More Permanent Establishments Expected Under OECD Draft

By Rick Mitchell and Kevin A. Bell

Oct. 11 — “Ambiguity” in the OECD's new standard for defining permanent establishments has created a risk that a company's profits could be taxed multiple times, as many jurisdictions target the same income stream, a top business tax official said.

During work on business-profit tax recommendations in the international project to fight base erosion and profit shifting, the biggest concern for companies was double taxation. “But now that the PE threshold has been agreed, we are increasingly concerned not just with double taxation, but actually with triple, quadruple, quintuple taxation, etc.,” said William Morris, chairman of the OECD Business Industry Advisory Group's committee on international taxation.

Morris commented on the first day of the Organization for Economic Cooperation and Development's Oct. 11-12 consultation in Paris on transfer pricing matters, which aims to deal with two of the most significant incomplete items under the BEPS project: attribution of profit to a PE and the use of the profit split method. The Oct. 11 discussion dealt with PEs—specifically, the OECD's July 4 draft on that topic.

Under the July draft, a dependent agent—one threshold for meeting the PE definition—is one who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise.” The draft emphasized the importance of evaluating the allocation of risk and the location of decision makers when determining how to attribute profit to a foreign branch of a multinational corporation.

More PEs, More Ambiguity

Hans van Egdom, a transfer pricing specialist with the Dutch Tax Administration and co-chair of Working Party No. 6, the OECD's transfer pricing working party, chaired the Oct. 11 PE discussion. He and Morris agreed that the new definition will create more instances where PEs are triggered.

Van Egdom said the OECD may produce another draft on PE profit attribution. The delegates to Working Party No. 6 will meet in Paris in November and “discuss whether there is a new discussion draft or not,” he said.

Morris, who is General Electric's senior international tax counsel and global tax policy director as well as chairman of the BIAC international taxation committee, said the new draft, in addition to triggering more PEs, creates significant ambiguity about when a PE is created. He gave the example of a multi-jurisdictional team for which the potential subjectivity of the “principal role” concept “makes its very difficult to defend against multiple claims over the same income stream.”

New guidance is needed for business or tax authorities on how to apply the new threshold, Morris said. “Were not saying that our income shouldn't be taxed, but we are saying that there should be clearer rules to determine by whom that income is taxed and to ensure it isn't taxed more than once,” he said.

Disagreement on ‘Authorized OECD Approach.'

Morris said BIAC recommends that countries adopting changes to the OECD Model Tax Convention's Article 5, which addresses the definition of PE, should be required to also adopt the authorized OECD approach (AOA) under the convention's Article 7, which addresses taxation of business profits. The AOA in particular integrates all existing guidance on the model convention.

The recommendations under the BEPS project, finalized in October 2015, didn't include guidance on how the AOA on profit allocation would work with the new categories of PE.

BIAC believes that requiring the AOA's adoption “is the only way to ensure that the PE threshold in Article 5 and profit attribution guidelines fit together coherently around the world and address both the double taxation and double non-taxation concerns,” Morris said.

William Sample of the taxation committee at the United States Council for International Business said the OECD's new guidance on PEs should be clearly framed by the OECD's existing guidance in its 2008 and 2010 reports on the AOA. Sample, corporate vice president for worldwide tax at Microsoft Corp., said the draft fails to make clear that the AOA requires a functional analysis approach to identify and characterize dealings between a head office and PE.

The approach subsequently calls for identifying the most appropriate transfer pricing method to apply, he said.

‘Wrong Way to Go.'

Sol Picciotto of the BEPS Monitoring Group agreed that the latest discussion draft needs more work, but he had very different views on what direction that work should take. In particular, the group, which was founded by tax justice organizations including Oxfam, the Tax Justice Network and Christian Aid, argues that “assumptions in the draft that the authorized OECD approach is the way to go are mistaken.”

Picciotto said the bulk of existing bilateral tax treaties worldwide haven't adopted the AOA, some OECD members have not accepted it, and it has been been “explicitly rejected” by the United Nations' Tax Committee and developing countries.

He argued that the OECD approach would alter an existing international balance between residence and source tax countries, which the BEPS project had vowed not to do.

“We think it would be inappropriate to smuggle the authorized OECD approach” into the BEPS draft, to “foist” it on developing countries, he said.

Mary Bennett, a partner with Baker & McKenzie LLP in Washington and a former head of the OECD's tax treaty, transfer pricing and financial transactions division, said the OECD put more than 10 years of work into developing the AOA principles. A 2008 agreement on how to apply those principles to existing tax treaties addressed the vast majority of AOA aspects but was known as the “partial AOA” because it didn't include commentary on intangibles and some service transactions.

She said both the 2008 and a more complete 2010 version of the AOA include its two steps for identifying PE and characterizing its dealings with the home office and using the transfer pricing guidelines. But while most OECD countries have signed up to the 2008 AOA agreement, and many non-OECD countries have expressed plans to use that version, “it could be decades until the 2010 agreement starts showing up in many treaties,” because of the very slow treaty adoption process, she said.

To contact the reporters on this story: Rick Mitchell in Paris at and Kevin A. Bell in Washington at

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

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