UK View on Revised PE Standards in the Multilateral Instrument

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1 United Kingdom Sonia Watson, Nick Palazzo-Corner and Stefan Haemmerle* UK View on Revised PE Standards in the Multilateral Instrument The authors assess why the United Kingdom given its active leadership throughout much of the BEPS Project would elect not to implement the revised PE standards through the multilateral instrument. 1. Introduction The OECD is now reaching the final stages of the Base Erosion and Profit Shifting (BEPS) Project. 1 This has been an intense and involved project focused on international tax and tax avoidance. Income tax treaties are the OECD s main instrument for implementing a number of the Actions arising from the BEPS Project, and the mechanism to do this quickly is by means of a multilateral instrument, namely the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. Included in the multilateral instrument are the recommendations from the BEPS Action 7 Final Report (Preventing the Artificial Avoidance of Permanent Establishment Status). The UK Treasury (Her Majesty s Treasury or HM Treasury) and the UK tax authority (Her Majesty s Revenue and Customs or HMRC) consider that they have been one of the leading participants in the BEPS Project. To quote a recent article, both HMRC and HM Treasury have committed considerable resources and expertise to make it a success, and the United Kingdom has already begun to implement the OECD s recommendations. 2 The recommendations under Action 7 are not minimum standards, and the UK tax authority has largely elected to reserve the right to not implement the BEPS Project s revised permanent establishment (PE) standards through the multilateral instrument. This article will assess why the United Kingdom given its active leadership throughout much of the BEPS Project would elect to not implement the revised PE standards through the multilateral instrument. In undertaking this analysis, the article first summarizes the revised PE standards and key mechanisms of the multilateral instrument. Next, the authors consider what elements of the revised PE standards the United Kingdom is planning to implement through the multilateral instrument. Finally, the article * Sonia Watson is Partner at PricewaterhouseCoopers LLP, London; Nick Palazzo-Corner is Senior Manager at PricewaterhouseCoopers LLP, London; and Stefan Haemmerle is Manager at PricewaterhouseCoopers LLP, London. The opinions expressed in this article are those of the authors and not necessarily those of their firm. 1. OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013), International Organizations Documentation IBFD. 2. J. Harra, BEPS and HMRC, Tax J. (29 Oct. 2015). speculates as to the reasons why the United Kingdom would have elected to implement such a limited number of the revised PE standards through the multilateral instrument for the time being. 2. Summary of Revised PE Standards On 5 October 2015, the OECD released the Action 7 Final Report containing the proposal for changes to the PE standards in article 5 of the OECD Model Convention. In short, the proposed changes in the standards act to lower the threshold for creating a PE and limit the availability of exemptions from creating PEs. 3 There are five key areas of recommended changes set out in the BEPS Action 7 Final Report, namely (i) dependent agent PE, (ii) independent agent exemption, (iii) specific activity exemptions, (iv) contract splitting and (v) anti fragmentation Dependent agent permanent establishment The Action 7 Final Report proposes that the current dependent agent PE threshold be replaced. The current dependent agent PE threshold is a test as to whether an agent habitually concludes contracts. The revised threshold, by contrast, is passed where the agent habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification [by the principal]. This change to the dependent agent PE standard is not a surprise; indeed, a change in the dependent agent standard was expected, primarily due to the concerns of various tax authorities about commissionaires and similar arrangements. What has taken some by surprise is the extent to which the test lowers the threshold to a negotiates the material elements of contracts test. 4 The proposed test captures any activity which could constitute the principal role when both the agent s and principal s activities with regard to a contract(s) are considered. Given the lack of a bright-line test for determining the principal role (and some of the examples in the revised Commentary providing a low bar for the agent to be considered to be carrying out the principal role) this standard is, in practice, a significant departure from the previous dependent agent PE threshold In this section of the article, this recommended threshold is referred to solely as the threshold and the focus is on the OECD Model. 4. OECD Model Tax Convention on Income and on Capital: Commentary on Article 5 para. 33 (2014), Models IBFD. 5. OECD, Preventing the Artificial Avoidance of Permanent Establishment Status Action 7: 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, sec. A, paras (OECD 5 Oct. 2015), Interna- 181

