13 October 2016
Global Tax Alert
OECD holds public
consultation on
attribution of
profits to PEs
and profit splits
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Executive summary
On 11 and 12 October 2016, the Organisation for Economic Co-operation and
Development (OECD) held a public consultation with respect to the discussion
drafts on Additional Guidance on Profit Attribution to Permanent Establishments
(the PE Discussion Draft) and on Revised Guidance on Profit Splits (the PSM
Discussion Draft) that were released earlier this year.1 The consultation was an
opportunity for stakeholders to engage directly with the OECD Secretariat and
the country delegates who are responsible for the OECD’s transfer pricing work.
The OECD Working Party will discuss the comments and next steps at its next
meeting in November 2016.
Detailed discussion
On 5 October 2015, the OECD released final reports on all 15 focus areas in
its Action Plan on Base Erosion and Profit Shifting (BEPS). Among the final
reports were the final report on Action 7: Preventing the Artificial Avoidance
of Permanent Establishment Status (the Action 7 Report)2 and the final report
on Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation (the
Actions 8-10 Report).3 Following these reports, the OECD on 4 July 2016
issued the PE and the PSM Discussion Drafts. The PE Discussion Draft included
two fact patterns that were considered to particularly benefit from additional
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Global Tax Alert
guidance concerning the attributions of profits to PEs. These
facts patterns were: (a) dependent agent PEs, including those
created through commissionaire and similar arrangements;
and (b) warehouses as fixed place of business PEs. The
PSM Discussion Draft contained proposed revisions to the
guidance on the application of the transactional profit
split method, together with a number of questions. Both
discussion drafts included an invitation to interested parties
to send their comments. In total, the OECD received over
860 pages of comments on the two discussion drafts.
The public consultation on 11 and 12 October 2016 was a
dialogue among stakeholders, country tax officials, and the
OECD Secretariat on key issues and concerns addressed
in those comments. The consultation was hosted by OECD
Working Party No. 6, which is responsible for the OECD’s
work on transfer pricing matters. The first day of the public
consultations covered the additional guidance on profit
attribution to PEs; the second day covered the proposed
revisions to the guidance on application of profit splits.
Additional Permanent Establishment Guidance
The consultation on the Additional Permanent Establishment
Guidance began with opening remarks from Hans van
Egdom, the Co-Chair of Working Party No. 6. He mentioned
the key issues to be discussed: (i) the order of application of
Article 7 and Article 9 of the OECD Model Tax Convention;
(ii) the difference in allocation of risks under Article 7 and
under Article 9; (iii) the difference between the notion of
significant people function under Article 7 and control over
risk under Article 9; (iv) the impact of the 2015 guidance
on accurate delineation of the transaction under Article 9;
(v) the administrative burden for business and tax authorities,
especially when little profit would be attributed to the PE;
(vi) what are the dealings in the examples include in the
discussion draft; and vii) the return to be allocated to funding.
The two fact-patterns included in the discussion draft,
dependent agent PEs and warehouse PEs were discussed in
more detail, including the five examples in the report. Finally
the section on exploring whether there are mechanisms that
could ensure additional co-ordination of the application of
Article 7 and Article 9 were discussed.
Some issues raised during the discussion were:
•There are concerns as to how appropriate the 2010
Authorized OECD Approach (AOA) of attributing profits
to PEs might prove to be. It was suggested by some that
it should be a prerequisite for countries signing up to the
proposed multilateral instrument under BEPS action 15 that
they adopt the AOA. The contrary argument was that this
amounted to imposing the 2010 AOA on countries that have
either not yet chosen to adopt it or expressly rejected it.
•The order of application of Articles 7 (business profits)
and 9 (associated enterprises) of the OECD Model Tax
Convention and the need for coordination of the outcomes
under each of the articles is an area for further discussion.
•The need for guidance on the threshold for the creation of
PEs under the revised Article 5 of the Model Tax Convention.
There remains concern that the revisions will give rise to
more PEs but not necessarily more tax.
The Co-Chair concluded that a holistic view is needed on
various topics. The goal should be to tax value where it is
created, avoiding double taxation and avoiding unnecessary
administrative burdens, but also to avoid double non-taxation.
