Permanent establishments, transactional profit splits - KPMG Global
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Attribution of profits to permanent establishments and transactional profit splits

Permanent establishments, transactional profit splits

The Organisation for Economic Cooperation and Development (OECD) today released two discussion drafts for public comments under the base erosion and profit shifting (BEPS) project:


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As noted in today’s OECD release, the discussion drafts contain additional guidance on the attribution of profits to permanent establishments (PEs) and profit splits. Comments are due by 15 September 2017.

Additional guidance, attribution of profits to permanent establishments

The report on Action 7 of the BEPS Action Plan (Preventing the artificial avoidance of  permanent establishment status) mandated the development of additional guidance on how the rules of Article 7 of the OECD Model Tax Convention would apply to PEs resulting from the changes in the report—in particular for PEs outside the financial sector. The report indicated a need to take account of the results of the work on other parts of the BEPS project dealing with transfer pricing—in particular the work related to intangibles, risk and capital. The report stated that the changes to Article 5 of the Model Tax Convention do not require substantive modifications to the existing rules and guidance on the attribution of profits to PEs under Article 7.

The new discussion draft replaces the discussion draft published for comments in July 2016. This new discussion draft sets out high-level general principles for the attribution of profits to PEs in the circumstances addressed by the report on BEPS Action 7. The discussion draft also includes examples illustrating the attribution of profits to PEs arising under Article 5(5) and from the anti-fragmentation rules in Article 5(4.1) of the OECD Model Tax Convention.

Revised guidance on profit splits

Action 10 of the BEPS project invited clarification of the application of transfer pricing methods, in particular the transactional profit split method, in the context of global value chains. 

The OECD today reported that under this mandate, this revised discussion draft replaces the draft released for public comment in July 2016. Building on the existing guidance in the OECD Transfer Pricing Guidelines, as well as comments received on the July 2016 draft, the revised draft is intended to clarify the application of the transactional profit split method, by identifying indicators for its use as the most appropriate transfer pricing method and providing additional guidance on determining the profits to be split. The revised draft also includes a number of examples illustrating these principles. While comments are invited on any aspect of the revised draft, the document also identifies a number of issues relating to the application of the profit split method on which feedback is particularly sought.

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