2 Sonia Watson, Nick Palazzo-Corner and Stefan Haemmerle 2.2. Independent agents The revised proposal leaves the substance of the independent agent exemption relatively unchanged, although, with the exception of economic independence, some of the more detailed guidance relating to the test of independence has been removed. The independent agent exemption aims to prevent agents that act exclusively or almost exclusively for closely related parties from being able to qualify as independent agents. The effect of this standard is to prevent captive agents of a group benefitting from the independent agent exemption, and thereby removing the agent s activities from qualifying as a PE subject to profit attribution processes Specific activity exemptions There are various specific activity exemptions from PE status in article 5(4) of the OECD Model Convention. These relate to maintaining facilities for the display or storage of goods, etc. This part of article 5 and the anti-fragmentation standard below have been reviewed by BEPS Project participants partly to address evolving digital business models. Despite earlier proposals to make all such specific activity exemptions subject to an overall preparatory or auxiliary requirement, the Action 7 Final Report recommends that states adopt either this approach or the anti-fragmentation rule, and broadly maintains the approach in the article s current version (i.e. with no requirement that each of the various specific activity exemptions be subject to this preparatory-or-auxiliary test). An explanation of the terms preparatory (emphasizing the short-term duration of the relevant activity) and auxiliary (being an activity to support, without being part of, the essential and significant part of the activity of the enterprise as a whole ) is also included in the Commentary, supported by new examples designed to illustrate the intended operation of these terms Anti-fragmentation standard The Action 7 Final Report proposes a new anti-fragmentation standard to article 5(4) of the OECD Model (as above). If the anti-fragmentation rule were implemented in a treaty, the specific activity exemptions would not be available to a fixed place of business used or maintained by an enterprise if the same or a closely related enterprise carries on business activities at either the same place or at another place in the state if: the same or the other place is a PE; the overall activity from a combination of the activities is not of a preparatory/auxiliary character; and, in either case, the activities carried on (by the two enterprises at the same place, or by the same or closely related enterprise at the two places) constitute complementary functions that are part of a cohesive business operation. 7 There is not a clear definition of what constitutes complementary functions and a cohesive business operation. As such, this test has caused concern amongst businesses that the lack of clarity will inevitably lead to disputes Splitting-up of contracts With the intention of countering the artificial splitting-up of longer-term contracts (e.g. to prevent those contracts falling within the 12-month construction/installation site PE standard of article 5(3) of the OECD Model), changes to the Commentary on article 5(3) will be made and an additional example will be added to the Commentary on the OECD Model on the principal purpose test. In practice, the change may also affect the interpretation of service PE provisions where they exist in treaties (which relate to the same or a connected project ) Conclusion Action 7 has been directed at countering specific perceived abuses arising from the existing terms of the threshold PE standard. In practice, it is likely that the lack of bright line tests, increased political interest in PEs and increased tax authority focus on PEs will lead to increased PE disputes (both between fiscal authorities and taxpayers and between different fiscal authorities). The PE threshold standard is, in itself, only part of the PE equation. Whilst this article is focused on the threshold PE recommendations released through Action 7, the attribution of profits to PEs is of equal importance, as a lowered PE threshold would likely in and of itself have little effect on source/residence state taxation rights. The OECD released an initial discussion draft 9 to review the guidance on the attribution of profits to PEs which tentatively concluded that further guidance on profit attribution was not needed as a result of Action 7, as the nature of a PE has not changed. In addition, there were a number of examples which illustrated that the changes to the transfer pricing rules from BEPS Actions 8-10 now mean that in many cases there may not be any additional profit attributable to a PE arising from the changes to the dependent agent PE rule. Whilst further developments in this area were expected in 2016, these have not yet been published. 3. Interaction with Multilateral Instrument Historically, changes to PEs have generally been adjusted through local country domestic law followed by bilateral negotiation of income tax treaties. This has led to a relatively slow pace of change in actual tax rules compared to the speed at which the OECD can propose change. Therefore, a key objective of the BEPS Project was to identify a method of simultaneously effecting change across bilat- tional Organizations Documentation IBFD [hereinafter Action 7 Final Report]. 6. OECD, Action 7 Final Report, supra n. 4, at sec. B(1). 7. Id., at sec. B(2). 8. Id., at sec. C. 9. OECD, Discussion Draft, BEPS Action 7: Additional Guidance on the Attribution of Profits to Permanent Establishments (OECD 4 July 2016) [hereinafter Action 7 Discussion Draft]. 182 International Transfer Pricing Journal May/June 2017 IBFD

