A recent proposal by the Organisation for Economic Co-operation and Development (OECD) to amend the ‘permanent establishment’ (PE) definition of its Model Tax Convention report has been welcomed by tax experts at PricewaterhouseCoopers.

The proposed clarification is a result of widespread concern in the tax profession following an Italian Supreme Court decision in the Philip Morris case. The court held that an Italian company should be treated as a multiple PE of foreign companies in the same group, a decision which appeared to contravene the generally accepted interpretation of the OECD PE definition which applies to one specific enterprise and not a group of entities as a whole.

Peter Cussons, international corporate tax partner, PricewaterhouseCoopers, said: “We welcome this news having called for such clarification a year ago. The OECD’s proposals will effectively reverse three of the key principles enunciated by the Italian Supreme Court in the Philip Morris case, thereby removing future confusion surrounding the rules of PE.

“The OECD are inviting comments on their proposals up until 30 June 2004 and we would encourage businesses to feedback and support them to ensure this public discussion draft is accepted and approved. The fog is lifting but there is still work to be done before we can forecast a clear outlook.”

Under the proposal there should be no aggregation of activities undertaken by a local affiliate on behalf of two or more non-resident group companies.

In addition, the proposal provides that a service provider will not ordinarily be regarded as a PE of its customer, and that merely participating in meetings for the negotiation of contracts will not of itself trigger a PE.

(SP)