Attribution of Profits to PEs and the OECD 2006 Report
Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law
June 4, 2007
Tax Notes International, Vol. 46, No. 10, pp. 1059-1072, 2007
The dichotomy between the dependent permanent establishment (PE) and the independent subsidiary has shaped international taxation for decades. In an official report dating from December 2006, however, the OECD for the first time proposed to strengthen the independence of PEs, in particular regarding the finance sector. This paper undertakes to demonstrate that this “separate entity approach" brings about substantial problems in the application of international tax rules, as it bases the allocation of profits on the assumption that risks can be attributed separately to individual PEs or to the head office, namely by assigning the economic consequences of defined entrepreneurial risks to the persons responsible. Yet, a special allocation of risks and opportunities following some vague managerial competence to take decisions appears inappropriate and can hardly be reconciled with the benefit principle as the basis for territorial tax apportionment. Instead, the paper argues that it seems more appropriate to establish the risk structure of the company as a whole and then treat the involved PEs by analogy. Finally, the paper addresses the problem of increased opportunities to manipulate international profit attribution by the introduction of fictitious dealings under the new approach.
Number of Pages in PDF File: 33
Keywords: Permanent Establishment, separate entity approach, international tax law, business tax law, corporate tax law, taxation, subsidiary
Date posted: May 4, 2010