Permanent Establishments: BEPS Action 7 and Australian measures
On 15 May 2015 the OECD, as part of the Base Erosion and Profit Shifting (‘BEPS’) project, released a revised Discussion Draft on Action 7 (‘the Discussion Draft’) in relation to preventing the artificial avoidance of permanent establishment (‘PE’) status. The Discussion Draft sets out recommended changes to the OECD model tax treaty based on feedback and consultation on the previous draft and aims to lower the threshold used to determine whether a PE exists.
Shortly before this OECD release, as part of the 12 May 2015 Federal Budget, the Australian Government announced the introduction of a new multinational anti-avoidance law (‘MAAL’) aimed specifically at structures that are designed to avoid the existence of a PE. We have separately addressed the MAAL below.
The OECD Discussion Draft and the MAAL are directed at tackling a similar issue – however the approaches which have been adopted are very different. The MAAL is to have effect from 1 January 2016 and will therefore apply in advance of any future treaty changes which seek to incorporate the OECD’s recommendations on Action 7 (and Action 6 on treaty abuse)
Australia’s move to take unilateral action on this issue, in advance of the BEPS project, runs contrary to the notion of a cohesive and coordinated approach to international tax reform being championed by the BEPS project. The MAAL may also have far-reaching impacts on the manner in which multinationals conducting business in Australia choose to structure their operations. In addition, multinationals face further uncertainty as to whether Australia will in due course adopt the OECD recommendations on Actions 6 and 7 and how such measures would interact with the MAAL.