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David Rosenbloom Comments on OECD Options for Preventing Artificial Avoidance of PE Status

November 3, 2014, Worldwide Tax Daily
Worldwide Tax Daily quoted H. David Rosenbloom concerning a discussion draft released by the OECD on October 31, 2014. The draft proposed changes to the definition of permanent establishment in article 5 of the OECD model tax treaty and outlined the preliminary findings of the focus group tasked with carrying out action 7 of the OECD's base erosion and profit-shifting (BEPS) project. For the complete article, please visit Worldwide Tax Daily's website.
Excerpt taken from the article "OECD Lays Out Options on Preventing Artificial Avoidance of PE Status" by Kristen A. Parillo and Lee A. Sheppard for Worldwide Tax Daily.

Tectonic Shift in International Tax

H. David Rosenbloom of Caplin & Drysdale said the BEPS project in general -- and the action 7 discussion draft in particular -- seems to represent a tectonic shift in international tax. "The original understanding here was that the source country would reduce or eliminate tax, and the residence country, which was in a much better position than the source country to avoid double or multiple tax, would then impose tax," he said.

"That model has been followed to a greater or lesser extent by most countries in the world," Rosenbloom said, "with the OECD taking a strong residence orientation and the U.S. taking an even stronger residence orientation in its model treaty."

Even the United Nations' model tax treaty, which is designed to give source countries more taxing rights, still stays within the prevailing international tax guidelines, Rosenbloom said.

The action 7 discussion draft seems to reflect a reaction to the unwillingness or inability of residence countries to actually impose their tax on multinationals, Rosenbloom said. "And in those circumstances, the justification for requiring the source countries to give up their tax base sort of evaporates," he said.

"This draft is contrary to the fundamental tenets of U.S. treaty policy, it seems to me, in the sense that it's basically strengthening the right of the source country in a particular area to tax," Rosenbloom continued. "What I see happening is that multinationals are going to find themselves paying more tax in source countries. And frankly, once you start down that path, I'm not sure where it stops. There are lots of things that source countries can do, and some of them already do it."

Such an outcome would be to the detriment of residence countries, Rosenbloom said. "It's always been a source of puzzlement to me why the people who think about multinational companies and tax policy never think about the inbound side," he said, "because whether you're thinking about it as a recipient of inbound investment or you're thinking about what other countries might do on the inbound side, it does seem to me that outbound countries -- of which the U.S. is probably the preeminent one -- have a real interest in thinking about those things. But we don't spend much time or energy on it."

Because the United States has gradually and progressively loosened the rules requiring U.S.-based multinationals to pay U.S. taxes, other countries have stepped forward to assert taxing rights over those companies, Rosenbloom said. "I think that's what's happening here," he said. "It's true of BEPS generally, but this draft is a particularly clear case because these proposals, while they're not dramatic, they are clearly contrary to what underlying U.S. treaty policy has been for many years."


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