3 UK View on Revised PE Standards in the Multilateral Instrument eral tax treaties on a multilateral basis. From this need emerged the multilateral instrument. This Multilateral Convention and its accompanying 86-page Explanatory Statement were published by the OECD on 24 November The Convention (i.e. the multilateral instrument) has two main aims, namely: to transpose a series of tax treaty measures from the OECD/G20 BEPS Project into existing bilateral and multilateral tax treaties; and to set a new standard for mandatory binding arbitration in relation to resolving double taxation disputes. Over 100 jurisdictions have participated in negotiations on the multilateral instrument, indicating their interest in negotiating the multilateral instrument to implement the treaty-based aspects of the recommendations of the Action 7 Final Report. This includes two broad categories of changes: mandatory minimum standards which include the prevention of treaty abuse under Action 6 and the minimum standard for the improvement of dispute resolution/compensating adjustments under Action 14. Although these minimum standards are broadly mandatory, some optionality exists within them; and all other changes (including arbitration and the revised PE standards) which are essentially optional. The multilateral instrument could enable the signatory parties to make a large number of the changes to their existing treaties, whether based on the OECD or UN Model Conventions. However, the flexibility included in the multilateral instrument suggests that some of the parties do not intend to implement some of those recommendations, or intend to implement them only in part. While some options were included in the recommendations and the multilateral instrument needs to reflect them, part of the flexibility is designed to enable parties to opt out of particular recommendations altogether (by making reservations on particular provisions) or to disapply them for individual treaties ( to accommodate specific tax treaty policies ). 11 The parties provisional notifications of their intentions to sign the multilateral instrument in June 2017 will better indicate the level of consistency in applying the BEPS Project measures and the likelihood that the multilateral instrument will effectively achieve its goals. Following a country s signing of the multilateral instrument, the multilateral instrument will only enter into force for that country three full months after the country s ratification of it (for the first five countries, three full months after the fifth ratification). The multilateral instrument will then be binding for a tax treaty where all parties to that treaty have ratified the instrument through their necessary domestic legal processes and the specified 10. OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (2016), Treaties IBFD; and OECD, Explanatory Statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (2016), Treaties IBFD. 11. OECD, press release, Countries Adopt Multilateral Convention to Close Tax Treaty Loopholes and Improve Functioning of International Tax System (24 Nov. 2016). time lag thereafter has expired. Given the steps required, this means that for the first countries ratifying the multilateral instrument (of which the United Kingdom is highly likely to be one), taxable periods beginning in 2019 are likely to be the first affected in relation to PE status. 4. United Kingdom s Approach to the Multilateral Instrument and Revised PE Standards in the Context of the United Kingdom s Involvement in the BEPS Project As noted, the United Kingdom has played a leading role in initiating and implementing the outcomes of the BEPS Project. Both HMRC and HM Treasury have committed considerable resources and expertise to make it a success, and the United Kingdom has already begun to implement the OECD s recommendations (e.g. by enacting Actions 8-10 in domestic transfer pricing law). The United Kingdom also supports the proposed further work by the OECD on clarifying OECD guidance. 