February 8, 2024
PE Watch | Latest developments and trends, February 2024
OECD releases ICAP statistics: PE highlights
On 29 January 2024, the Organisation for Economic Co-operation and Development (OECD) released the first-published statistics on the International Compliance Assurance Programme (ICAP) since the start of the program in 2018, covering all 20 cases completed by October 2023. The statistics provide information on the tax administrations that participated in the completed ICAP risk assessments, the average time taken to complete a risk assessment, the core risk areas covered and aggregated data on the risk assessment outcomes. The document also includes information on the relationship between ICAP and other routes to tax certainty, such as advance pricing arrangements (APAs) and mutual agreement procedures (MAPs).
ICAP covers five main transaction types/areas: tangible goods, intangibles, services, financing and permanent establishments (PEs). The statistics show that, among the core risk areas, the PE issue was considered low-risk by the majority of tax administrations that assessed this risk area in their evaluations. Specifically, in 95% of the cases where PE was included in the scope of a tax administration's risk assessment, it was classified as low-risk.
See EY Global Tax Alert, OECD publishes ICAP statistics, dated 31 January 2024.
OECD publishes comments received on suggested updates to the Commentary on Article 5 of the OECD Model Tax Convention
On 22 January 2024, the OECD published the summary of the comments received on proposed changes to the Commentary on Article 5 of the OECD Model Tax Convention and its application to extractible natural resources. During a public consultation released in November 2023, the OECD proposed to implement a 30-day period as the threshold for establishing a PE in relation to the activities involved in the exploration and extraction of natural resources.
Several stakeholders expressed concerns that this lower threshold is impractical and would impose an undue burden on contractors and service providers within the extractive industry. As such, this change would lead to increased tax uncertainty and could adversely affect international trade, they argued. They emphasized that this would disproportionately affect the extractive sector compared to other industries and questioned both the need for and the underlying policy reasons behind these proposed changes. These groups advocated for a longer PE threshold period and requested further clarification on which activities would be included.
Conversely, other stakeholders acknowledged potential advantages of the suggested amendment. They noted that a lower PE threshold might enable countries rich in natural resources to more effectively tax subcontractors involved in extractive activities, thus addressing issues related to the insufficient taxation of these entities. Moreover, it was mentioned that some tax treaties with resource-rich countries already apply lower PE threshold periods.
Arguments were also presented against applying the new rules to activities involving renewable resources, because policy considerations for renewable and nonrenewable resources differ significantly. The feedback included discussions on finding a balance between allowing source countries to obtain a fair portion of the value derived from resources and fostering an investment climate conducive to the development of renewable energy sources. Certain stakeholders recommended a cautious approach to extending the scope of this provision to include renewable resources, suggesting that it should initially remain focused on traditional extractive activities.
Other PE developments
United Arab Emirates releases guidance on Tax Groups including taxation of foreign PEs
On 8 January 2024, the United Arab Emirates Federal Tax Authority published the Corporate Tax Guide for Tax Groups, aimed at providing a general understanding about the taxation of entities forming a Tax Group. This guide focuses on two key areas concerning PEs: the application of foreign PE exemptions for Tax Groups and the methods for calculating taxable income of foreign PEs.
In the first section, the guide explains that Taxable Persons (i.e., entities subject to Corporate Tax) within a Tax Group, can opt to exclude income from their foreign PEs when determining their taxable income. This decision, which must be made by the Parent Company, applies to all foreign PEs within the group. When a new subsidiary joins the Tax Group, it automatically follows the existing election status, regardless of its prior decisions. If the Parent Company does not make this election, none of the foreign PEs within the Tax Group can benefit from the exemption. This applies even to newly joined subsidiaries that may have previously opted for the exemption.
The guide notes that the calculation of taxable income for foreign PEs should be made as if each foreign PE were a separate, independent entity. The allocation of income and expenses to the foreign PE must follow the Authorised OECD Approach (AOA) and the arm's-length principle. Additionally, if the head office is part of a Tax Group, transactions between the foreign PE and other group members are excluded from the group's overall results. Nevertheless, the profits from foreign PEs are determined as if the Tax Group did not exist. This means transactions between a foreign PE and other group members are considered to the extent they comply with the arm's-length standard.
United Kingdom publishes answers to the public consultation to update the PE definition
On 16 January 2024, the United Kingdom (UK) government released a summary of the feedback received from a public consultation conducted in the previous summer, focusing on proposed changes to transfer pricing, the PE definition and legislation on Diverted Profits Tax. This summary sheds light on the UK government's ongoing deliberation to potentially revise the UK's definition of a PE to bring it in line with Article 5 of the OECD's 2017 Model Tax Convention. The essence of this revision is to broaden the criteria for identifying a dependent agent PE, a move that holds significant implications for the asset management sector.
In a reassuring development for asset managers, the government has confirmed its commitment to preserving the Investment Manager Exemption (IME) and Investment Broker Exemption (IBE), ensuring continuity regardless of any adjustments to the PE definition. However, the government has also recognized the potential need to further refine the IME and IBE.
Additionally, the government has committed to reforming UK domestic legislation concerning the attribution of profits to PEs. This endeavor aims to achieve alignment with the Authorized OECD Approach, as detailed in Article 7 of the OECD Model Tax Convention, ensuring a consistent and standardized application of these rules to PEs.
The government will consult again on any draft legislation in this area, allowing stakeholders another opportunity to highlight any concerns over the accuracy or suitability of any updated statutory definitions and exemptions.