The issues that require follow up include:
•More coordination between the notion of significant people
functions under Article 7 and control over risk under
Article 9
•More guidance on administrative approaches, including
filing of tax returns for dependent agent PEs
•More coordination between the United Nations and the
OECD on Article 7, including (not) using the AOA
•A closer look at the interaction with the multilateral
instrument under BEPS Action 15, specifically on Article 5,
and the to be developed guidance on Article 7
Revised Profit Split Guidance
The second day of the public consultation on profit splits
began with opening statements by Michael McDonald, Chair
of Working Party No. 6. The discussion draft sought to clarify
and strengthen the guidance on the transactional profits split
method in the context of global value chains. In particular,
it considered the approaches to splitting profits through
transactional profit splits of actual profits and transactional
profit splits of anticipated profits. It also proposed further
draft guidance on the appropriate application of transactional
profit split methods.
In their opening statements to the day, the Business
International Advisory Committee (BIAC), representing
international business, focused on the question of when a
profit split should be applied. BIAC stressed the primacy of
the most appropriate method (the principle that any transfer
pricing method should be assessed against alternative
Global Tax Alert
transfer pricing methods taking into account the facts of the
situation and the availability of data in order to choose the
most appropriate method) and the need to protect the arm’s
length principle. They argued that the profit split method
should not be used as a default option, suggesting that in
some situations, a profit split would be too complicated.
They called for more detail and a wider range of examples in
the guidance to ensure that the profit split method would be
applied consistently. They also wanted to see more guidance
on valuation and the application of profit splits to ongoing
transactions.
By comparison, the BEPS monitoring group, as a
representative of civil society, called for the systemization of
the profit split method. They believe that sooner or later some
form of a unitary taxation model will need to be applied to
multinationals. They believe the profit split method should not
be used as a ”fall back” suggesting that in many cases there
is significant value contributed by members of an integrated
multinational group. This ”synergy profit” is, in their view,
the root of the problems with taxing multinationals. Their
concerns are that if the profit split method continues to be
used on an ad hoc basis, this will only add to these difficulties.
The discussions during the second day looked at:
•Profit splits of anticipated profits and actual profits and
whether they involved different situations that need to be
addressed separately in the guidance.
•What factors relating to the activities of the parties, the
transaction in scope and the market are relevant in
considering when a transactional profit split of anticipated
or actual profits is likely to be the most appropriate method.
•What are ”unique and valuable contributions” for the
purposes of determining whether a transactional profit
split method is the most appropriate method.
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•What is the relevance of sequential/parallel integration to
determining whether a profit split of actual or anticipated
profits is the most appropriate method.
•What is the relevance of sharing of risks to transactional
profit splits of actual profits and how to define ”sharing of
risks” in this context.
•The relevance of a value chain analysis to when and how
to apply a transactional profit split method.
The Chair concluded – based on the input of international
business – that more clarification in the guidance is needed,
in particular on the interaction with chapter I of the OECD
Transfer Pricing Guidelines, which has been amended as a
result of BEPS Actions 8-10. Furthermore, he noted that the
BEPS monitoring group, as a representative of civil society,
has fundamental issues with the current and proposed
guidance, on the framework of respecting separate legal
entities and the application of the arm’s length principle.
They favor that some form of a unitary taxation model will
need to be applied to multinationals.
Next steps
The OECD Working Party will discuss the comments at its
next meeting in November. For now it is unclear whether
new discussion drafts will be released.
Implications
The changes in the threshold for PEs included in the October
2015 BEPS deliverables, in combination with the proposed
changes on attribution of profits to PEs, and the proposed
changes on profit splits may have significant impact on
global businesses. Global businesses should evaluate the
implications of the proposed additional guidance and also
monitor the follow up work by the OECD.
Endnotes
1. http://www.oecd.org/tax/transfer-pricing/BEPS-discussion-draft-on-the-attribution-of-profits-to-permanentestablishments.pdf and http://www.oecd.org/tax/transfer-pricing/BEPS-discussion-draft-on-the-revised-guidance-onprofit-splits.pdf.
2. See EY Global Tax Alert, OECD releases final report on preventing the artificial avoidance of permanent establishment
status under Action 7, dated 19 October 2015.
3. EY issued multiple alerts on the various topics covered in the Action 8-10 report. See EY Global Tax Alert, OECD releases
final transfer pricing guidance on risk and recognition under Actions 8–10, dated 13 October 2015, on the topics that are
most relevant for the business consultation.
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Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Transfer Pricing, Rotterdam
• Ronald van den Brekel
+31 88 407 9016
Ernst & Young LLP, Transfer Pricing, Washington, DC
• Chris Faiferlick
+1 202 327 8071
[email protected]
[email protected]
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