December 15, 2023
PE Watch | Latest developments and trends, December 2023
OECD PE developments
OECD releases a public consultation to update the Commentary on Article 5 of the OECD Model Tax Convention
On 16 November 2023, the Organisation for Economic Co-operation and Development (OECD) released a public consultation on proposed changes to the Commentary on Article 5 of the OECD Model Tax Convention and its application to extractible natural resources.
The consultation document comprises an alternate provision for both onshore and offshore activities related to the exploration and exploitation of extractible natural resources such as oil, gas, and minerals, together with related commentary. As per the proposed provision, relevant activities in the source state in the aggregate 30 days in any 12-month period commencing or ending in the fiscal year concerned will be deemed to be carried on through a Permanent Establishment (PE).
The consultation document also invites stakeholders to share their thoughts on the potential to extend this alternative provision to include renewable sources like hydroelectric, wind, wave, tidal and solar energy.
Additionally, the consultation document discusses the interaction of the proposed provision with other related distributive rules, such as Article 8 (international shipping and air transport) and Article 15 (employment income) of the OECD Model Tax Convention.
The public consultation will be open until 4 January 2024.
Azerbaijan signs the MLI
On 20 November 2023, the OECD announced that Azerbaijan had signed the MLI. At the time of signature, Azerbaijan submitted a list of tax treaties that it would like to designate as covered tax agreements (CTAs) and submitted a preliminary list of reservations and notifications in relation to the CTAs (MLI positions).
Regarding the PE positions of the MLI, Azerbaijan reserved the right for the entirety of Article 12 (Agency PE) not to apply to its CTAs. Likewise, it reserved its right for the entirety of Article 14 not to apply with respect to provisions of its CTAs relating to the exploration for or exploitation of natural resources. On the other hand, Azerbaijan did not make any reservation on Article 13 (specific activity exemptions) or Article 15 (closely related person) of the MLI.
Other PE developments
Colombia releases final regulations on the Significant Economic Presence
On 27 November 2023, the Colombian Ministry of Finance released Decree 2039 whereby it provides the final regulations on the Significant Economic Presence (SEP). Under the SEP rules, certain foreign entities rendering digital services and/or selling goods to customers in Colombia would be deemed to have Colombian-source income and thereby be subject to tax in Colombia on such income.
Among other items, the Decree delivers clarity on key terminologies related to the SEP rules, including defining "clients" and "digital services." It also specifies the determining factors for identifying a user's location as being in Colombia. In addition, the Decree details compliance requirements and administrative processes for nonresidents with an SEP in Colombia, such as options to either file a tax return and pay tax or pay tax via withholding tax.
This Decree will enter into force on 1 January 2024.
See EY Global Tax Alert, Colombia issues regulations on Significant Economic Presence, dated 4 December 2023.
Sweden updates guidance on allocation of shares to PEs
On 27 November 2023, the Swedish Tax Agency updated its guidance on the allocation of shares to a PE, replacing its guidance 131 470760-12/111, released in 2012. As per the revised guidance, shares should be attributed where the decision makers, who manage the acquisition, disposal and financing of the subsidiary, are located because, in this case, there should be a mandate to assume the risks associated with the acquisition and its financing. If these decision makers are not operating in the PE, the subsidiary shares and the acquisition-related debt are unlikely to be allocated to this PE.
The Swedish Tax Agency acknowledges that extensive integration of the subsidiary's activities and the PE's operations might warrant the allocation of subsidiary shares to the PE even if the decision makers that are acquiring, disposing of and financing the subsidiary are not located within the PE, provided the subsidiary shareholding is integral to and shaped by the operations of the PE. However, the Swedish Tax Agency clarifies that simply providing services to the subsidiary from the PE does not establish a sufficient level of integration to allocate the subsidiary shares to the PE.
UK releases guidance on transfer pricing documentation for PEs
On 9 October 2023, His Majesty's Revenue and Customs (HMRC) updated its guidance on the transfer pricing records requirements for PEs in the United Kingdom. According to the guidance, there are no specific record-keeping requirements for PEs beyond the general duty to keep and preserve records required to make and deliver a correct and complete return.
Regarding the attribution of profits to PEs, the HMRC considers that the 2022 OECD Transfer Pricing Guidelines represent an appropriate way to demonstrate that the profits of a PE have been calculated in accordance with the arm's-length principle. As such, groups may choose to include details of transactions concerning PEs in their Local File to maintain a single set of documents covering their related-party transactions.
Furthermore, the HMRC requires taxpayers to document the characterization and terms of any dealings between the head office and the PE to ascertain that profits are in accordance with the arm's-length principle.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP (Netherlands)
Ernst & Young Solutions LLP (Singapore)
Ernst & Young LLP (United States)
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor