Just successfully did this from the UK. To get it to work via PayPal, what wasn't clear here, is that you need to do so from Xbox.com. And if you already have PayPal attached to your account, remove it first.
Steps:
- Remove PayPal from UK account
- Switch location in system settings on XB1 - restart
- Set billing address on XB1 - I used the Oregon Uni from earlier in thread
- Set phone - I used my mobile, dropping the 0 to get 10 digits
- Goto Xbox.com (I made sure to goto /en-US rather an en-gb/, though I don't know if essential).
- Goto Account, Payment & Billing, Add Paypal (it's not immediately obvious and I ended up on Support pages for adding Paypal initially, but hunt, it is in there)
- Enter Paypal Details
- Go back to XB1, check your payment details, paypal will now be there.
You can purchase games and DLC. DLC from US works with UK disc, at least the Caterham did for Forza 5, which was my test ahead of Titanfall.
Switch back to UK location and restart if you want to have EU servers. I'll change back after Titanfall purchase on Tuesday.
Hope that helps.