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Attribution of Profits to Permanent Establishments in the OECD-View

Hausarbeit 2012 31 Seiten

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Table of Content

1 Introduction

2 Definition of the Permanent Establishment
2.1 Definition according to Section 12 of the German Fiscal Code
2.2 Definition According to Article 5 OECD Model Tax Convention
2.3 Permanent Establishment in the Double taxation agreement beween Germany and Great Britain

3 The Authorised OECD Approach
3.1 The two step analysis for the Permanent Establishment a Hypothetical Independent Enterprise
3.1.1 Analysis of the functions
3.1.2 Attribution of Assets, Risks and Capital under the OECD Approach
3.1.2.1 Attribution of Assets
3.1.2.2 Attribution of Risks
3.1.2.3 Attribution of Capital
3.1.3 Determination of the profit of the hypothetical independent Permanent Establishment (Selbstständigkeitsfiktion) as the second step
3.1.4 Summary of the two Step Analysis
3.2 The Tax Balance Sheet for the Permanent Establishment
3.2.1 Tangible Assets
3.2.2 Intangible Assets
3.3 Transfer Prices between the Mother Company and the Permanent Establishment
3.3.1 Transfer Price Methods
3.3.1.1 Comparable Uncontrolled Price Method
3.3.1.2 Resale Price Method
3.3.1.3 Cost-Plus Method
3.3.1.4 Transactional Net Margin Method
3.3.1.5 Transactional Profit Split Method
3.3.2 Comparability analysis
3.4 Special Regulations for PE’s of Banks
3.5 Special Regulations for the Trading of Financial Instruments
3.6 Special Regulations for PE’s of Insurance Companies

4 Attribution of profits to permanent establishments In The OECD model tax convention
4.1 Article 7 of the OECD Model tax convention
4.2 Profit allocation according to Article 7 of the OECD model tax convention

5 The Authorised OECD Approach in the GErman Law
5.1 Status Qou of the Profit and Asset Determination
5.2 Change of the Foreign Relation Tax Act

6 Summary

7 list of literature

8 list of abbreviations

1 Introduction

In my scientific writing I will write about the attribution of profits to Permanent Establishments in accordance with the updated OECD Model Tax Convention and the OECD Report on the attribution of profits to Permanent Establishments in the Versions of 2008 and 2010.

First I will start with the definition of the Permanent Establishment in the German law and according to the OECD Model Tax Convention.

Afterwards I will continue with the allocation of Profits to the Permanent Establishment by the two step analysis and the different transfer price methods. Additionally I will write about the hypothetical independent enterprises and special regulations for Banks, the trading of financial instruments and Insurance companies.

2 Definition of the Permanent Establishment

The term of the Permanent Establishment is one very important term in the Tax Law, but never the less there is no clear single definition. Therefore there is a basic definition in the Section 12 of the German Fiscal Code and other definition in the German Income Tax Law and the German Value Added Tax Law and also in the Article 5 of the OECD-Model Agreement.

According to the Sections 49 and 50 of the German Income Tax Act there is a limited tax liability for a permanent Establishment and the negative income of a permanent establishment is treated by Section 2a paragraph 1 and 2 of the German Income Tax Act. Another Important Section for the Permanent Establishment is Section 6b of the German Income Tax Act.

The treatment in the meaning of the trade tax is mentioned in the Sections 2, 8 No. 7, 9 Nos. 3, 28 and 30 of the German Trade Tax Act (GewStG).

2.1 Definition according to Section 12 of the German Fiscal Code

According to Section 12 of the German Fiscal Code a Permanent Establishment is a static place where a business is establishment. Furthermore they have a catalogue which they consider as a permanent establishment the following places and objects which are used for more than six month:

- “Place of Business Management
- Branches
- Offices
- Factories or workshops
- Warehouses
- Purchasing offices or sale outlets
- Mines, quarries or other stationary, moving or floating facilities for the exploitation of natural resources
- Building sites or constructions or installation projects, including those moving or floating, where

- an individual building site or construction or installation project, or
- one of several coexistent building sites or constructions or installation projects, or
- A number of immediately successive building sites or constructions or installation projects[1] ”.

