Comments on Draft Additional Guidance on Attribution of Profits to a Permanent Establishment

The BMG has made a submission on Attribution of Profits to a Permanent Establishment in response to the OECD Discussion Draft.


A major motivator in initiating the entire BEPS project was to end BEPS motivated planning by centrally managed groups. Such planning often attributes sales to zero or low-taxed entities and separates sales through fragmentation from related core functions such as marketing, order fulfilment, and customer support performed by other group entities. Under Action 7 of the BEPS project some modest changes were agreed, so that in defined circumstances a non-resident entity could now be found to have a taxable presence (permanent establishment – PE) in a country in which it makes sales. The current proposals aim to clarify how profits should be attributed to such a PE.

We agree that attribution of profits depends on an analysis of the functions performed by the PE, but in our view this must not be done in isolation. A holistic approach should be adopted, which considers all the activities carried out in the country by the relevant entities in conjunction. Where a multinational chooses to carry out itself activities such as marketing, sales, order fulfilment, and customer support, it does so in order to take advantage of the synergies so created, thereby giving the customer a seamless experience and itself (i.e., the group) a significant market advantage. Hence, it is the cumulative importance of all group activities that should be considered when evaluating the value which is created in the country.

Due to this cumulative importance, our view is still that article 7 should be applied prior to article 9, since this would result in both better focus by taxpayers and tax authorities, and a practical reduction in the resources needed by both tax authorities and taxpayers for compliance.

A holistic approach will also lead in some circumstances to a different transfer pricing method being the most appropriate method. In particular, where such related functions are performed by highly integrated associated entities and are viewed holistically, the profit-split method is likely to prove more appropriate than one-sided methods.

A holistic approach is also important since the DD is meant to apply to all versions of article 7 of the model convention, and whether or not a state has accepted the changes adopted by a majority of OECD states in 2010, described as the authorized OECD approach (AOA). While the AOA has some merits, it has been used to further exacerbate a fragmented approach to the attribution of profits, which (along with the independent entity principle in general) has been a principal enabler of BEPS. Adoption of the holistic approach which we suggest could, we believe, allow some of those helpful features of the AOA to be retained, while ensuring that BEPS structures are not allowed to continue due to a narrow interpretation applying the independent entity principle to an entity which is not even legally separate.

Our Specific Comments section includes a number of concrete suggestions to make the DD more internally consistent and effective in its application.