Centre for Tax Policy and Administration

OECD releases BEPS discussion drafts on attribution of profits to permanent establishments and transactional profit splits

 

22/06/2017 – Public comments are invited on the following discussion drafts:

  • Revised Guidance on Profit Splits, which deals with work in relation to Actions 8-10 ("Assure that transfer pricing outcomes are in line with value creation") of the BEPS Action Plan.

Release of a discussion draft containing Additional Guidance on
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 that there is also a need to 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. Importantly, the Report explicitly 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 permanent establishments under Article 7 (see paragraph 19-20 of the Report).

Under this mandate, this new discussion draft has been developed which replaces the discussion draft published for comments in July 2016. This new discussion draft sets out high-level general principles outlined in paragraph 1-21 and 36-42 for the attribution of profits to permanent establishments in the circumstances addressed by the Report on BEPS Action 7. Importantly, countries agree that these principles are relevant and applicable in attributing profits to permanent establishments. This discussion draft also includes examples illustrating the attribution of profits to permanent establishments arising under Article 5(5) and from the anti-fragmentation rules in Article 5(4.1) of the OECD Model Tax Convention.

Please note that comments are not sought on the 2016 Discussion Draft or on the changes to the PE 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 proposed guidance in this discussion draft on the application of Article 7 to determine the attribution of profits to permanent establishments.

 


Discussion Draft on the Revised Guidance on Profit Splits

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

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, this revised draft is intended to clarify the application of the transactional profit split method, in particular, 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.

 


Deadline for submitting public comments on the discussion drafts

Interested parties are invited to send their comments on these discussion drafts. Comments should be sent by 15 September at the latest by e-mail to TransferPricing@oecd.org in Word format (in order to facilitate their distribution to government officials).

All comments received on these discussion drafts will be made publicly available. Comments submitted in the name of a collective “grouping” or “coalition”, or by any person submitting comments on behalf of another person or group of persons, should identify all enterprises or individuals who are members of that collective group, or the person(s) on whose behalf the commentator(s) are acting.


Public Consultation

The OECD intends to hold a public consultation on the additional guidance on the attribution of profits to permanent establishments and on the revised guidance on the transactional profit split method in November 2017 at the OECD Conference Centre in Paris, France. Registration details for the public consultation will be published on the OECD website in September [see details here]. Speakers and other participants at the public consultation will be selected from among those providing timely written comments on the respective discussion drafts.

 

Also available:

Projet de discussion sur les lignes directrices supplémentaires sur l'attribution du bénéfice aux établissements permanents. [PDF]

The French version of the discussion draft on the Revised Guidance on Profit Splits will be availabe soon.