On March 22, 2018, the OECD released the report ‘Additional Guidance on the Attribution of Profits to Permanent Establishments’. This report follows the final report on ‘Preventing the Artificial Avoidance of Permanent Establishments Status’, which was released earlier as part of action point 7 of the BEPS project.
In the final report it was recommended to change the definition of a permanent establishment (“PE”) in Article 5 of the OECD Model Tax Convention. The definition of a PE is crucial in determining whether a non-resident enterprise must pay (income) tax in another country.
The final report recommended in particular changes aimed at preventing the use of certain “common tax avoidance strategies” that have been used to circumvent the existing PE definition. One of the strategies used was the fragmentation of functions to avoid the classification of a PE. The changes suggested by the final report were incorporated in 2017 as part of the update of the OECD Model Tax Convention. The final report also mandated the development of additional guidance on how existing rules on the attribution of profits to PE’s would apply to PE’s resulting from the newly suggested changes, taking into consideration the final report on ‘Aligning Transfer Pricing Outcomes with Value Creation’ (i.e. action 8-10).
After public consultation, this mandated additional guidance has now been released in the report. The report provides high-level general principles for the attribution of profits to PE’s in new circumstances. In particular, the guidance covers PE’s arising from commissionaire structures for the sale of goods, online advertising sales and procurement structures.
Joris Steunenberg - Consultant T/A economics