2.2 Definition According to Article 5 OECD Model Tax Convention

A Permanent Establishment in the meaning of Article 5 of the OECD Model Tax Convention is a stationary place where a business is partly or completely carried on. In the Model Tax Convention there is also a Catalogue of terms which are considered as a Permanent Establishment. The Catalogue contains the following items:

- “Place of management
- Branch
- Office
- Factory
- Workshop
- Mine, an oil or gas well, a quarry or any other place of extraction of natural resources”[2]

A construction side is only considered as a Permanent Establishment if the work exceeds a period of twelve month.

Additionally the Article 5 paragraph 4 of the OECD Model Tax Convention contains an additional negative catalogue of terms which are not treated as a permanent establishment:

- “The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery
- The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise
- The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise
- The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character
- The maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.[3]

The Model Tax Convention provides additionally that here is no Permanent Establishment if the business is carried through a broker or an agent.

2.3 Permanent Establishment in the Double taxation agreement beween Germany and Great Britain

The term Permanent Establishment is regulated in Article 5 of the Double Taxation Agreement between Germany and Great Britain.[4]

In the first paragraph is mentioned that a Permanent Establishment is a “fixed place of business through which the business of an enterprise is wholly or partly carried on”. According to the Double Taxation Agreement between Germany and Great Britain the following items can be regarded as a Permanent Establishment[5]:

- “Place of management
- Branch
- Office
- Factory
- Workshop
- A mine, oil or gas well, a quarry or any other place of extraction of natural resources”

In paragraph three of this Double Taxation Agreement is a special condition for a Permanent Establishment of building and construction sides, this means that a Permanent Establishment is only given when the building and construction side is run for a period which is longer than twelve month[6].

The Double Taxation Agreement between Germany and Great Britain contains also negative conditions this means when the following conditions are fulfilled then a Permanent Establishment is not given[7]:

- “A) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise
- B) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery
- C) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise
- D) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise
- E) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character
- F) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub- paragraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character”

The conditions of a Permanent Establishment are also not fulfilled when the business is performed by a broker, general commission agent or any other independent agents[8].

If you compare the DTA between Germany and Great Britain with the OECD Model Tax Convention, then you notice that the mentioned items are the same.

3 The Authorised OECD Approach

3.1 The two step analysis for the Permanent Establishment a Hypothetical Independent Enterprise

3.1.1 Analysis of the functions

The analysis of the functions of the Company which is mentioned in the OECD Approach is similar to the comparability analysis which is mentioned in the Article 7[9] of the Model Tax Convention. For the analysis it must be assumed that the Permanent Establishment is an independent entity which performs its own functions and bears its own risks nevertheless it is in reality no legal separate Enterprise[10].

Therefore the functional analysis should be used if it justifies the application of the arm’s length principle which is mentioned in Article 9[11] of the OECD Model Tax Convention.

For the analysis we must keep in mind that no company will be similar to another company even when the companies are in the same sector or perform the same activities. Therefore the Authorised OECD Approach contains special Categories for bank loans (Part II), financial products of enterprises engaged in global trading (Part III) and in Part IV the assets representing the investment of reserves and surpluses derived from insurance business. In these special categories they use the term key entrepreneurial risk-taking function[12] (KERT function) based on the proportion between the risk and the financial assets.

To continue the analysis of your hypothetical independent enterprise you must search for a single enterprise which does not belong to a group. It must also have the same or at least similar functions, assets, risks and economically characteristics[13].

3.1.2 Attribution of Assets, Risks and Capital under the OECD Approach

3.1.2.1 Attribution of Assets

For the attribution of the assets to the fictional independent Permanent Establishment we must consider that the Permanent Establishment is the economical owner of the assets[14]. Therefore we must find out which assets are significant for the performance of the functions of the Permanent Establishment and this depends also on the type of company[15] and the type of assets.

