Multilateral Instrument: The Application Of Specific Activity Exemption Article To Covered Tax Agreements

1. INTRODUCTION

The 2015 Final Report on action 7 of the OECD/G20 BEPS Action Plan, titled "Preventing the Artificial Avoidance of Permanent Establishment Status" (the Action 7 Final Report), addresses the issue of artificial avoidance of permanent establishment (PE) status, and reviews the definition to prevent the use of certain common tax avoidance strategies that are currently adopted to circumvent the existing PE definition. Those strategies result in shifting profits out of the country where the sales took place without a substantive change in the functions performed in that country, including (i) the arrangements through which taxpayers replace subsidiaries that traditionally acted as distributors by commissionaire arrangements, (ii) the splitting-up of contracts, and (iii) the exploitation of the specific exceptions to the PE definition provided for by Article 5(4) of the 2014 OECD Model Tax Convention (the MTC), an issue which is particularly relevant in the