An Examination Of The BEPS Action On Artificial Avoidance Of Permanent Establishment Status (Part 1)

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.