Transfer pricing

OECD releases parts I-III of report on attribution of profits to permanent establishments and updates status of project


21 December 2006

The OECD Committee on Fiscal Affairs has published new versions of Parts I, II and III of its Report on the Attribution of Profits to Permanent Establishments, along with a cover note containing an update on the status of that project. The project, which has been underway for several years, is aimed at achieving a greater consensus on the manner of attributing profits to permanent establishments under Article 7 (Business Profits) of the OECD Model Tax Convention, with a primary goal of avoiding double taxation.

The new versions of Parts I (General Considerations), II (Banks) and III (Global Trading) reflect the broad consensus of OECD member countries around an approach to attributing profits to permanent establishments which is based upon the arm’s length principle as described in the 1995 OECD Transfer Pricing Guidelines. Previously published discussion drafts of Parts I-III are superseded by the new versions. The Committee announced that work on Part IV (Insurance), which was published in discussion draft form in 2005, is ongoing and that the intention is to publish a new version of Part IV as soon as possible.

The Committee indicated that work is underway to draft the necessary language to implement the conclusions of the Report under the OECD Model Tax Convention. In order to provide maximum certainty on how profits should be attributed to permanent establishments, the Committee has decided that the Report’s conclusions should be reflected in a new version of Article 7, together with accompanying Commentary, to be used in the negotiation of future treaties and of amendments to existing treaties. In addition, in order to provide improved certainty for the interpretation of existing treaties based on the current text of Article 7, the Committee has decided that revised Commentary for that current text should also be prepared, to take into account those aspects of the Report that do not conflict with the existing Commentary. The Committee intends to release both parts of this implementation package in draft form for public comment during 2007. The implementation language will also address the availability of double taxation relief where the domestic tax laws of the countries where an enterprise is resident and where it has a permanent establishment apply different authorised approaches under the Report for attributing an arm’s length amount of capital to the permanent establishment.

For further information, please contact Mary Bennett (


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