TEI Files Comments Regarding BEPS Discussion Draft on PE Profit Attribution.

• Author: Parsons, Giles
• Position: Tax Executives Institute, base erosion and profit shifting, permanent establishment

On September 8, 2017, TEI filed comments with the OECD regarding its recent public discussion draft entitled Additional Guiddnce on Attribution of Profits to Permanent Establishments. The Institutes comments included recommendations for more realistic and detailed numerical examples to better illustrate the guidance in the draft. TEI also recommended the OECD place a greater emphasis on the need for countries to adopt Authorized OECD Approach to PE profit attribution, among other things. TEI's comments were prepared under the aegis of the European Direct Tax Committee, whose chair is Giles Parsons. Ben Shreck, TEI tax counsel, coordinated the drafting of the Institute's comments.

The Organisation for Economic Co-operation and Development (OECD) published final reports pursuant to its base erosion and profit shifting (BEPS) project on October 5, 2015. The reports were the culmination of the OECD's Action Plan on Base Erosion and Profit Shifting (hereinafter the Plan) published in 2013. The Plan set forth 15 actions the OECD would undertake to address a series of issues that contribute to the perception of tax bases being eroded or profits shifted improperly. Included in the October 2015 final reports was the report under Action 7 of the Plan, Preventing the Artificial Avoidance of Permanent Establishment Status (the Report). On July 4, 2016, the OECD issued a public discussion draft under Action 7 entitled Additional Guidance on the Attribution of Profits to Permanent Establishments (Prior Discussion Draft or Prior Draft). On June 22, 2017, the OECD issued another public discussion draft under Action 7 entitled Additional Guidance on Attribution of Profits to Permanent Establishments (Discussion Draft or Draft). The Discussion Draft requests comments from stakeholders on the application of Article 7 of the OECD's Model Tax Convention (the MTC), regarding the attribution of profits to permanent establishments (PE).

I am pleased to respond to the OECD's request for comments on behalf of Tax Executives Institute, Inc. (TEI). TEI also requests the opportunity to speak in support of these comments at the public consultation to be held in November 2017 in Paris.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organization has 56 chapters in Europe, North and South America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 individual members represent over 2,800 of the leading companies in the world. (1)

TEI Comments

TEI welcomes the Discussion Draft's objective to provide guidance on the attribution of profits to PEs arising from the revisions to Article 5 of the MTC set forth in the Report. While the Draft presents high-level general principles, the OECD could increase its usefulness to both taxpayers and tax authorities by including more detailed guidance and additional examples to illustrate more complex circumstances and outcomes. Regrettably, the absence in the Draft of the more detailed--although still too general--examples from the Prior Discussion Draft can only be interpreted as a lack of consensus at the OECD. The lack of clarity resulting from the Draft will likely result in tax authorities asserting unwarranted PEs, leading to unnecessary controversy and expense. In addition, while TEI understands the reasoning behind the OECD's decision not to include numerical examples, "to avoid drawing conclusions from this guidance on the level of profitability of the intermediary or the permanent establishment," the inevitable, and regrettable, outcome is a lack of insight and guidance from the simple, non-numeric examples in the Draft. This also obscures the purpose of the examples where numbers would make the purpose much clearer. TEI recommends, therefore, the reinstatement of numerical examples and the inclusion of additional detailed and complex examples in final guidance to illustrate particular issues. (2) In particular, missing is a situation where no additional profit is allocated to a deemed PE. If numerical examples are not included, a less favorable alternative would be to reference this situation in non-numeric examples by including the statement "if the analysis shows that there is no additional profit to attribute to the deemed PE" or something similar.

TEI also welcomes confirmation in Paragraph 7 that the changes made to Article 5 have not modified the nature of a PE that is deemed to arise under either the pre-BEPS or post-BEPS versions of...