Comments on the OECD Public Discussion Draft on the Attribution of Profits to Permanent Establishments

05 September 2016
By. Pim Fris and Guillaume Madelpuech

On 4 July 2016, the Organisation for Economic Co-operation and Development (OECD) invited comments from interested parties on the Public Discussion Draft on the Attribution of Profits to Permanent Establishments, as a result of the Base Erosion and Profit Shifting (BEPS) Action Plan.

NERA transfer pricing experts Pim Fris and Guillaume Madelpuech submitted their comments on 5 September 2016. The authors remain uncertain that the Draft addresses the concerns attached to the question of profit attribution to Permanent Establishments (PEs), particularly in the context of what in the BEPS process is called the “Digital Economy.” The essential mission of the BEPS initiative is to align taxation with value creation. Today’s business models can only be captured on the basis of understanding these value creating processes and identifying the contribution to that joint value creation by the parties involved. The current Draft seems to have overlooked the value dimension nearly completely. The examples are based on static descriptions of activities and operational or financial risks (ignoring strategic and human and intellectual capital risks). Consequently, no relevant insight is offered into how the parties involved contribute to joint value creation.

It is important to note that the current Discussion Draft on profit attribution to Permanent Establishments may benefit from the insights offered by the Discussion Draft, issued simultaneously, containing Guidance on Profits Splits and applicable integrally to the PE profit attribution, the authors state. In their comments, the NERA experts strongly recommend alignment of the current Discussion Draft with the Draft on profits splits, particularly where they address the importance of Value Chain Analysis, the economic significance of risk, and the application of profit split as a method in situations of integrated operations.

The OECD requested that submitted comments avoid addressing the PE definition as such. But given the interaction between the determination in today’s business models of the existence of a PE and the attribution of profits, it is doubtful whether this request is justified, the authors argue.