The OECD today released two discussion drafts on international tax standards that deal with allocating multinational corporation profits between tax jurisdictions: guidance on the attribution of profits to permanent establishments (PEs) and proposed revisions to OECD transfer pricing guidelines on profit splits.
Both drafts seek to address unfinished work in OECD/G20 base erosion profit shifting (BEPS) plan. Neither draft currently represents the consensus position of the OECD Committee on Fiscal Affairs or its subsidiary bodies, the OECD said.
Attribution 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 are 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.
Included are examples that addresses the effect of the new BEPS transfer pricing work on the determination of profits attributable to a dependent agent PE where the person that acts on behalf of the non-resident enterprise is an associated enterprise that performs control functions related to risks contractually assumed by the non-resident enterprise.
The guidance also includes a number of examples that illustrate attribution of profits to a nonresident’s PE that conducts warehousing activity, taking into account changes made to the “preparatory or auxiliary” exceptions in the PE definitions in the BEPS final agreements.
Profit split guidelines
The guidance on profit splits describes the transfer pricing method in the context of a value chain to show why the method may be the most appropriate method and also provides some assistance in determining how to split profits.
The guidance distinguishes two types of profit splits: one which splits actual profits and the other which sets prices based on a split of anticipated profits.
In a split of actual profits, multiple parties share in the outcomes of the business activities and risks associated with those outcomes in accordance with the accurate delineation of the actual transaction.
A split of anticipated profits, on the other hand, typically involves a situation where the parties make contributions that are difficult to value. In this type of profit split, the principles of splitting profits on an economically valid basis are applied to the anticipated profits of an enterprise resulting from its own contributions and also from those made by an associated enterprise in order to determine a price for the contributions from that associated enterprise, the OECD said.
Comments are requested on both drafts by September 5. A public consultation on the drafts will be held October 11-12 at the OECD Conference Center in Paris.
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