Xpc Bermuda

In order to understand the situation given, it is extremely essential to be familiar especially with the OECD Model as the case study concerns all the significant topics provided in the Model such as the arm’s length principles, permanent establishment, international business profit and also the double taxation jurisdiction. The first topic that will be discussed here is about the tax advantages of the current arrangements for the Group’s intellectual property. To begin with, the fact that the XPC Bermuda has operated and performed the IP administration such as ensuring the IP is properly registered and that registrations are kept up to date should be taken into consideration. Whether it should be considered as a permanent establishment is very essential as it directly links with the taxing. According to the Article 7 of OECD^[1], the Contracting State cannot tax the profits of an enterprises of the other state unless it carries on its business through a “permanent establishment” situated therein. Thus, if the XPC Bermuda’s condition does not fall into the category of the Article 5 of OECD, then it is not a permanent establishment and it cannot be taxed by the contracting state at all. Moreover, the fact that XPC Bermuda (a company which is a resident of a Contracting State) does not pay dividends means that this has not been taxed by that other State as provided in the Article 10 of the Model.

From the fact provided, it has been informed that XPC Ireland has recently received tax assessments from XPC Malaysia and XPC China which are the manufacturing subsidiaries. According to the Article 5 (7), for the purpose of taxation, a subsidiary company constitutes an independent legal entity which means a subsidiary will not by itself constitutes a permanent establishment, however, if its activities fall within the Article 5 of OECD then it is considered as a permanent establishment and has tax liabilities in the Contracting State which in this case, are Malaysia and China.

Secondly, it is undeniable that the changes to national and international tax law that could result in claims for extra tax in connection with the Group’s intellectual property is very important. As the Article 7 of the OECD Model has been changed, the aim of the 2010 version of Article 7 is to solve the problem of inconsistent interpretation of how attribute profits to a permanent establishment which results in double taxation and non-taxation to provide uniformity in the methods for attributing profits between a head office and a permanent establishment. There has been considerable variation in the domestic laws of OECD member countries as to the correct interpretation of the Article 7. As a result, this lack of a common interpretation and consistent application of this article can result in double taxation. Moreover, through the examination of the company’s arrangement, it seems that the topic of Commissionaire Arrangement should be brought up here. According to the Action 7 of BEPS, This Action mandated the development of changes to the definition of “permanent establishment” to prevent the artificial avoidance of Permanent Establishment status, including through the use of commissionaire arrangements and the specific activity exemptions. The main advantage of the commissionaire structure from a business point of view are that it can be used to centralise business risks such as inventory risks, bad debts risks and currency risks to centralise and co-ordinate purchase and production of goods, to facilitate a single pricing policy, to centralise the distribution of goods across the entire market and to reduce transfer pricing problems.

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