12 The question as to what constitutes a PE was a significant strand of the BEPS Project work. The United Kingdom s interest and concern in the area of PEs is evident from its implementation of the diverted profits tax regime in April 2015, which was specifically designed to counteract arrangements by which companies exploit the existing PE rules. In practice, the authors have experienced a significant increase in PE enquiries, particularly in conjunction with transfer pricing and/or diverted profits tax enquiries. Given HMRC s apparent focus on PE issues, some people were surprised when HMRC announced, as part of a public meeting on 12 December 2016, that the United Kingdom will largely elect not to implement the revised PE changes by means of reservations to the respective articles in the multilateral instrument. Of all the proposed changes to article 5 of the OECD Model contained in the multilateral instrument, the United Kingdom will implement only the anti-fragmentation rule. The United Kingdom has decided to reserve against these areas of the multilateral instrument. A reservation may technically be withdrawn at any time and give full effect to the changes across all qualifying treaty arrangements. The character of the reservation is significant as, given the temporary nature of a reservation, it is reasonable to take the view that where there is any doubt as to the benefit of a change, it would be sensible to reserve. The discussion below explores the possible reasoning for the United Kingdom s mass reservations on the revised PE standards and why HMRC may have taken these actions. 5. Speculation: Why Would the United Kingdom Not Want to Integrate the Majority of Revised PE Standards into Treaty and Domestic Law? The discussion here seeks to answer one question: given the United Kingdom s leading role in the BEPS Project, acceptance of the Action 7 final recommendations and 12. Harra, supra n

4 Sonia Watson, Nick Palazzo-Corner and Stefan Haemmerle approval of the multilateral instrument, why would the United Kingdom then not implement all of the Action 7 recommendations? This leads to a further two related questions: why would the United Kingdom implement the anti-fragmentation change alone, and why only into bilateral tax treaties? This section will seek to answer the first question as to why the United Kingdom does not propose to implement the majority of the Action 7 recommendations. The other two questions will be considered in section 6. In assessing the reasons why the United Kingdom decided not to implement the majority of the Action 7 recommendations, the authors consider five options for explaining the United Kingdom s actions Given the United Kingdom s BEPS Projectinspired diverted profits tax, the United Kingdom does not require any further changes to achieve the effect of those Action 7 items In evaluating this option, it is necessary to consider (i) what is the effect of those Action 7 items and (ii) what is the effect of diverted profits tax. If the two align, it would suggest that this could reasonably account for the United Kingdom s not implementing the revised PE standards through the multilateral instrument. As noted, the effect of Action 7 is to lower the point at which a source state has taxation rights on a non-resident through the PE rules. This is shown through a lowering of the dependent agent PE threshold, limiting the independent agent exemption and specific activity exemptions, as well as the proposed introduction of targeted rules to prevent the thresholds being avoided (e.g. anti-fragmentation exemption). The diverted profits tax is designed to prevent taxpayers from avoiding creating a UK permanent establishment that would bring a foreign company into the charge to UK Corporation Tax. 13 Rather than lowering the PE threshold, it achieves this by applying a motive/design test to the taxpayer s activities. The diverted profits tax can apply only where: it is reasonable to assume that any of the activity of the [group] is designed so as to ensure that the foreign company does not, as a result of the avoided PE s activity, carry on that trade in the United Kingdom for the purposes of corporation tax (whether or not it is also designed to secure any commercial or other objective). 14 Given the breadth of this provision (i.e. requiring that it be reasonable to assume that there is a tax motive to the design and that this can be met irrespective of any other commercial or other objective), it is quite possible that much of the activity which would be affected by the revised PE standard would also require careful consideration as to whether it was affected by the diverted profits tax. Therefore, there is likely some degree of crossover between the diverted profits tax and the revised PE standards. That said, there is a fundamental difference between the revised PE standards and diverted profits tax. The diverted profits tax would not affect arrangements which did not pass the current PE threshold and where it was not reasonable to assume that this was to prevent a non-resident carrying out a UK trade. Therefore, the diverted profits tax alone cannot reasonably account for the United Kingdom s decision not to implement the revised PE standards through the multilateral instrument The United Kingdom came to the view that much artificial avoidance could be captured with a change in interpretation of the current PE terminology without making further changes to the words For most of the revised PE standards, this argument can be immediately dismissed. The anti-fragmentation rule, independent agent exemption changes, specific activity exemption changes and contract splitting changes are fundamentally different to the current UK domestic law and the majority of UK treaty PE articles. Those aforementioned changes represent material changes to the article itself in order to