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TMI BlogAction Plan 7 - Permanent establishment statusX X X X Extracts X X X X X X X X Extracts X X X X ..... an independent business. The changes will also restrict the application of a number of exceptions to the definition of permanent establishment to activities that are preparatory or auxiliary nature and will ensure that it is not possible to take advantage of these exceptions by the fragmentation of a cohesive operating business into several small operations; they will also address situations where the exception applicable to construction sites is circumvented through the splitting-up contracts between closely related enterprises. Following steps have been advocated: Reworking exceptions to PE Definition An anti-fragmentation rule is to be adopted to aggregate all activities carried by an enterprise in a state, along with activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n enterprise, it is possible to avoid the application of that rule by changing the terms of contracts without material changes in the functions performed in a State. Commissionnaire arrangements have been a major preoccupation of tax administrations in many countries, as shown by a number of cases dealing with such arrangements that were litigated in OECD countries. In most of the cases that went to court, the tax administration s arguments were rejected. Similar strategies that seek to avoid the application of Art. 5(5) involve situations where contracts which are substantially negotiated in a State are not formally concluded in that State because they are finalised or authorised abroad, or where the person that habitually exercises an aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be carried on with a view to providing the necessary guidance before the end of 2016, which is the deadline for the negotiation of the multilateral instrument. Action taken b in Indian Tax Regime The OECD, under BEPS Action Plan 7, reviewed the definition of 'PE' with a view to preventing avoidance of payment of tax by circumventing the existing PE definition by way of commissionaire arrangements or fragmentation of business activities. To tackle such tax avoidance scheme, the BEPS Action plan 7 recommended modifications to Article 5(5) to provide that an agent would include not only a person who habitually concludes contracts on behalf of the non- resident, but also a person who habitually plays a principal role leading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evail over corresponding provisions in the DTAAs, to the extent they are beneficial. Since, in the instant situations, the provisions of the domestic law being narrower in scope are more beneficial than the provisions in the DTAAs, as modified by MLI, such wider provisions in the DTAAs would become ineffective, unless the provisions of domestic law are appropriately amended. In view of the above, section 9(1)(i) was amended to align the same with the provisions in the DTAA as modified by MLI so as to make the provisions in the treaty effective. Accordingly, section 9(1)(i) was amended by the Finance Act, 2018 to provide that business connection shall also include any business activity carried through a person who, acting on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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