Study On Anti-fragmentation Rules Of Permanent Establishment In International Tax Conventions

Permanent Establishment(PE)is one of the most important system designs in the International tax regime,although it prefers the residence principle,it also tends to protect the interest of source country.However,with the development of ICT and new business models,MNCs are more likely to avoid PEs,which heavily erodes the tax base of the source country.The fragmentation arrangement is one of methods MNCs use to avoid being taxed,considering the serious effects caused by these arrangements,several multilateral initiatives and unilateral measures have been adopted.The BEPS Action 7 led to the revise of OECD MC,which shows the importance that the international community attaches to the issue.While the DPT of the UK and the“ Complex Operating Settlement” standard of Spain show that more countries are asking for more source country jurisdiction.Although the fragmentation arrangements have received the attention of the international community,and relevant international organizations or countries have adopted coping strategies against them,these countermeasures are more or less imperfect,especially as they are more concerned with the anti-fragmentation rules themselves.However,a series of system designs and adjustments after the anti-fragmentation of the PE did not give a more detailed answer,which is the main reason for the lack of rules for the PE under the anti-fragmentation rules.Therefore,inresponse to the problem of fragmentation arrangements,it is necessary to study not only the anti-fragmentation rules themselves,but also a detailed analysis of the fragmentation arrangements of the PE.In view of this,this paper will analyze the PE in international tax conventions from the following aspects.The first part is about the reasons for the origin of the fragmentation arrangements,and this section will start with the avoidance of the PE and limitations of its definition.First of all,it is pointed out that one of the main reasons for the fragmentation arrangements is that MNCs hope to avoid PEs,and by analyzing the function of PE,it is pointed out that after avoiding PEs,MNCs can achieve the effect of exempting the taxation of the source country.The challenges posed by the avoidance of PE to the international tax order will also be analyzed.Secondly,another deeper reason for the origin of fragmentation arrangements is the limitation of the definition of traditional PE.With the development of technology,the definition of PE gradually lags behind commercial practices,especially the specific activity exemptions and the provisions of the agency PE on “signing contracts in the name of enterprises”.The second part is an introduction to the classification of fragmentation arrangements.It first analyzes arrangements fragmenting PE into a main and a preparatory or auxiliary POB,and points out that the fragmentation is accomplished through the mutual assistance between main and preparatory or auxiliary activities.Secondly,it analyzes the fragmentation of the PE into several preparatory or auxiliary POBs,and points out that this arrangement utilizes the aggregation effect,once the combination of these activities amounts to an essential or significant business performance,the combination of activities will no longer be preparatory or auxiliary,and it can constitute a PE.Finally,it analyzes the fragmentation arrangements under the centralized operating model,and points enterprises can realize the fragmentation by using the combination of commissionnaire and toll manufacturers under this business model.The third part is about the different paths of the anti-fragmentation rules of thePE.First,it will focus on the BEPS Action 7,which provides countermeasures for artificial avoidance of PE statues.The provisions of the PEs were amended to include amendments to the PE exception clause,the addition of anti-fragmentation rules and the modification of the agency PE clause.Secondly,this section will also analyze unilateral measures such as the DPT in the UK and the “Complex Operating Settlement” standard of Spain,and point out the biggest limitation of the former is that its application will result in serious consequences such as treaty override,while the latter is based on breaching the extension of PE.Finally,the analysis of the identification of the PE after adopting the anti-fragmentation rules will be carried out.By comparing separate identification with unified identification,it is concluded that the unified identification is better than separate identification.The fourth part is the analysis and thinking about the current anti-fragmentation rules in China.Firstly,starting from the bilateral taxation conventions signed by China and the domestic anti-avoidance rules,it is pointed out that there are certain anti-fragmentation rules in China's current tax conventions and domestic laws.But such rules have considerable limitations,such as not considering the fragmentation of activities between closely related parties.Secondly,based on the actual situation in China,we will proceed from introducing the anti-fragmentation clause,improving the GAAR and clarifying the rules for identification of PE after anti-fragmentation in China,and giving corresponding solutions to how to improve China's response to fragmentation arrangements.