In an attempt to close the loopholes of the existing PE definition through BEPS Action 7, the OECD has, inadvertently, also lowered the threshold for the classification of the local business activities of a foreign enterprise as a PE of such enterprise. It has, in turn, opened the road for many governments to adopt diverse interpretations of Article 7 to attribute additional profit to the local operations of foreign enterprises.

This means that the “zero-sum approach” or the “single taxpayer approach”, which suggests that after an arm’s length remuneration has been provided to a dependent agent (as per the arm’s length principle enshrined in transfer pricing), no further remuneration needs to be awarded to the dependent agent PE is no longer valid anymore.

In this informative leaflet, we explain the changes that have resulted after BEPS Action 7, when and how they become applicable to countries, and the process steps that each multinational enterprise should follow to clearly map out the countries in which they have the risk of formation of a PE.

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