Jenn: OECD Clarifying, Not Rewriting, Allocation Rules on PE

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Alex M. Parker

June 9 — Current discussions at the OECD aim to clarify how the profit attribution rules will work for new permanent establishments, not to rewrite the rules, according to a U.S. official involved in the talks.

The negotiations are one big piece of unfinished business from the Organization for Economic Cooperation and Development's project to combat tax base erosion and profit shifting, which included a new threshold for determining when a permanent establishment, or a taxable branch of a foreign entity, has been created. The recommendations under the BEPS project, finalized in October 2015, didn't include any guidance on how the authorized OECD approach (AOA) on profit allocation would work with one of these new categories of PE.

The U.S. has said it won't decide whether to sign on to the new permanent establishment threshold until the work on the AOA is completed by Working Party No. 6, which deals with transfer pricing matters.

Brian Jenn, an attorney-adviser with the U.S. Treasury's Office of International Tax Counsel and a U.S. delegate to the working party, said the discussions are “motivated by the potential for increased findings of PEs.”

From the perspective of the working party, it's not the case “that anything will have to fundamentally change about the AOA, and about the way the AOA operates,” Jenn told those attending Bloomberg BNA and Baker & McKenzie's annual transfer pricing conference in Washington.

The goal of the new guidance will be to address how the AOA would work in these new situations, as well as to provide countries with the “comfort and confidence” that there is agreement on how it would be applied, the official said.

He said the guidance would likely take the form of “illustrative examples” on situations in which a permanent establishment has been created, which include inclusions under new definitions of a “dependent agent” and whether an activity is “preparatory or auxiliary” in nature.

A key issue, Jenn said, will be teasing out what additional income should be attributed to a permanent establishment when the permanent establishment was created by a related party, which already has transactions between itself and the home company.

Distinguishing Article 9, Article 7 Income

In these cases, the tax administration will have to determine what the difference is between income allocated through transfer pricing rules—under Article 9 of the OECD Model Tax Convention—and income allocated through the AOA, which is spelled out in Article 7. The articles have slightly different methods for looking at the allocation of risk, which were further refined through the new BEPS language.

“In Article 9, contracts matter, and so the contractual allocation of risk will be respected provided the party to whom the risk is allocated under the contracts has control and the financial capacity to bear the risk,” Jenn said. “That framework, which is based in the first instance on contracts, is very different from the approach of the AOA, which attributes risks based on significant people functions in relation to those risks.”

John Hughes, a senior adviser in the Transfer Pricing Operations unit at the Internal Revenue Service, said he hopes the new guidance on the AOA will provide a more “disciplined, methodical” approach for tax administrations.

“There's a kind of conceptual purity that we've been talking about, but as you can imagine or have experienced, these issues get very difficult to ‘cash out' with particular sorts of facts or circumstances,” Hughes said. “The AOA report is very general—a lot of paragraphs that say a lot of things—but not as much direction or guidance on exactly how some of these concepts are to be applied. It will be useful to have some very clear examples of how these concepts cash out.”

Jenn said he couldn't offer a specific time line for when the new guidance would be released, but hoped it would be “in the near term.”

To contact the reporter on this story: Alex M. Parker in Washington at

To contact the editor responsible for this story: Molly Moses at

Request Transfer Pricing Report