A. MNEs that are benefiting from the preparatory or auxiliary exemption of article 5(4) OECD Model Tax Convention; and
B. MNEs that are using commissionaire and similar strategies.
Preparatory an auxiliary exemption of article 5(4) OECD Model Tax Convention
In this blog we will focus on item A which is currently clarified in Article 5(4) of the OECD Model Tax Convention (“MTC”). This provision is widely applied in Double Taxation Avoidance Agreements (“DTAAs”) and lists a number of auxiliary and supplementary activities, such as warehousing and storage, which despite entailing the existence of a fixed place of business under article 5(1) OECD MTC, do not qualify as PE activities. If cross-border activities are considered a PE under article 5(1), article 5(4) automatically applies if one of the activities listed in article 5(4)(a)-(d) is the only activity carried out. Unfortunately the article 5(4)(a)-(d) does not explicitly mention that the activities carried out at these premises must be of a preparatory or auxiliary nature. It only explains a number of activities that are typically considered to be preparatory or auxiliary by nature such as for instance the use of storage facilities or delivery of goods or merchandise. This enabled large internet companies such as Amazon to prevent PE taxation in countries where warehouses were located by means of article 5(4)(a).
