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Permanent Establishments under the Pillars: The Relevance of a Transfer Pricing Analysis
DOI:
https://doi.org/10.33119/ASCASP.2023.1.3Keywords:
transfer pricing, pillar one, pillar two, permanent establishmentAbstract
This paper analyses the treatment of Permanent Establishments (PEs) under the OECD’s Pillar One and Pillar Two frameworks. It delves into the complexities of the Global Anti Base Erosion Model Rules (GloBE) and the Qualified Domestic Minimum Top-Up Tax (QDMTT) rules under Pillar Two, as well as the reallocation of taxing rights under Pillar One. The role of transfer pricing in dealing with PEs is scrutinised, particularly its influence on the calculation of Adjusted GloBE income and Elimination Profit. The practical implications of these rules on PEs are illustrated through case studies. The paper also highlights the potential for disputes and the need for upfront certainty on transfer pricing positions.
References
OECD:
OECD (2010). Report on the Attribution of Profits to Permanent Establishments. Retrieved from: https://www.oecd.org/ctp/transfer-pricing/45689524.pdf
OECD (2017). Commentary on the Model Tax Convention on Income and on Capital.
OECD (2018). Additional Guidance on the Attribution of Profits to Permanent Establishments, BEPS Action 7. Retrieved from: https://www.oecd.org/tax/transferpricing/additional-guidance-attribution-of-profits-topermanent-establishments-BEPS-action-7.pdf
OECD (2021). Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS. Retrieved from: https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economyglobal-anti-base-erosion-model-rules-pillar-two.pdf
OECD (2022a). Bilateral Advance Pricing Arrangement Manual. Retrieved from: https://www.oecd.org/publications/bilateral-advance-pricing-arrangement-manual-4aa570e1-en.htm
OECD (2022b). Progress Report on Amount A of Pillar One, Two-Pillar Solution to the Tax Challenges of the Digitalisation of the Economy. Retrieved from: https://www.oecd.org/tax/beps/progress-report-on-amounta-of-pillar-one-july-2022.pdf
OECD (2022c). Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti- Base Erosion Model Rules (Pillar Two). Retrieved from: https://www.oecd.org/tax/beps/tax-challenges-arisingfrom-the-digitalisation-of-the-economy-global-antibase-erosion-model-rules-pillar-two-commentary.pdf
OECD (2022d). Tax Challenges Arising from the Digitalisation of the Economy –Global Anti-Base Erosion Model Rules (Pillar Two) Examples. Retrieved from: https://www.oecd.org/tax/beps/taxchallenges-arising-fromthe-digitalisation-of-the-economy-global-anti-baseerosion-model-rules-pillar-two-examples.pdf
OECD (2022e). Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
OECD (2023a). Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements. Retrieved from: https://www.oecd-ilibrary.org/docserver/f0cad7f3-en.pdf?expires=1688055608&id=id&accname=guest&checksum=A4410B91FC6CDD0EDFE1A28A1B759115
OECD (2023b). Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two).
Retrieved from: https://events.ataftax.org/index.php?page=documents&func=view&document_id=79
Journals
Chand, V. & Lembo, G. (2020). Intangible-Related Profit Allocation within MNEs based on Key DEMPE Functions: Selected Issues and Interaction with Pillar One and Pillar Two of the Digital Debate. International Tax Studies, 3(6). Retrieved from: https://www.ibfd.org/shop/journal/intangible-related-profit-allocationwithin-mnes-based-key-dempe-functions-selected
Chand, V., Turina, A., & Ballivet, L. (2020). Profit Allocation within MNEs in Light of the Ongoing Digital Debate on Pillar I – A “2020 Compromise”?: From Using A Facts and Circumstances Analysis or Allocation Keys to Predetermined Allocation Approaches. World Tax J., 12, 565–619. Drobnik, P. (2018). The Attribution of Profits to a Dependent Agent PE – If the Dependent Agent Is a Commissionaire (Wholly Owned Subsidiary) of the Principal. International Transfer Pricing Journal, 25(3).
