Episode Transcript
[00:00:00] Foreign.
[00:00:06] Hello everyone and welcome to our podcast series A and M Tax Polity Updates where you bring you insights into the latest developments in global tax policy and controversy space.
[00:00:18] My name is Bruno Aniceto Da Silva and I'm a Senior Advisor for the Global Tax Policy and Controversy Team and I'm based out of Hong Kong, China.
[00:00:28] In this episode I would like to bring you a brief analysis of the 2025 update to the OECD Model Tax Convention, which was released on 19th November and which will be included in the condensed and full editions of the Model Tax Convention to be published during 2026.
[00:00:45] This is a long awaited update that brings three types of revisions to the Model Tax Convention.
[00:00:52] First, an amendment to one article, Article 25 with the inclusion of a new additional par second, an updated commentary to some of the articles of the Model Tax Convention and finally the revised reservations and positions by both OECD and non OECD member countries.
[00:01:14] Let us first start with the new updates to Article 25 on the Mutual Agreement Procedure, which includes an additional paragraph 6.
[00:01:26] The purpose of this new added paragraph is to clarify the relationship between tax treaties and the General Agreement on Tariffs and Services, the gatts.
[00:01:35] The new paragraph clarifies that if taxation measures fall within the scope of a tax treaty, meaning a provision to which the provisions of Article 24 apply, then any dispute should be resolved under the map.
[00:01:51] So the idea is to avoid an overlapping of jurisdictions since paragraph 6 to article 24 covers taxes of any kind of description. Therefore, any tax matter will only be brought to the Council for Trade in Services if both States agrees that either the measure does not fall within the scope of the Convention or that the dispute should be resolved by the Council for Trading Services case, in which the dispute will be based on the principle of national treatment provided in Article 17 of the guide.
[00:02:25] So then, let's now look to the updated commentary to some of the articles of the Model Tax Convention and here the most relevant aspect and in which I would like to divulge most of my analysis in this podcast considering impacts to business is the guidance provided to Article 5 and the circumstances under which cross border work from home or other relevant place may give rise to a permanent establishment.
[00:02:50] This is an important APE test because home office became far more common in the post COVID 19 while the former guidance provided in the Model Tax Convention was not necessarily adequate to address this new reality.
[00:03:05] So the updated guidance starts by noting that determining whether there is a PE is based on facts and circumstances.
[00:03:12] Therefore, the existence of PE is first of all based on the general tests of whether there is a fixed place of business with a sufficient degree of permanency.
[00:03:22] The interpretation of the meaning of both fixed place and permanency tests follows the guidance that was already provided in the prior commentary.
[00:03:30] Now the interesting is that there's a nuance which comes now from the fact that the at the disposal test, which is also a general element for assessing a pe, appears no longer to be relevant for assessing whether there is a home office pe.
[00:03:47] And this is somehow justified since in the context of home Office the at the disposal test was misadjusted as it requires access to the premises by other persons working for the enterprise, something that typically does not happen in your home office context because typically other people cannot have access to home office of individual.
[00:04:10] So this is precisely the reason why you looked at former paragraphs 18 and 19 of the commentary which discussed the at the disposal test in the home office context have now been deleted.
[00:04:22] The updated commentary stresses that home office or any other relevant place have features that distinguish them from the use of other places by an enterprise.
[00:04:33] So what are these distinguished features? When we deal with the considerations for a PE in the context of remote work, there are essentially two continuity of use and the existence of a commercial reason for the individual's physical presence in the state.
[00:04:49] The OECD provides five illustrative examples in the updated commentary on this, but everything plays around these two elements. So let's first start with the continuity of use.
[00:05:03] The revised commentary emphasizes that activities carried out at home or another location must not be intermittent or incidental. A home office will only constitute a PE if it's used continuously over an extended period of time. As a practical threshold one individual works from home for less than 50% of their total working time over a 12 month period. The location is generally not regarded as a pe.
[00:05:31] This determination is any case based on actual conduct and formal agreements only matter to the extent that they reflect reality.
[00:05:39] So what we see, and that's why I stress that there are two elements that are relevant for the home office to assess there is a fixed place of business, is that the 50% threshold effectively works as a gateway criterion.
[00:05:55] So if this threshold is not exceeded, there is no pe.
[00:05:58] Remember, we can have a fixed place, but there's not a fixed place of business, so there's no pe. If it's exceeded, then we turn to the second element to assess that we actually do have a fixed place of business of the enterprise. And the second element is commercial reason for presence.
[00:06:18] So place of business requires a commercial reason for the individual's presence in the jurisdiction.
[00:06:23] Such a reason exists where physical presence directly facilitates the carrying on of the enterprise's business such as people or resources to which the enterprise needs access for the performance of its activities.
