Business Profit allocation Flashcards
Permanent establishment
tax concept – doing
economic activities at source with sufficient presence
that entitle the source country to levy a tax [threshold of
presence] + No legal personality (branch)
Types of permanent establishments that allow taxation at the source state
Physical base PE (OECD article 5(1))
Construction PE (OECD MC article 5 (3))
Agency PE (OECD MC article 6 (5)
Service PE (UN MC)
PE fixed place of business:
OECD MC article 5 (1)
Place of business at disposal of the enterprise, fixed geographically and permanently through which business is carried on
Exemptions of fixed place of business
*The use of facilities for storage/display/delivery of goods
*The maintenance of stock of goods or merchandise for
the purpose of processing by another enterprise
*The maintenance of a fixed place of business solely for
the purpose of purchasing goods or merchandise or
collection of information for the enterprise (advertising
activity, market research
What is construction PE (OECD MC article 5(3))
roads, big infrastructures, canals, bridges, buildings, complex machine
Important is the time span OECD (12 Months) v. UN (6 Months)
* Easy to circumvent (abuse) – divide contracts in several parts. Each contract (one company of the group and less than 12 months)
* BEPS recommendation –anti fragmentation rule [Closely related companies + connected activity + 30 days] (pa. 52)
PE (dependent agent)
Dependent Agent
is a PE without the
need to a fixed
place of business
* Pre-2017 OECD –
“habitually
exercises authority
to conclude
contracts in the
name of the
enterprise
Dependent Agent
is a PE without the
need to a fixed
place of business
* Pre-2017 OECD –
“habitually
exercises authority
to conclude
contracts in the
name of the
enterprise
If a person is authorized to negotiate all details and
elements of contract in a binding manner of an enterprise
(the approval of the enterprise is a mere formality – rubber
stamping) – PE for the enterprise
Independent PE
(BEPS – no independent
agent: persons who act exclusively or almost exclusively
on behalf or one or more closely related enterprises)
Not required to comply with detailed instructions from
the enterprise
*No control of the enterprise
*The independent agent bears commercial and
entrepreneurial risk
*The independent agent has skills and knowledge
*The independent agent works for different clients
Anti Fragmentation rule (OECD MC article 5(4.1))
proposes to address fragmenting operations in different jurisdictions to obtain a tax advantage.
Scatter functions (warehousing, purchasing, information,
etc.) around various places
*The enterprise has a PE – (1) enterprise (closely related
enterprise); (2) overall activity resulting from the
combination of activities is not preparatory or auxiliary
Service PE (UN model)
“The furnishing of services, including consultancy services, within a
Contracting State by an enterprise through employees or other
personnel engaged by the enterprise for such purposes, but only if
activities of that nature continue (for the same or a connected project)
within that State for a period or periods aggregating more than 183
days in any twelve-month period commencing or ending in the
taxable year concerned
Doing business – Subsidiary/PE (paragraph 7 of article 5 OECD
MC)
Subsidiary independent from a PE
* But (1) Subsidiary can act as the Dependent Agent PE of the
Parent (DAPE); (2) Premises of subsidiary at disposal of the Parent
Profit allocation between resident and source state when PE is in source state
1) Relevant business activity:
Use a formula to split between head office and PE
2) Functionally separate entity:
PE – is a separate and
independent
enterprise (functions, assets
and risks
- Article 5 and 7 – PE
7(1) Residence taxation unless PE
7 (2) Separate entity approach and
arm’s length(TP)
IF PE is separate entity:
STEP 1: functions, assets and risks
A functional analysis has to be carried out before
transactions within various parts of a single enterprise
(“dealings”) have to be priced at arm’s length, giving rise to
a profit element. Necessary to identify the economically
significant activities and responsibilities undertaken through
the PE.
STEP 2: The arm’s length methodology
Determination of the PE remuneration by reference to the
functions performed, assets used and risk assumed by the
enterprise – see The OECD Transfer Pricing Guidelines