achieve effects which it would not be reasonably possible to do under the current article 5 of the OECD Model. This is, however, not necessarily entirely the same for dependent agent PE arrangements. Historically, the requirement that the agent demonstrate the authority to conclude contracts has been taken to represent different thresholds. A legalistic interpretation has taken conclude to be a legal test of when the contract entered into force, whereas substantive interpretation has taken it to be a test of which party effectively decides on the terms. Generally, the legalistic interpretation has had greater weight in the United Kingdom, given that disputes may ultimately be decided by a court. The existing Commentary on article 5 of the OECD Model undermines the legalistic interpretation and equates, to some extent, the current dependent agent PE threshold with the functional/substantive approach presented by the revised dependent agent PE rule. The Commentary on the current article 5 of the OECD Model makes clear that exercising the authority to conclude contracts could be a person: who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise even if the contract is signed by another person in the State in which the enterprise is situated or if the first person has not formally been given a power of representation. 15 It also states that: a person [that] has attended or even participated in negotiations in a State between an enterprise and a client will not be sufficient, by itself, to conclude that the person has exercised in that State an authority to conclude contracts in the name of the enterprise. The fact that a person has attended or even participated in such negotiations could, however, be a relevant factor in determining the exact functions performed by that person on behalf of the enterprise UK: DPT1000, HMRC Diverted Profits Tax Guidance, at UK: Finance Act 2015, sec. 86(1)(e). 15. Para. 33 OECD Model: Commentary on Article OECD Model: Commentary on Article 5 (2010), para International Transfer Pricing Journal May/June 2017 IBFD

5 UK View on Revised PE Standards in the Multilateral Instrument Taken together, this suggests that the test is, at a minimum, not solely a legal test (and more likely, intended to be a substantive test). Assuming the Commentary on the OECD Model also represents what was in the mind of the parties to any treaty when entering into that treaty, it also suggests that whether a dependent agent PE is created should generally be a test of the extent to which a function represents the authority to conclude contracts. This is relevant to this question, as it suggests that an alignment between the interpretation of article 5 shown in the current OECD Model and HMRC practice would achieve some of the effect of the revised PE standards on article 5, as in line with the revised PE standards the interpretation in the Commentary would generally also represent a lowering of the dependent agent threshold compared to historic practice. Whilst this is a relevant point that might account for not enacting the dependent agent provisions (and is likely to be relevant for any taxpayers whose activities will continue where the current dependent agent PE rule is in point), for the reasons set out above this cannot account for the United Kingdom s reserving on the majority of the revised PE standards A combination of the previous two options achieved the objective of Action 7 recommendations and therefore no further change was required Although neither section 5.1. nor section 5.2., when taken in isolation, can rationally explain the United Kingdom s decision not to enact the revised PE standard through the multilateral instrument, it is prudent to consider whether they could, taken together, provide an explanation. In the authors opinion, they cannot; together they do not replicate the effects of the revised PE standards and, therefore, there must be something about the revised PE standards which has led the United Kingdom to reserve on those revised PE standards The incremental United Kingdom tax revenue would be insufficient to justify the changes Initially, this would appear to be the least likely of the five options, as it would be illogical to propose changes that grant a source state greater taxation rights and for that source state then not to receive any further income from taxation. To test this point, it is necessary to take one of the most significant changes to the PE standards that the United Kingdom has reserved against, namely the lower dependent agent PE threshold and accompanying change to the independent agent exemption, and consider how often, in practice, the activities that would lead to a PE under the revised PE standards (but not the current PE standards) would lead to additional taxation for the United Kingdom Dependent agent PE If there were already an agent of the non-resident enterprise in the source state and an activity were carried out which passed the dependent agent PE threshold of the revised PE standards (but not of the current PE threshold), in the authors opinion, in practice, this would be unlikely to result in significant additional profit arising in the source state in most cases. This potential outcome is recognized by the OECD in its 2016 discussion draft on the attribution of profits to PEs indeed, Example 1 in that discussion draft illustrates this point. 