Attribution of Profits to PEs and the OECD 2006 Report

33 Pages Posted: 4 May 2010  

Wolfgang Schoen

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law

Date Written: June 4, 2007

Abstract

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.

Keywords: Permanent Establishment, separate entity approach, international tax law, business tax law, corporate tax law, taxation, subsidiary

Suggested Citation

Schoen, Wolfgang, Attribution of Profits to PEs and the OECD 2006 Report (June 4, 2007). Tax Notes International, Vol. 46, No. 10, pp. 1059-1072, 2007. Available at SSRN: https://ssrn.com/abstract=1596582

Wolfgang Schön (Contact Author)

Max Planck Institute for Tax Law and Public Finance, Department of Business and Tax Law ( email )

Marstallplatz 1
Munich, 80539
Germany

Paper statistics

Downloads
229
Rank
109,353
Abstract Views
1,089