Avoidance of Permanent Establishment status of Non-Residents was made through various arrangements. Company structures their business in way that status of Permanent Establishment can be artificially avoided. Government observed that certain common strategies were used to circumvent the definition of Permanent Establishment. Changes to the definition of Permanent Establishment were utmost importance. This task was undertaken by The Organisation for Economic Co-operation and Development (OECD) under the Base erosion and profit shifting (BEPS) action plan. They identified 3 issues and amendments were made under the Action Plan 7.
3 Common strategies used by Non-Resident for artificially avoidance of Permanent Establishment that government is trying to stop:
A. Commissionaire arrangement: In this arrangement a person sells products in a country in its own name but on behalf of foreign enterprises. Foreign enterprise is able to sell its product without technically having a Permanent Establishment.
B. Anti Fragmentation: Large Multinational Companies fragmenting its operations into small businesses in order to argue that each part is just a preparatory and auxiliary activities benefiting from article of treaties. Preparatory and auxiliary are separate when viewed in isolation but constitute whole business activities when viewed on combined basis.
C. Contract Splitting: Splitting long term contract to short term contract by bypassing the time threshold that trigger the Permanent Establishment.
All these strategies are covered under the Base erosion and profit shifting (BEPS) Action Plan 7 of The Organisation for Economic Co-operation and Development (OECD) and government is trying to address these issues by amending PE definitions. Plethora of Judicial precedents are available on these strategies, still nothing is Permanent and nothing is settled
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