OECD Issues Further Action 7, Action 8-10 BEPS Guidance

The OECD has released for stakeholders’ comments two new discussion drafts as part of its base erosion and profit shifting work.

The first draft builds on the OECD’s final report on BEPS Action 7 (on preventing the artificial avoidance of permanent establishment status).

The final Report on Action 7 of the BEPS Action Plan mandated the development of additional guidance on how the rules of Article 7 of the OECD Model Tax Convention would apply to PEs resulting from the changes in the Report, in particular for PEs outside the financial sector.

That Report indicated that there is also a need to take account of the results of the work on other parts of the BEPS Action Plan dealing with transfer pricing, in particular the work related to intangibles, risk and capital.

Under this mandate, the OECD has released a new discussion draft to replace the discussion draft published for comments in July 2016.

The new discussion draft sets out high-level general principles for the attribution of profits to permanent establishments in the circumstances addressed by the Report on BEPS Action 7. The OECD said countries agree that these principles are relevant and applicable in attributing profits to permanent establishments.

The discussion draft also includes examples illustrating the attribution of profits to permanent establishments arising under Article 5(5) and from the anti-fragmentation rules in Article 5(4.1) of the OECD Model Tax Convention.

The second discussion draft, which provides revised guidance on profit splits, follows on from a recommendation in Action 10 of the BEPS Action Plan on the application of transfer pricing methods, in particular the transactional profit split method, in the context of global value chains.

The revised discussion draft replaces the draft released for public comment in July 2016. Building on the existing guidance in the OECD Transfer Pricing Guidelines, as well as comments received on the July 2016 draft, the revised draft is intended to clarify the application of the transactional profit split method in particular, by identifying indicators for its use as the most appropriate transfer pricing method, and providing additional guidance on determining the profits to be split. the OECD said. It added that the revised draft also includes a number of examples illustrating these principles.

Comments on the drafts have been invited until September 15, 2017.