Dziurdź, K., (2014). Attribution of Functions and Profits to a Dependent Agent PE: Different Arm’s Length Principles under Articles 7(2) and 9? World Tax Journal, 6(2).
Gramm, C. (2020). Profit Attribution to a Fixed Place Permanent Establishment: Case Study – Showroom. International Transfer Pricing Journal, 27(2).
Martin, C., Chand, V. & Burkhalter, N. (2020). Arm’s Length Principle from a Swiss Perspective: Profit Allocation to Inbound and Outbound Permanent Establishments. Intertax,50(1).
Ruberti, R. (2022). Applying the AOA to a PE That Performs Services: A Case Study on the Balance Sheet and the Profit and Loss Account of the Branch. International Transfer Pricing Journal, 29(3).
National/Regional legislation
ATAF (2022). ATAF Suggested Approach to Drafting Digital Services Tax Legislation.
IN: India Ministry of Finance, Public Consultation on the proposal for the amendment of rules for profit attribution to permanent establishments. Retrieved from: https://www.indianembassyusa.gov.in/pdf/taxcorner/Public_consultation_apr18.pdf
NL: Decree on the Attribution of Profits to Permanent Establishments (Besluit winstallocatie vaste inrichtingen 2022 – BWBR0046838), (2022, 2 July).
UK: Draft Legislation on multinational top-up tax (2022). Retrieved from: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1092586/Draft_legislation.pdf
UK: HMRC, INTM267100 – Non-residents trading in the
UK: profits of the PE. Retrieved from: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm267100
UK: HMRC, INTM267050 – Non-residents trading in the
UK: profits of the PE: Attribution – method of calculation of chargeable profits (2022 update). Retrieved from: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm267050
Other sources
Tax Foundation (2021). Corporate Tax Rates around the World. Retrieved from: https://taxfoundation.org/publications/corporate-tax-rates-around-theworld/#Highest
OECD (2010). Report on the Attribution of Profits to Permanent Establishments. Retrieved from: https://www.oecd.org/ctp/transfer-pricing/45689524.pdf
OECD (2017). Commentary on the Model Tax Convention on Income and on Capital.
OECD (2018). Additional Guidance on the Attribution of Profits to Permanent Establishments, BEPS Action 7. Retrieved from: https://www.oecd.org/tax/transferpricing/additional-guidance-attribution-of-profits-topermanent-establishments-BEPS-action-7.pdf
OECD (2021). Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two): Inclusive Framework on BEPS. Retrieved from: https://www.oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economyglobal-anti-base-erosion-model-rules-pillar-two.pdf
OECD (2022a). Bilateral Advance Pricing Arrangement Manual. Retrieved from: https://www.oecd.org/publications/bilateral-advance-pricing-arrangement-manual-4aa570e1-en.htm
OECD (2022b). Progress Report on Amount A of Pillar One, Two-Pillar Solution to the Tax Challenges of the Digitalisation of the Economy. Retrieved from: https://www.oecd.org/tax/beps/progress-report-on-amounta-of-pillar-one-july-2022.pdf
OECD (2022c). Tax Challenges Arising from the Digitalisation of the Economy – Commentary to the Global Anti- Base Erosion Model Rules (Pillar Two). Retrieved from: https://www.oecd.org/tax/beps/tax-challenges-arisingfrom-the-digitalisation-of-the-economy-global-antibase-erosion-model-rules-pillar-two-commentary.pdf
OECD (2022d). Tax Challenges Arising from the Digitalisation of the Economy –Global Anti-Base Erosion Model Rules (Pillar Two) Examples. Retrieved from: https://www.oecd.org/tax/beps/taxchallenges-arising-fromthe-digitalisation-of-the-economy-global-anti-baseerosion-model-rules-pillar-two-examples.pdf
OECD (2022e). Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
OECD (2023a). Manual on the Handling of Multilateral Mutual Agreement Procedures and Advance Pricing Arrangements. Retrieved from: https://www.oecd-ilibrary.org/docserver/f0cad7f3-en.pdf?expires=1688055608&id=id&accname=guest&checksum=A4410B91FC6CDD0EDFE1A28A1B759115
OECD (2023b). Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global AntiBase Erosion Model Rules (Pillar Two).
