Permanent Establishment: BEPS Action 7

Joachim Emil Piper & Sussie Cathrin Steindal

Student thesis: Master thesis


On October 5, 2015 OECD Published a Final Report on Base Erosion and Profit Shifting (BEPS) Action 7: "Preventing the Artificial Avoidance of Permanent Establishment Status", which is one of the actions set forth in the OECD BEPS-project. This Final Report contains the new definition of Permanent Establishment to be implemented in Article 5 of the OECD Model Tax Convention. The aim of this thesis is to analyse and interpret the current definition of Permanent Establishment and the proposed definition in Action 7. Furthermore, to examine whether BEPS Action 7 achieves the goal of preventing tax planning leading to BEPS. Additionally, the aim is to examine efficient allocation of resources when MNEs tax planning causes base erosion. Finally, this thesis aims to analyse whether the efficient allocation of resources is consistent with the purpose of BEPS Action 7. It is found that the proposed changes contained in BEPS Action 7 expand the current definition of Permanent Establishment, while the specific activity exemptions are narrowed. As this seems suitable to prevent tax avoidance strategies, the proposed changes also impact legitimate commercial arrangements and create a disproportionate compliance burden on both taxpayers and tax authorities. Further, it is found that efficient resource allocation can be achieved through regulation that imposes a tax on MNEs. As a result of a broader tax base this leads to a reduction in tax rates while still maintaining the necessary tax revenue. In addition, this leads to a reduction in the deadweight loss and an overall maximization of welfare, which approximate the efficient resource allocation in a perfect market. It is found that the purpose of BEPS Action 7 and the efficient allocation of resources are to prevent tax planning that leads to BEPS. In this context OECD seem willing to sacrifice costs in the attempt of doing so. However, to reach an efficient allocation of resources the cost of preventing BEPS cannot exceed the benefits, as this will lead to an inefficient allocation of resources. The discussion based on the proposals from the comments received on the discussion drafts found that none of the proposals would prevent tax planning to the same extent as BEPS Action 7 and lead to a more efficient allocation of resources. Finally, it is found that the ideal solution eliminating tax planning and BEPS is a harmonization of all tax regimes. The proposal "A World Tax Authority" approximates this but is found to be unrealistic, as most states seem unwilling to cede sovereignty.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2016
Number of pages111
SupervisorsJane Bolander & Kalle Johannes Rose