Discussion Draft on the Attribution of Profits to Permanent Establishments
The Final Report on Action 7 of the BEPS Action Plan (“Preventing the Artificial Avoidance of Permanent Establishment Status”) mandates follow-up work to develop additional guidance on the issue of attribution of profits to permanent establishments. This work is intended to provide guidance on how the rules of Article 7 would apply to permanent establishments resulting from the changes in the Report on Action 7 of the BEPS Action plan to Article 5, as well as take account of the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital.
This discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, presents the two fact-patterns that would particularly benefit from additional guidance concerning attributions of profits to permanent establishments, which are: a) dependent agent permanent establishments, including those created through commissionnaire and similar arrangements; and b) warehouses as fixed place of business permanent establishments. For each fact-pattern, and through the use of examples, a number of questions are identified on which comments are sought from commentators.
This discussion draft also includes a final section exploring whether there are mechanisms that could ensure additional co-ordination of the application of Article 7 and Article 9 to determine the profits of a permanent establishment without providing opportunities for the re-emergence of BEPS risks that the changes under Actions 7 and 8-10 were designed to reduce.
Please note that comments are not sought on the changes to the permanent establishment definitions that have been agreed under Action 7 and which were published in the 2015 Final Report, Preventing the Artificial Avoidance of Permanent Establishment Status. Commentators should concentrate solely on the application of Article 7 to determine the attribution of profits to permanent establishments.
Discussion Draft on the Revised Guidance on Profit Splits
The Final Report on Actions 8-10 of the BEPS Action Plan (“Assure that transfer pricing outcomes are in line with value creation”) sets out the scope of the work mandated under Action 10 of the BEPS Action Plan in relation to the application of transfer pricing methods.
The discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, aims at clarifying and strengthening the guidance on the transactional profits split method in the context of global value chains. In particular, it elaborates on two different approaches to splitting profits: transactional profit splits of actual profits and transactional profit splits of anticipated profits. It also proposes further draft guidance on the appropriate application of transactional profit split methods.
Commentators are encouraged to respond to the questions included in the discussion draft, as well as the direction of the draft more generally. Examples of scenarios in which a transactional profit split is found to be the most appropriate transfer pricing method are also invited.
The OECD intends to hold a public consultation on these two discussion drafts on 11-12 October 2016 at the OECD Conference Centre in Paris, France. Registration details for the public consultation will be published on the OECD website in September.