Retrieved from: https://events.ataftax.org/index.php?page=documents&func=view&document_id=79
Journals
Chand, V. & Lembo, G. (2020). Intangible-Related Profit Allocation within MNEs based on Key DEMPE Functions: Selected Issues and Interaction with Pillar One and Pillar Two of the Digital Debate. International Tax Studies, 3(6). Retrieved from: https://www.ibfd.org/shop/journal/intangible-related-profit-allocationwithin-mnes-based-key-dempe-functions-selected
Chand, V., Turina, A., & Ballivet, L. (2020). Profit Allocation within MNEs in Light of the Ongoing Digital Debate on Pillar I – A “2020 Compromise”?: From Using A Facts and Circumstances Analysis or Allocation Keys to Predetermined Allocation Approaches. World Tax J., 12, 565–619. Drobnik, P. (2018). The Attribution of Profits to a Dependent Agent PE – If the Dependent Agent Is a Commissionaire (Wholly Owned Subsidiary) of the Principal. International Transfer Pricing Journal, 25(3).
Dziurdź, K., (2014). Attribution of Functions and Profits to a Dependent Agent PE: Different Arm’s Length Principles under Articles 7(2) and 9? World Tax Journal, 6(2).
Gramm, C. (2020). Profit Attribution to a Fixed Place Permanent Establishment: Case Study – Showroom. International Transfer Pricing Journal, 27(2).
Martin, C., Chand, V. & Burkhalter, N. (2020). Arm’s Length Principle from a Swiss Perspective: Profit Allocation to Inbound and Outbound Permanent Establishments. Intertax,50(1).
Ruberti, R. (2022). Applying the AOA to a PE That Performs Services: A Case Study on the Balance Sheet and the Profit and Loss Account of the Branch. International Transfer Pricing Journal, 29(3).
National/Regional legislation
ATAF (2022). ATAF Suggested Approach to Drafting Digital Services Tax Legislation.
IN: India Ministry of Finance, Public Consultation on the proposal for the amendment of rules for profit attribution to permanent establishments. Retrieved from: https://www.indianembassyusa.gov.in/pdf/taxcorner/Public_consultation_apr18.pdf
NL: Decree on the Attribution of Profits to Permanent Establishments (Besluit winstallocatie vaste inrichtingen 2022 – BWBR0046838), (2022, 2 July).
UK: Draft Legislation on multinational top-up tax (2022). Retrieved from: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1092586/Draft_legislation.pdf
UK: HMRC, INTM267100 – Non-residents trading in the
UK: profits of the PE. Retrieved from: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm267100
UK: HMRC, INTM267050 – Non-residents trading in the
UK: profits of the PE: Attribution – method of calculation of chargeable profits (2022 update). Retrieved from: https://www.gov.uk/hmrc-internal-manuals/international-manual/intm267050
Other sources
Tax Foundation (2021). Corporate Tax Rates around the World. Retrieved from: https://taxfoundation.org/publications/corporate-tax-rates-around-theworld/#Highest
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Published
2023-08-31
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- 2024-03-22 (2)
- 2023-08-31 (1)
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[1]
Chand, V. et al. 2023. Permanent Establishments under the Pillars: The Relevance of a Transfer Pricing Analysis. Analysis and Studies CASP. 15, 1 (Aug. 2023), 31–42. DOI:https://doi.org/10.33119/ASCASP.2023.1.3.
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