The OECD has released additional guidance on the attribution of profits to permanent establishment (PE), as part of its work on base erosion and profit shifting (BEPS) Action 7.
The OECD’s October 2015 Report on Action 7 recommended changes to the definition of PE in Article 5 of the OECD Model Tax Convention, which determines whether a foreign enterprise must pay income tax in the source country. In particular, the Report recommended changes aimed at preventing the use of certain common tax avoidance strategies that have been used to circumvent the existing PE definition.
The Report also mandated the development of additional guidance on how the existing rules on attribution of profits to PEs under Article 7 would apply to PEs resulting from the changes recommended in the Report (in particular for PEs outside the financial sector), taking into account the revised guidance contained in the Report on Aligning Transfer Pricing Outcomes with Value Creation (BEPS Actions 8-10).
The additional guidance – released on March 22, 2018 – sets out high-level general principles, which countries agree are relevant and applicable in attributing profits to PEs in accordance with applicable tax treaty provisions. It also provides examples on the attribution of profits to certain types of PEs arising from the changes to the PE definition under BEPS Action 7.