The OECD today released 107 comment letters, mostly from business representatives, that respond to two OECD discussion drafts providing for common tax rules to be used to allocate multinational corporation profits among the countries in which they operate.
Fifty-five comment letters relate to the OECD’s proposed revisions to its transfer pricing guidelines concerning profit splits. Fifty-two comment letters concern draft guidance dealing with the attribution of profits to permanent establishments (PEs).
Both drafts were made public last July and address unfinished work associated with the OECD/G20 base erosion profit shifting (BEPS) plan, a multi-country effort that seeks to curtail multinational corporation tax avoidance.
The vast majority of comments released were submitted by business representatives.
Profit splits
The guidance on profit splits describes why the transfer pricing method may be the most appropriate method and also provides some assistance in determining how to split profits, distinguishing between profit splits of actual profits and profit splits of anticipated profits.
Business representatives were generally supportive of the OECD’s work, stating that the guidance offered needed clarity. Several practitioners said they appreciated that the draft does not suggest that profit splits should have preference over other transfer pricing methods.
Joseph Andrus, former OECD Head of Transfer Pricing Unit at the OECD Centre for Tax Policy and Administration, submitted comments on the draft in his own capacity, stressing that the language should be changed to ensure that the draft does not prevent the application of profit splits in situations where the method works well.
Jeffery Kadet commented on behalf of the BEPS Monitoring Group, a group of tax experts associated with civil society organizations that campaign for tax justice. Kadet proposed the development and use of defined allocation keys and weights to apply the profit-split method to actual profits of common business models.
Allocation of profits to PEs
The discussion draft on attribution of profits to PEs uses examples to ask a number of questions on which comments from stakeholders were sought. The examples illustrate how to attribute profits to PEs in the light of changes made by the BEPS plan report on action 7 — in particular the new tax rules for dependent agent PEs — as well as the BEPS plan changes to the OECD transfer pricing guidelines.
In its comments, the Business and Industry Advisory Committee to the OECD (BIAC) stated that additional guidance is required on the revised threshold of Article 5 of the Model Tax Convention before it is possible to provide comprehensive comments on the correct approach for attribution.
BIAC argued that the prerequisite of adopting the Article 5 revised threshold should be a country’s commitment to formally adopt the Authorized OECD Approach. Further BIAC said some language in the discussion draft interprets Article 9 in a manner that goes beyond consensus agreement reached in October 2015 in relation to BEPS Actions 8-10. Further, the group said that more work was needed to reduce double taxation, minimize compliance burdens, and to develop practical approaches to circumstances where the recognition of a PE is not expected to generate additional tax for a territory.
A public consultation on both drafts will be held October 11–12 at the OECD Conference Center in Paris.
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It’s good that the head of the transfer pricing unit at the OECD recognizes the need to prevent the profit splitting guidance from stopping profit splitting methods that work well.
Actually, the former head of the TP unit said that!