The OECD released general principles for attributing profits to permanent establishments.
In a recent 25-page report, "Additional Guidance on the Attribution of Profits to a Permanent Establishment," the OECD outlines these principles, along with examples. The guidance addresses how the existing rules on attribution of profits to PEs would apply in light of changes to the permanent establishment (PE) definition under BEPS Action 7 Preventing the Artificial Avoidance of Permanent Establishment Status.
Some of the examples address how these proposed principles would affect warehousing, delivery, merchandising and information collection activities, commissionaire structures for the sale of goods, online advertising sales structures and procurement structures.
This latest report follows the OECD's invitation for public comments on two discussion drafts on the same topic, issued in July 2016 and June 2017. The comment period for the June 2017 discussion draft ended on September 15, 2017.
The OECD's 2015 BEPS Action 7 report recommended changing the PE definition in Article 5 of the OECD Model Tax Convention to prevent taxpayers from artificially avoiding PE status in relation to base erosion and profit shifting.
The report addresses commissionnaire arrangements, where a local subsidiary acts as distributor, resulting in a shift of profits from out of the country where the sales take place, without substantive change in the functions performed in that country (or similar strategies involving substantial negotiation of contracts in a State which are not formally concluded in that State because they are finalized or authorized abroad).
BEPS Action 7 also focuses on multinational companies who use specific activity exemptions, including the fragmentation of their operations among multiple group entities, to qualify for the exception from PE status for preparatory and auxiliary activities. Finally, this report also examines situations where construction contracts are split up between closely related enterprises.
Changes to the PE definition that resulted from BEPS Action 7 are incorporated into Article 5 of the 2017 OECD Model Tax Convention and related commentary.
BEPS Action 7 also mandated the development of additional guidance on how the existing profit allocation rules would apply to PEs arising because of the changes to the definition of PE, taking into account the guidance in the OECD's 2015 BEPS Actions 8 - 10 report Aligning Transfer Pricing Outcomes with Value Creation.
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