The OECD has issued a consultation to guage feedback on additional guidance on the application of BEPS Action 7 Preventing the Artificial Avoidance of Permanent Establishment Status, which will be used as the framework rules to determine the attribution of profits to permanent establishments (PEs)
The draft guidance focuses on how the rules of Article 7 of the OECD Model Tax Convention would apply to permanent establishments, in particular those outside the financial sector, as well as how BEPS Action 7, would interface with rules on transfer pricing, in particular the work related to intangibles, risk and capital.
The 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.
It 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.
These include examples based on the use of a related intermediary, ie, a commissionaire structure through a related intermediary; sale of advertising on a website and ownership rights’ issues; and procurement and sale of goods via a third party. Each scenario is set out in detail with analysis of the reasons for the particular tax approach.
The OECD draft guidance states ‘that the host country's taxing rights are not necessarily exhausted by ensuring an arm's length compensation to the intermediary. As noted earlier, one of the elements to determine and deduct in calculating the profits attributable to the PE is an arm's length reward to the intermediary. Depending on the facts and circumstances of a given case, the net amount of profits attributable to the PE may be either positive, nil or negative (ie, a loss)’.
OECD stresses that any comments should focus solely on the draft guidance and not to any earlier discussion drafts or agreed definitions of permanent establishments issued in 2015/16.
A further public consultation day will also be held at the OECD in Paris in November.
Closing date
The closing date for comments is 15 September 2017 to [email protected] in Word format.
The 15-page OECD BEPS Action 7 Additional Guidance on Attribution of Profits to Permanent Establishments discussion draft is available here