The OECD seeks to provide clarity on what constitutes a permanent establishment for activities in connection with the exploration or exploitation of extractible natural resources.

The most significant feature of the proposed additions to the OECD’s model tax convention commentary is a lower threshold for when a permanent establishment (PE) is deemed to be created for corporate income tax purposes. Under the reduced threshold, if a non-resident enterprise carries on relevant activities for more than 30 days in a particular state, it will be held to have created a PE in that state. Under those circumstances, that state (the ‘source state’) will have primary taxation rights over the profits generated from that activity. 

This change should give countries with extractible natural resources the opportunity to secure an adequate share of the value bound up in those resources. As with all aspects of the OECD’s model treaty, countries are free to bilaterally include it in the income and capital tax treaty between them. They may choose not to do so because of the potentially increased compliance and administrative burdens associated with recognising a PE after just 30 days of relevant activity.  

Some states may only apply the provision to offshore activities. This is because onshore activities, such as mining, are likely to create a PE in any event. Offshore activities include activities in connection with the seabed, its subsoil, and their natural resources.  

Other states might welcome a provision that covers both offshore and onshore activities. Otherwise, some onshore work, such as engineering, consultancy services or seismic surveys, might fall below the PE threshold.

The guidance also provides for the source state to tax capital gains, where moveable and immoveable property forming part of the PE’s business property is disposed of. A similar outcome is provided for where shares or similar interests in an entity deriving more than 50% of its value, directly or indirectly from such property, are disposed of.

Finally, the guidance includes commentary on employment income. This includes situations where a non-resident employee performs consecutive contracts with different non-resident employers, and the remuneration was not borne by a PE. Under the suggested provision, the source state could tax that remuneration even if the employer did not have a PE in that state, provided the employment lasted more than 30 days in the relevant 12-month period. 

Interested parties are invited to comment on all aspects of the draft guidance. However, the OECD would value input on the specific questions below. ICAEW plans to respond to the consultation. If you have any comments to feed into ICAEW’s response, including on the employment income aspects that are not specifically covered in the questions, please send them to Richard Jones by Friday 8 December 2023.

Q1. The proposed alternative provision covers only activities connected with extractible natural resources (oil, gas and minerals), as explained at paragraph 187. Is there a case for extending the provision to cover the harnessing of renewable resources such as hydroelectric, wind, wave, tidal or solar power?

Q2. Are there particular challenges of profit attribution to the short-duration permanent establishments that this provision would create? What are they and how should they be addressed?

Q3. The paragraph on capital gains in the new provision (paragraph 4) largely replicates the rules in Article 13 of the OECD Model. But subparagraph c) allows the aggregation of movable and immovable property for the purposes of triggering a rule modelled on Article 13(4). Are there particular challenges in doing that?

Q4. The provision contains an exclusion for the operation of ships or aircraft designed or modified, and used, for the primary purpose of (i) transporting supplies or personnel, or (ii) towing or anchor handling. Is the “designed or modified” a useful extra condition, and would there be any practical difficulties in applying it?

Q5. Are the vessels mentioned as examples at paragraph 184 as within and outside the provision the right ones? 

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