For financial companies for example Banks the place of management and creation of the assets and the risks are crucial for determination of the assets which are attributed to the Permanent Establishment[16].

3.1.2.2 Attribution of Risks

To attribute the right risk to the Permanent Establishment you have must use the information’s which you get from functional analysis. Therefore you must assume an amount of risk which is attributable to the activities of the fictive individual Permanent Establishment. The attribution of the risks is also mentioned in Article 7 of the OECD Model Tax Convention. This means that the attributed risk must be equivalent to the risk which a real independent enterprise would have to carry.

Additionally you have also considered different risks based on the type of Company. For some companies you have to consider the risks of losses through a loss in the value of assets[17] or through decision making processes[18]. Another risk which you have also to consider would be the risk which is created by the inventory[19].

This leads to the conclusion that the attribution of the risk is one of the most important parts in the attribution process.

3.1.2.3 Attribution of Capital

To support the functions which the fictive Permanent Establishment performs there must be an amount of free capital which is at arm’s length. This amount must be at least in an amount which an economical independent needs to perform its functions, to own the assets and to support the risks[20].

The authorised OECD Approach allows different method for determining the arm’s length value. Based on these fact there is no single arm’s length amount when you compare the outcomes from the different methods[21].

3.1.3 Determination of the profit of the hypothetical independent Permanent Establishment (Selbstständigkeitsfiktion) as the second step

Basis for the assignment of the profit to the Permanent Establishment is the Authorised OECD Approach. This means that the Permanent Establishment will be regarded as an independent enterprise which owns own assets and bears own risks.

For the attribution of the profit to the Permanent Establishment the arm’s length principle will be applied. That means that the profit will be allocated to the Permanent Establishment which they would have generated as it would have as an independent enterprise[22].

Assets have to be assigned to the company respectively the Permanent Establishment in which they are used for the performance of the activities. For the assignment the economical owner must be determined therefore the functional analysis will be applied for the identification of the “significant people functions”[23].

Agreements between the parent company and the Permanent Establishment can be seen as contracts between independent enterprises, when the OECD Guidelines will be applied. The OECD use the term “Dealings” for these agreements. These agreements must also compare with contracts between independ enterprises[24]. But Dealings arise not from every transaction between the parent company and the Permanent Establishment rather special conditions must be fulfilled[25].

For the profit allocation to the Permanent Establishment the right transfer pricing method for determining the arm’s length range should be selected. The different methods for determining the arm’s length range are also mentioned in the OECD transfer pricing guidelines[26].

3.1.4 Summary of the two Step Analysis

To start the analysis for determine the right amount which should be allocated to the Permanent Establishment you have to calculate the profit or losses which are generated from inside[27] and outside[28] activities.

The first step of the analysis is the functional and factual analysis which provides among others the following Information’s. It identifies the significant functions, the risks, capital and assets which are attributable to the Permanent Establishment[29].

In the second step the arm’s length range will be determined. For the determination the comparability regulations of the OECD transfer pricing guidelines will be used. To determine the right amount the method suitable should be selected[30].

In the end the functional and factual analysis is the basis to have the view that the Permanent Establishment is an independent enterprise which has its own risk and performs its own activities[31]. Additionally it is important also to identify the functions which are not performed by the Permanent Establishment to calculate the right attributable amount[32].

3.2 The Tax Balance Sheet for the Permanent Establishment

3.2.1 Tangible Assets

To record the tangible assets in the right way in the balance sheet you have first to identify the assets which are used by the Permanent Establishment and also the way how they are used (joint, sole, license agreement, cost contribution agreement)[33]. If the Permanent Establishment is the economical owner due to the functional and factual analysis then there has to be checked if the risk is also by the Permanent Establishment.

Nevertheless there are different views of experts which leaves a scope for attribution the assets to the Permanent Establishment only due to the economical ownership or the place of use[34].

If the Permanent Establishment has the right to record the asset in their balance sheet then it has also the right to record the depreciation, the interest paid for a loan or in the case of leasing they have the right to record the rent[35].