[00:06:36] These other examples may be interacting with customers, suppliers, associated enterprises or other stakeholders in that country or state.
[00:06:46] By contrast, if required remote work is permitted solely to hire, retain talent without a business driven need for presence or it does so to reduce cost. For instance, there is a person works from home because a company wants to reduce expenses with office spaces, then there is no commercial reason for the purposes of assessing if there is a pe.
[00:07:13] Now the commentary provides different indicators of commercial reason which can involve meetings between the individual and clients, cultivation of a new customer base or identification of business opportunities real time or near real time interaction with customers or suppliers in different time zones, for example Call center services, virtual IT support or medical services access to business relevant expertise such as meetings with university personnel conducting research relevant to the enterprise collaboration with other businesses performance of services for clients when those services require physical presence interaction with other employees or personnel of the enterprise or associated enterprises.
[00:07:56] So the idea is that these factors will constitute indicia and help to distinguish between business driven arrangements from those that are motivated purely by employee convenience. In any event, despite that all the requirements of E can be met, the list of exclusions for preparatory or auxiliary activities continue to apply, meaning if any of the subparagraphs Provided in paragraph 4 to article 5 are met means that there is an exclusion from the existence of a pe.
[00:08:32] Now I'm going to go very briefly to the other amendments to the commentary. So I would say that most impactful on business is the cross border remote work. But there are other elements. One of them is the introduction of an alternative article which is in the commentary to Article 5 designed for countries wishing to extend source country taxing rights in the extractive sector. So it's an alternative wording to an article that countries may adopt for the purposes of strengthening their source taxation for for natural resource activities.
[00:09:09] So the idea is to lower the P threshold and there is some flexibility for countries to agree in the context of their bilateral negotiations from 3,090 or 883 days, 183 days per threshold and it can also extend to capital gains. So it's not only business profits as deriving from the existence of the pe, but it can be extended to capital gains. There are sort some updates in the commentary regarding transfer pricing.
[00:09:45] So what are the main elements? First, clarification in the commentary to Article 9 that any adjustments in the context of Article 9 remember is the article that deals with associated enterprises can only be made where transactions are not arm's length. In other words only alp arm's length principle adjustments are acceptable in the context of Article 9.
[00:10:11] There's also clarification that any procedural issues related with transfer pricing such as burden of proof fall under Article 24.
[00:10:20] Non discrimination is not an element of Article 9, so it burden of proof element can be an element to be challenged under the non discrimination but not under Article 9.
[00:10:32] Also regarding intragroup financing, there are references to Chapter 10 of the OECD Transfer Pricing Guidelines confirming that to determine whether a transaction constitutes a loan requires accurate delineation or domestic law analysis before arm's length pricing.
[00:10:49] In terms of deductibility.
[00:10:52] Also clarification that Article 9 does not govern deductibility. This is a matter of domestic law, again subject to non discrimination article meaning if I set different rules between domestic cross border transactions.
[00:11:08] This is not in principle Article 9 matter, but it can be a matter of discriminatory tax treatment.
[00:11:16] There's also clarifying wording regarding corresponding adjustments both for the paragraph 2 of article 9 and also paragraph 3 of the 2010 wording of article 7 which as you know incorporates in full the authorized OECD approach and the idea is just a clarification, not a modification in substance that corresponding adjustments should be made only when the the other State agrees both in principle and by the amount of the adjustment. The last element in the transfer pricing refers to Amount B and the mutual agreement procedure. So the new commentary aligns the MAP procedures with the outcomes that were reflected in the simplified and streamlined approach which is basically the Amount B and which was initially reflected in the Amount B report and and later incorporated in Annex 3 to Chapter 5 of the ECD Transfer Pricing Guidelines. Fundamentally it says that jurisdictions which did not adopt Amount B, if there is a dispute, the competent authorities of both States can only justify their positions based on the remainder of the Transfer Pricing Guidelines, meaning one of the States cannot justify a dispute based on on Amount B or the simplified streamline approach outcomes the latest element that I wanted to mention very briefly is the updated commentary to Article 26 confirming that information obtained through administrative assistance may be used for a named person subject to bilateral or multilateral agreements. So fundamentally what we are saying is that exchange of information is possible regarding information obtained from unnamed persons subject to bilateral or multilateral agreement.
[00:13:16] Before I conclude, just some final words to remind the importance of keeping in mind these latest developments as this reflects changes in treaty interpretation administrative practice, and therefore this could materially affect expositions of operational footprints. I also want to stress the fact that as I mentioned, there are reservations, observations and positions by OECD and non OECD member countries that can reflect changes interpretation, and also that some countries like India did not endorse all the elements of the interpretation on cross border Home office that I mentioned, in particular the reference to the cross commercial reason elements.
[00:14:02] And that is all from me today.
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