that there’s certainly concern over permanent establishment wording changes is that some parts are still being worked on, and it’s not clear how much extra revenue countries are going to get by adopting some of those wording changes,” Bill Dodwell, a tax partner and head of U.K. tax policy at Deloitte, told Bloomberg BNA.

Dodwell said the U.K.'s position seems to be that “if we’re not going to get some extra money here, why are we bothering to do it?”

BEPS Action 7

Changing the definition for a permanent establishment is part of the seventh action of the OECD’s 15-action base erosion and profit shifting, or BEPS, project that it developed with the Group of 20 countries to tackle multinational companies avoiding tax by moving profits to low-tax jurisdictions.

Action 7 is a non-compulsory part of BEPS, which ranges from compulsory requirements, such as country-by-country reporting of companies’ tax, profits and other information to guidance on the best practices for international tax law.

The proposals in the presentation are also subject to ministerial approval.

The OECD’s changes expand the PE definition to include commissionaire arrangements—structures used when companies sell products of foreign entities in exchange for a fee. These structures then allow companies to avoid having a permanent establishment to which sales are taxed.

Action 7 also seeks to challenge the way multinational enterprises fragment their operations into auxiliary or preparatory activities, such as warehouse operations, which are exempt from the existing PE definition. To continue their exemption, multinational companies cooperating with Action 7 would have to prove that such activities aren’t a core part of their businesses.

While the Treasury and HMRC said they won’t adopt a definition of a permanent establishment that includes commissionaire agreements, which forms the primary part of BEPS Action 7, the U.K. will aim to adopt the OECD’s proposed anti-fragmentation rules, according to the Dec. 12 presentation.

Multilateral Instrument

The U.K. government’s stance comes amid preparation to sign the OECD’s multilateral instrument, or MLI, in June 2017 that will allow countries to implement quickly any tax treaty changes from BEPS.

Countries, though, will coordinate on the MLI from February in order to help reach a consensus on how they will amend individual tax treaties, according to the Dec. 12 presentation.

“HMRC will produce and publish consolidated versions of treaties as amended by the MLI,” it said. “Where possible, we will agree these with our treaty partners before entry into effect—some have already started to approach us with the same objective.”

More than 100 jurisdictions are signed up to the MLI, which will affect more than 2,000 tax treaties worldwide, according to the OECD’s Nov. 24 statement on the conclusion of the MLI’s negotiation.

Diverted Profits Tax

In April 2015, the U.K. introduced its diverted profits tax, unofficially dubbed the “Google Tax,” which partly overlaps with the OECD’s changes to the definition of a permanent establishment.

U.S. officials have been critical of the provision as going beyond the agreed BEPS measures. U.S. Treasury attorney adviser Brett York said at the time the tax was introduced that it undercut the “whole point” of BEPS.

A spokesman for HM Treasury told Bloomberg BNA Sept. 20 that the tax “compliments” the OECD’s efforts through BEPS to stop large companies using “artificial arrangements” to avoid paying tax.

The U.K.’s diverted profits tax will raise 1.4 billion pounds ($1.7 billion) for the government by 2020, according to HMRC’s summary of impacts document published for the 2014 Autumn Statement.

A spokesperson for HM Treasury didn’t respond Dec. 16 to an e-mailed request for comment.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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