3.2.2 Intangible Assets

For the Attribution of the Intangible assets similar regulations as for tangible assets will be applied even when the intangible assets could have different forms for example an intangible asset could be the company name or a patent. Therefore it has to be distinguished between intangible assets which are developed by the enterprise and intangible assets which are bought from another company or person. The intangible assets should be recorded in accordance with the “principle of grounds”[36]

In the case of a contractual development of the intangible asset, the Permanent Establishment is not allowed to record the intangible asset[37] but they are allowed to record losses which might occur, when the development of the intangible asset is not successful[38].

[...]


[1] Citation of Section 12 of the German Fiscal Code

[2] Citation of Article 5 of the OECD Model Tax Convention

[3] Citation of Article 5 of the OECD Model Tax Convention

[4] DTA between Germany and Great Britain can be seen as an example for different DTA’s

[5] Paragraph 2 of the DTA between Germany and Great Britain

[6] Compare DTA Between Germany and India: Period for more than 6 Month; DTA between Germany and Malaysia: Period for more than 9 Month; DTA between Germany and Singapore: Period for more than 6 Month

[7] DTA between Germany and Great Britain, Article 5 II

[8] DTA between Germany and Great Britain, Article 5 VI

[9] Authorised OECD Approach 2010 B-3 i Margin No. 13

[10] Authorised OECD Approach 2010 B-3 i Margin No. 13

[11] Authorised OECD Approach 2010 B-3 i Margin No. 15

[12] Authorised OECD Approach 2010 B-3 i Margin No. 16

[13] Authorised OECD Approach 2010 B-3 i Margin No. 17

[14] Authorised OECD Approach 2010 B-3 ii Margin No. 18

[15] Authorised OECD Approach 2010 B-3 ii Margin No. 19

[16] Authorised OECD Approach 2010 B-3 ii Margin No. 20

[17] Authorised OECD Approach 2010 B-3 iii Margin No. 22

[18] Authorised OECD Approach 2010 B-3 iii Margin No. 22

[19] Authorised OECD Approach 2010 B-3 iii Margin No. 24

[20] Authorised OECD Approach 2010 B-3 iv Margin No. 28

[21] Authorised OECD Approach 2010 B-3 iv Margin No. 31

[22] Authorised OECD Approach 2008 Part 1 Margin No. 10

[23] Authorised OECD Approach 2008 Part 1 Margin No. 103

[24] Authorised OECD Approach 2008 Part 1 Margin No. 88

[25] Authorised OECD Approach 2008 Part 1 Margin No. 210

[26] Authorised OECD Approach 2010 B-4 Margin No. 41

[27] Trade between the Permanent Establishment and an affiliated Company

[28] Trade between the Permanent Establishment and an Independent Company

[29] Authorised OECD Approach 2010 B-5 Margin No. 44

[30] Authorised OECD Approach 2010 B-5 Margin No. 44

[31] Authorised OECD Approach 2010 B-5 Margin No. 45

[32] Authorised OECD Approach 2010 B-5 Margin No. 45

[33] Authorised OECD Approach 2010 D2 Margin No. 72

[34] Authorised OECD Approach 2010 D2 Margin No. 75

[35] Authorised OECD Approach 2010 D2 Margin No. 75

[36] Authorised OECD Approach 2010 D2 Margin No. 80

[37] Authorised OECD Approach 2010 D2 Margin No. 84

[38] Authorised OECD Approach 2010 D2 Margin No. 89

Details

Seiten
31
Jahr
2012
ISBN (eBook)
9783656268659
ISBN (Buch)
9783656269250
Dateigröße
779 KB
Sprache
Englisch
Katalognummer
v200756
Institution / Hochschule
Hochschule Rhein-Waal
Note
Schlagworte
Permanent Establishment Betriebsstätte OECD Profit Gewinn Transferprices Transferpreise

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Titel: Attribution of Profits to Permanent Establishments in the OECD-View