Preventing Treaty Abuse

I. S. 398Introduction

The recent developments in the global business environment, characterized by intense competition and rapid growth of multinational enterprises (MNEs), have led to new business models and structuring of business operations in order to meet the increasing demands of expansion on a global scale. Agency arrangements, as a way for enterprises to have a business presence in local markets, have been widely-recognized as a business strategy in order to attain commercial efficiencies in undertaking cross-border trade and investment. The tax consequences of business models and structures involving agents have been the subject of attention and major concern among countries, as they relate to problems of aggressive tax planning and base erosion and profit shifting (BEPS).

The OECD has noted that the rules on taxation of agency permanent establishments (PEs) under Articles 5(5) and 5(6) of the OECD Model as currently applied in practice lead to opportunities for avoidance of the PE status, resulting in BEPS. Action 7 of the BEPS Final Report entitled, ‘Preventing the Artificial Avoidance of Permanent Establishment Status’ deals with these issues as it calls for changes in Articles...