17 This would likely be the case in most instances, as both the revised PE standards and OECD profit attribution principles are based on functional thresholds. Therefore, given that the functional threshold for creating a dependent agent PE under the revised PE standards is likely to be lower than that of the current PE standards, it would be unlikely to have a dependent agent PE created under the revised standards (and not the current standards) and that dependent agent PE also leads to a reward which is materially greater than a transfer pricing reward. This is based on the assumption that the existing transfer pricing arrangements for the agent reflect the latest transfer pricing guidance from BEPS Actions Independent agent exemption The independent agent exemption can apply only where a dependent agent PE has already been created. The revised PE standards propose to limit the independent agent exemption to circumstances where the agent does not act exclusively or almost exclusively for closely related parties. If the independent agent exemption did apply, no PE would arise and therefore, if the agent s activity did not create a fixed place of business PE and/or was not already a group company in the source state, this would mean that no profit of the principal should be subject to source taxation as a result of the agent s activity. That said, in practice, were any material level of profit at stake, it is likely that the agent s activity would create a fixed place of business PE or would already be an entity subject to local taxation. Whilst, in theory, any local entity which benefitted from the independent agent exemption could result in a different level of profit attributable to the source state due to the application of the transfer pricing rules rather than profit attribution rules, it is unlikely that this would, in practice, give rise to a materially decreased level of profit to be taxed in the United Kingdom without the applicability of the diverted profits tax to the arrangement. Considering the above factors, it again appears unlikely that the revised PE standards would result in any materially different profit being subject to UK tax. To conclude, with each of the revised PE standards that the United Kingdom has elected not to follow, the authors analysis is that, in practice, whilst there might be some difference in source state taxation, the revised PE standards would be unlikely to lead a materially different level of source state taxation. 17. OECD, Action 7 Discussion Draft, supra n

6 Sonia Watson, Nick Palazzo-Corner and Stefan Haemmerle 5.5. Tax competition Given the conclusion in section 5.4., the authors would expect that the United Kingdom would have had to consider whether the (likely) immaterial level of tax take which would arise from the revised PE standards would be justified in the context of the compliance burden it would create. There is also the question as to whether the United Kingdom would lose tax revenue to non-uk activities carried out by UK residents. These multilateral instrument changes in the effect of an income tax treaty on PE status apply only if both (or all) parties to that treaty implement the multilateral instrument and in a similar manner. Throughout the revision of the PE standards, there has been concern that the changes were going to result in an increase in the number of disputes due to a lack of clarity. In the authors opinion, the UK tax authority likely considered that, with the availability of the diverted profits tax, a refreshed approach to the current dependent agent PE standards and the minimal incremental tax that would likely be generated from the revised PE standards, there was an insufficient reason to create as significant a compliance burden for UK-source taxpayer activity. Furthermore, given the United Kingdom s general position as a residence, rather than source, state, it would likely be a net loser from a lowering of the PE threshold. There is not one clear reason for the United Kingdom s reserving its right not to implement the revised PE standards through the multilateral instrument. However, considering the five areas above, it is clear how the United Kingdom could reasonably have reached the conclusion that it was sensible not to implement the revised PE standards. The United Kingdom continues to pursue an open for business approach in which creating certainty for business is important. The compliance burden for taxpayers would be significant, the most egregious activity could likely be prevented through a combination of the diverted profits tax and an interpretation of the dependent agent PE provisions in greater alignment with the model tax commentary and, ultimately, there is likely little incremental tax at stake. 