OECD releases BEPS discussion drafts on attribution of profits to permanent establishments and transactional profit splits

OECD releases BEPS discussion drafts on attribution of profits to permanent establishments and transactional profit splits

On June 22, 2017 the OECD released two public discussion drafts, containing guidance on its Final Reports on Base Erosion and Profit Shifting (BEPS) of October 2015. Both discussion drafts replace earlier draft versions released for public comment in July 2016.

1. The first discussion draft, regarding the additional guidance on attribution of profits to permanent establishments (PE’s), relates to the earlier report on Action 7 of the BEPS Action Plan (Preventing the Artificial Avoidance of Permanent Establishment Status). This report mandated the development of additional guidance on how the rules of Article 7 of the OECD Model Tax Convention (MTC) would apply to PE’s, resulting from the changes set out within the report.
2. The second discussion draft, regarding the revised guidance on profit splits, relates to Action 10 of the BEPS Action Plan (Transfer pricing – high-risk transactions). This discussion draft includes a clarification of the application of transfer pricing methods, in particular the transactional profit split method, in the context of global value chains.

Additional guidance on the attribution of profits to permanent establishments

The new discussion draft on the attribution of profits to PE’s sets out high-level general principles for the attribution of profits to PE’s in the circumstances addressed by the Report on BEPS Action 7. This discussion draft includes four examples which provide guidance on the attribution of profits to PE’s in practice. More specifically the discussion draft provides guidance on:

• PE’s arising from article 5, paragraph 5 of the MTC with examples of a commissionaire structure; and
• PE’s arising from article 5, paragraph 4 of the MTC with an example of the attribution of profits to PE’s with respect to the anti-fragmentation rule.

Furthermore, the discussion draft reemphasizes that the changes to Article 5 of the MTC do not require substantive modifications to the existing rules and guidance on the attribution of profits to PE’s under Article 7 of the MTC.

Revised guidance on profit splits

The revised guidance on profit splits is intended to clarify the application of the transactional profit split method. More specifically the discussion draft provides guidance on:

• The profit split as the most appropriate transfer pricing method; and
• On the determination of the profits to be split.

The revised draft also includes a number of examples illustrating the principles above and thereby confirms that transactional profit splits are most appropriate where each enterprise makes unique and valuable contributions and the business is highly integrated.

For the purpose of the revised guidance on profit splits, the OECD has listed a number of issues in the discussion draft, on which feedback is particularly sought.

Comments and public consultation

The deadline for providing comments on the discussion drafts is September 15, 2017, after which the OECD plans to hold a public consultation on the additional guidance on the attribution of profits to PE’s and on the revised guidance on the transactional profit split method, in November 2017.

Discussion drafts

The full discussion drafts can be accessed through the links below.

Attribution of Profits to Permanent Establishments

Revised Guidance on Profit Splits