Transfer pricing

Attribution of Profits to Permanent Establishments


Under the authorised OECD approach resulting from that project, the Permanent Establishment (PE) is first hypothesised as a distinct and separate enterprise, through a functional and factual analysis to determine its functions and attribute to it assets, risks and free capital.


On 17 July 2008, the OECD Council approved the release the Report on the Attribution of Profits to Permanent Establishments . The Report includes a preface and four Parts. Part I sets out general considerations for attributing profits to permanent establishments, regardless of the business sector in which they operate.


The latter three Parts of the Report elaborate upon the application of this approach to PE of enterprises operating in the financial sector, where doing business in permanent establishment form is especially common. Part II describes the application of the approach to enterprises carrying on a banking business through a permanent establishment. Part III addresses the situation of permanent establishments of enterprises carrying on global trading in financial instruments.


Part IV deals with the application of the approach to PE of enterprises carrying on insurance activities.

This final Report replaces all previous drafts of the various Parts, including the interim version of Parts I - III published in December 2006 and the discussion draft of Part IV published in August 2007.

The Committee on Fiscal Affairs has undertaken to adopt a two track approach to implementation of the Report in order to provide tax administrations and taxpayers with maximum certainty as to how profits should be attributed to permanent establishments under both existing and future treaties.


A revised Commentary on the current version of Article 7, which includes those conclusions of the Report that do not conflict with the prior Commentary, has been included in the 2008 update to the Model Tax Convention . In order to reflect the full conclusions of the Report, work has also begun on a new version of Article 7, to be included in the next update to the Model Tax Convention and to be used in the negotiation of new treaties and of amendments to existing treaties. A discussion draft of the new Article 7  was released on 7 July 2008.



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