6. Speculation: Why Would the United Kingdom Integrate the Anti-Fragmentation Rule? The further two related questions for which answers are being sought are (i) why would the United Kingdom implement the anti-fragmentation change only and (ii) why not make a corresponding domestic law change? The second question will be answered first. The authors consider that, notwithstanding communication to date from HMRC being unclear on this matter, it is highly likely that the United Kingdom will change its domestic law to include the anti-fragmentation rule. On this basis, the authors have proceeded with their analysis of the answer to the first question. Given the analysis set out above considering why the United Kingdom would not implement the other revised PE standards, those same tests have been applied in this section to identify whether there is a different result when considering the anti-fragmentation rule which would therefore explain why the anti-fragmentation rule is to be enacted (and the multilateral instrument change in the standard to be adopted). With regard to the diverted profits tax, this could not apply as this rule does not currently exist in UK law for the diverted profits tax to supplement enforcement of it (i.e. one cannot artificially avoid this rule today, as it does not exist), and therefore the diverted profits tax could not alone justify not enacting the anti-fragmentation rule. Similarly, as the anti-fragmentation rule is not in UK law, there is no current interpretation that can change and justify not enacting the anti-fragmentation rule. This leaves open the question as to the likely impact on taxation, balanced against the compliance burden that would be created for taxpayers. In the authors experience, there are unlikely to be many instances in practice where the anti-fragmentation rule would apply. That said, the breadth of the rule might mean that some multinational activity which arguably benefits from specific activity exemptions across multiple entities (for example, maintenance of a stock of goods through a fixed place) would lead to some additional UK taxable profit if this rule were implemented. The authors observe that, given the increasing integration of global businesses and centralized supply chains, it is relatively easy for a multinational to undertake an activity which is not purposefully fragmented but which could be affected by the anti-fragmentation rule. Further, multinationals systems today are generally designed to monitor PE risk on an entity-by-entity basis and therefore most multinationals would struggle to identify areas where the anti-fragmentation rule could have an effect. Taken together, this suggests that the impact on the UK taxpayer environment could be significant in terms of the compliance burden for multinationals in monitoring activity which might be affected by the anti-fragmentation rule. Given the likely low levels of additional tax revenue resulting from the anti-fragmentation rule and the potentially high levels of taxpayer compliance burden, the authors consider it somewhat inconsistent for the United Kingdom to have elected to implement this revised PE standard but have reserved on the other parts of the revised PE standards. 7. conclusion This article aimed to analyse why the United Kingdom, given its active leadership throughout much of the BEPS Project, would elect not to implement the majority of the revised PE standards through the multilateral instrument. The authors analysis leads to the conclusion that this is likely predominantly due to three reasons: the United Kingdom does not consider that there is additional tax revenue available for itself 186 International Transfer Pricing Journal May/June 2017 IBFD

7 UK View on Revised PE Standards in the Multilateral Instrument through the revised PE standards (and indeed revenue might be lost to other states); the changes would lead to uncertainty and an increased number of disputes, and likely decrease the attractiveness of the business environment in the United Kingdom; and the United Kingdom likely considers that the diverted profits tax provides HMRC with the enforcement tool through which to ensure that the current PE standard is not avoided. That said, the authors note that, notwithstanding that these reasons are largely applicable to the antifragmentation rule, the United Kingdom is not reserving on that part of the revised standards. IBFD, Your Portal to Cross-Border Tax Expertise The University of Amsterdam and IBFD have combined their expert knowledge to introduce a unique advanced master s programme: International Tax Law: Principles, Policy and Practice. This one-year, full-time programme is based in Amsterdam, the Netherlands. Advanced Master s in International Tax Law Principles, Policy and Practice of International Taxation X Access, including dedicated support, to the IBFD Library, with unrestricted access to the IBFD Tax Research Platform X International network and opportunities that develop longterm contacts X Study facilities at both the University of Amsterdam and IBFD X Each year, a scholarship covering half the tuition fee is awarded to two exceptional candidates The programme starts every September. Applications must be received by 1 April of the same year. For more information or to apply, visit: uva.nl/llm-international-tax-law Contact us IBFD Head Office P.O. Box Rietlandpark HE Amsterdam 1019 DW Amsterdam The Netherlands Tel.: (GMT+1) academic@ibfd.org Sales: sales@ibfd.org Online: 015LLM-A01-H 187