Transfer pricing

Comments Received on Part I (General Considerations) and Part II (Banks) of the Discussion Draft on the Attribution of Profits to Permanent Establishments


The permanent establishment concept has a history as long as the history of double taxation conventions. Currently, the international tax principles for attributing profits to a permanent establishment are provided in Article 7 of the OECD Model Tax Convention on Income and on Capital, which forms the basis of the extensive network of bilateral income tax treaties between OECD Member countries and between many OECD and non-OECD economies. There is a considerable variation in the domestic laws of OECD Member countries, and no consensus amongst the OECD Member countries as to the correct interpretation of Article 7. This could lead to double, or less than single taxation.

On 8 February 2001, the OECD published a discussion draft on attributing profits to a permanent establishment under Article 7 of the OECD Model Tax Convention. The purpose of releasing this discussion draft was to solicit comments from the public on the detailed and fundamental review of Article 7 in the discussion draft.

The following organisations have given consent to publish their comments on this Discussion Draft.

The comments received were generally positive, about the goals of the project, the need for a consensus to take into account changes in ways of doing business and the idea of greater conformity between taxation of branches and subsidiaries. There also was general support for using, by analogy, guidance from the OECD Transfer Pricing Guidelines to apply the arm's length principle of Article 7.

Some commentators did however disagree with the premise on which the Working Hypothesis was based. Concerns were also raised as to the practicality of applying the Working Hypothesis in specific situations.

  1. The Chartered Institute of Taxation
  2. Ernst & Young
  3. Goodmans LLP
  4. IFA Korea
  5. Institute of Directors
  6. Electronic Commerce Tax Study Group (ECTSG)
  7. PricewaterhouseCoopers
  8. Taxation Committee of ICC United Kingdom
  1. BIAC
  2. United States Council for International Business (USCIB)

Concerns were expressed as to the practicality of the Working Hypothesis, in particular in relation to the comments of Part II. Most commentators expressed reservations about the abilitiy to apply in practice the regulatory approach to allocatig capital that was advocated by the majority of countries in the discussion draft.

  1. Australian Bankers' Association
  2. British Bankers' Association - London Investment Banking Association - Foreign Banks and Securities Houses Association
  3. Canadian Bankers Association
  4. Ernst & Young
  5. European Banking Federation
  6. Fédération Bancaire Française
  7. Institute of International Bankers
  8. Japanese Bankers Association
  9. KPMG
  10. New York Clearing House
  11. Swiss Bankers Association
  1. International Banks and Securities Association (IBSA)

The dialogue will continue in the form of a consultation, scheduled for April 2002, with representatives from the organisations that commented on the discussion draft. The aim of this consultation is to help establish an open and interactive discussion between busines and tax adminstrations so that a clearer understanding of the objectives and concerns of each can be obtained.