The OECD today released revised draft guidance on the attribution of profits to permanent establishments (PEs) as well as revised draft transfer pricing guidance on profits splits.
Both discussion drafts replace earlier drafts published in July 2016. Comments are requested by September 15 and a public hearing will be scheduled on both sometime in November.
The new PE discussion draft follows up on a 2015 Final Report,”Preventing the Artificial Avoidance of Permanent Establishment Status,” developed in response to Action 7 of the OECD/G20 base erosion profit shifting (BEPS) plan. The 2015 guidance noted the need for more guidance on the attribution of profits to PEs given the changes agreed to by countries in the BEPS final reports on PEs and transfer pricing.
The report provides a discussion of countries’ agreements on general principles and includes examples of how to analyze PE issues when a multinational enterprise uses a commissionaire structure, an online advertising sales structure, and a procurement structure involving a related intermediary.
The draft guidance also discusses the new preparatory and auxiliary activities and anti-fragmentation standards. An example is provided addressing PE and profit allocation issues when foreign online seller conducts warehousing, delivery, merchandise, and information collection activities in a country.
The guidance also discusses the interaction between Article 7 of the OECD model tax convention, which deals with attribution of profits to PEs, and Article 9, which deals with associated enterprises, and in particular with respect to dependent agent PEs.
A second discussion draft on the transactional profit split method discusses when the method is the most appropriate transfer pricing method and discusses how to split profits.
The revised draft also includes examples illustrating these principles and identifies a number of issues on which feedback is particularly sought.
The profit split guidance specifically states that it does not reflect a consensus view of the BEPS inclusive framework or the OECD Committee on Fiscal Affairs.
MNE Tax will provide further discussion of both drafts early next week.