UK and International Tax news

OECD Releases BEPS Discussion Drafts On Attribution Of Profits To PEs And Revised Guidance On Profit Splits

Monday 18th July 2016

The OECD has recently issued, and invited comments on, the following discussion drafts:

  • Revised Guidance on Profit Splits, which deals with work in relation to Actions 8-10 (“Assure that transfer pricing outcomes are in line with value creation”) of the BEPS Action Plan.

The Final Report on Action 7 mandates follow-up work to develop additional guidance on the issue of attribution of profits to PEs resulting from the changes to Article 5, as well as take account of the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital.

The discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, presents the two fact-patterns that would particularly benefit from additional guidance concerning attributions of profits to PEs, which are:

(a) dependent agent PEs, including those created through commissionnaire and similar arrangements; and

(b) warehouses as fixed place of business PEs.

For each fact-pattern, and through the use of examples, a number of questions are identified on which comments are sought from commentators.

The discussion draft also includes a final section exploring whether there are mechanisms that could ensure additional co-ordination of the application of Article 7 and Article 9 to determine the profits of a PE without providing opportunities for the re-emergence of BEPS risks that the changes under Actions 7 and 8-10 were designed to reduce.

Comments are not being sought on the changes to the PE definitions that have been agreed under Action 7 and which were published in the 2015 Final Report, Preventing the Artificial Avoidance of Permanent Establishment Status. Commentators are asked to concentrate only on the application of Article 7 to determine the attribution of profits to PE.

The Final Report on Actions 8-10 sets out the scope of the work mandated under Action 10 of the BEPS Action Plan in relation to the application of transfer pricing methods.

The discussion draft, which does not yet represent a consensus position of the Committee on Fiscal Affairs or its subsidiary bodies, aims at clarifying and strengthening the guidance on the transactional profits split method in the context of global value chains. In particular, it elaborates on two different approaches to splitting profits:

(a) transactional profit splits of actual profits, and

(b) transactional profit splits of anticipated profits.

It also proposes further draft guidance on the appropriate application of transactional profit split methods.

Commentators are invited to respond to the questions included in the discussion draft, as well as the direction of the draft more generally. Examples of scenarios in which a transactional profit split is found to be the most appropriate transfer pricing method are also invited.

Interested parties are invited to send comments on these discussion drafts by 5 September 2016, and the OECD intends to hold a public consultation on these two discussion drafts on 11-12 October 2016.

 

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

 

Contact Us