United States

OECD issues BEPS drafts on permanent establishments and profit splits

Comments on discussion drafts are requested by Sept. 5


On July 4, 2016, the Organisation for Economic Co-operation and Development (OECD) released discussion drafts concerning:

  1. The Attribution of Profits to Permanent Establishments, concerning the work in relation to base erosion and profit shifting (BEPS) Action 7, Preventing the artificial avoidance of permanent establishment status
  2. Revised Guidance on Profit Splits, concerning work in relation to BEPS Actions 8–10, Aligning Transfer Pricing Outcomes with Value Creation

These discussion drafts will be of interest to middle market companies with non-U.S. operations because they will form the basis for proposals governing when they will be subject to tax in a host country that adopts the OECD proposals on BEPS.

BEPS Action 7 final report, Preventing the Artificial Avoidance of Permanent Establishment Status, mandated follow-up work to develop additional guidance on the issue of attribution of profits to permanent establishments if the proposals regarding the definition of permanent establishments under Action 7 and other transfer pricing proposals are adopted.

The discussion draft presents two fact-patterns that would benefit from additional guidance concerning attributions of profits to permanent establishments:

  1. Dependent agent permanent establishments, including those created through commissionaire and similar arrangements
  2. Warehouses as fixed places of business permanent establishments

Questions are identified and input is sought for each fact pattern. The discussion draft also includes a section exploring whether there are mechanisms that could ensure additional co-ordination of other rules to determine profits of a permanent establishment.

The final report on Actions 8–10 of the BEPS project set 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 on Revised Guidance on Profit Splits aims to clarify 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:

  1. Transactional profit splits of actual profits
  2. Transactional profit splits of anticipated profits

The discussion draft also proposes further draft guidance on the appropriate application of transactional profit split methods.

Comments are requested on both drafts by Sept. 5. A public consultation on the drafts will be held Oct. 11 and 12 at the OECD in Paris, France.


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