OECD: Guidance on attribution of profits to permanent establishments

Published on July 21, 2016

On 4^th July 2016, the OECD published a discussion draft that contained additional guidelines on the attribution of profits to Permanent Establishments (”PE”). The draft deals with work in relation to BEPS Action 7 (”Preventing the Artificial Avoidance of Permanent Establishment Status”). At this stage, the solutions and opinions presented in the draft cannot be considered as an agreed viewpoint of the OECD. The OECD has submitted the draft for public discussion. It is expected to prompt a debate on the attribution of profits to PEs and to find solutions together with concerned parties.

The published discussion draft focuses on two fact-patterns which in the opinion of the OECD would particularly benefit from additional guidance concerning attributions of profits to PEs.

These are:

the manner of attribution of profits to PEs triggered by the activities of the so-called "dependent agents”, also those operating under an agency contract (or other agreement of that type); and
the manner of attribution of profits to warehouses being PEs.
The draft includes examples for each of the above fact-patterns and a number of questions and problems are identified on which comments are sought from public commentators.

Next steps of BEPS Action 7

As mentioned above, the OECD's draft has been submitted for public discussion as follow-up work on Action 7 to meet the need for additional guidance on how the rules of Article 7 would apply to PEs. Comments and remarks to the draft can be sent until 5th September 2016. Then, on 11^th–12^thOctober 2016 the OECD intends to hold a public consultation on the additional guidance on the attribution of profits to PEs.

Background

In July 2013, the OECD and the G20 countries published an action plan with the aim to develop procedures to prevent tax base erosion and profit shifting (”BEPS”). The final versions of the BEPS reports were published on 5th October 2015. On 7th October, the G20 countries approved the Report on Action 7 of the BEPS Action Plan – Preventing the Artificial Avoidance of Permanent Establishment Status.

The Report on Action 7 includes proposed changes to, among others, the concept of a dependent agent and the topic of PEs triggered by activities that are not only preparatory or auxiliary. The modifications are meant to prevent the artificial avoidance of the PE status. In the report, in the light of the proposed changes, the OECD deals also with the issue of attribution of profits to PEs.

The report concludes that there is no need for amendments to the present regulations on the attribution of profits to PEs contained in Article 7 of the Model Tax Convention (”MTC”). However, it is necessary to develop additional guidelines explaining how to attribute profits to PEs following the changes introduced under Action 7. When preparing the guidelines on attribution of profits to PEs, lawmakers should also take into account the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles.