The OECD released a discussion drafts on attribution of profits to permanent establishments (BEPS Action 7) on June 2017 for public comments.
The OECD discussion draft talk about how the attribution of profits to permanent establishments (PEs) under Article 7 of the Model Tax Convention (MTC) should take account of the changes in the final BEPS reports to both the PE definition (action 7) and the Transfer Pricing Actions (8-10), providing additional guidance on attribution of profits to permanent establishments (PEs) focusing on two topics:
- PE created related to the figure of the dependent agent (DAPE) through commissionaire and similar arrangements, and
- PEs related to warehouses as fixed place of business.
The discussion takes the form of four examples relating to DAPEs and one example relating to warehouses. Each example is followed by specific questions to commentators. The discussion draft also discusses the coordination of Articles 7 and 9 of the MTC.
The main points discussed about are: (1) that a PE should be treated as if it were distinct and separate from its overseas head office; and (2) that assets and risks should be attributed to the PE or the head office in line with the location of “significant people functions“.
Also, the draft pointed the importance that participating countries should consider simplification measures to eliminate any double taxation: double taxation could arise not only where the tax authorities in different countries do not share the same view of the profits attributable to a PE, but also within a country if the same profits are taxed in the dependent agent and in the PE.
1. Key hightlights related to Dependent Agent PE:
The discussion draft sets out four similar examples and an analysis of how profits should be allocated by considering article 5 (PEs), article 7 (business profits) and article 9 (associated enterprises) of the OECD model tax treaty, in the case of dependent agents created by the figure of commissionaire or similar arrangements.
Profits are attributed to the location of functions, assets and risks attributed to the significant people functions that perform significant functions in respect of assets used and controlled risks.
About the concept of “significant functions”:
- In the case that the PE performes activities on behalf of the nonresident enterprise and the DAE does not perform significant people functions relevant to the attribution of risks and assets to the DAPE, and no risk or capital is to be attributed to the DAPE, it shouldn’t be attributed any no profits to the DAPE.
- But in case the DAE does perform significant people functions relevant to the attribution of risks and assets to the DAPE, the analysis under art 7 rules, will be that a return for the funding of the economic ownership of the assets will be attributed to the DAPE, while the return for the risks will be allocated to the DAE.
In the case that there is the situation of transactions between a nonresident company and the resident dependent agent, the discussion draft states that an additional analysis to the attribution of profits to the DAPE should be performed, which is to determine the arm’s length remuneration of the dependent agent Enterprise.
If that were the case, the OECD proposes that it would be most efficient to apply transfer pricing rules before moving to an analysis of the profit to be attributed to the PE of the nonresident, as this process would provide the arm’s length fee deductible in the DAPE in respect of the functions performed by the DAE.
2. Key hightlights related to PE warehouse as fixed place of business PEs:
On the attribution of profits from activities not covered by the specific exceptions in Article 5 (4) of the MTC to warehouse PEs, the PE Discussion Draft states it is relevant whether significant people functions are being performed in the country in which the warehouse is based:
- If no significant people functions are performed, the profits attributable to the PE essentially reflect the reward for the economic ownership of the asset and the routine functions performed at the warehouse.
- If significant people functions are performed in the country in which the warehouse is situated, this should be reflected in the profits attributable to the PE.
Summing up, the discussion draft focuses on the concept of PE as DAPE and the existence of a warehouse as fixed place. In both topics, the core analysis to be performed should be the significant people functions performed by the PE, to attribute a level of adequate profit. Also, in the case of settling a resident PE of a nonresident company, rules of art. 9 MTC should be considered.
The PE discussion drafts, does not introduce any new rules, nor does it purpot to do so. It seeks to refresh the principles already established for the attribution of profits to a PE by way of examples.
The discussion draft could be downloaded here:http://www.oecd.org/tax/transfer-pricing/BEPS-discussion-draft-on-the-attribution-of-profits-to-permanent-establishments.pdf