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Multilateral Instrument: Examining Artificial Avoidance of PE Status Articles under Action 7 of BEPS Project

Tax treaties generally provide that the business profits of a foreign enterprise are taxable in a State only to the extent that the enterprise has in that State a permanent establishment (PE) to which the profits are attributable. The definition of PE included in tax treaties is therefore crucial in determining whether a non-resident enterprise must pay income tax in another State.

The PE concept is central to the allocation of taxing rights between the contracting states in tax treaties. A modification to the PE definition has direct impact on the scope of the exception to the source state. If a new rule narrows the scope of PE exceptions, then the tax base and thus the taxing right of the source country will be expanded, and vice versa.

The Action 7 of the BEPS 2015 Final Report (Permanent Establishment Status) includes the changes that would be made to the definition of PE in Article 5 of the OECD Model Tax Convention, which is widely used as the basis for negotiating tax treaties, as a result of the work on the OECD/G20 BEPS project.

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Content provided by China Tax & Investment Consultants Ltd
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