handbook-tb

Adolfo Martín JimenézThe only limits to this (the disregard principle or domestic GAARs)are not very effective as they clash with the PE thresholds in Article 5of the OECD Model Convention, which operate in favour of residencecountries/separate companies within a group. 70It remains to be seen whether the OECD Action Plan on BEPSwill correct this bias in the international transfer pricing system (forexample, with more frequent use of profit splits) or, rather, whetherit will foster it in another form (for example, by relying on economicownership of intangibles). The fact is that the PE principle and thetransfer pricing rules, together, have operated in parallel and as mutuallyreinforcing tools in favour of the interest of residence countries.The OECD work on attribution of profits to PEs (mainlyaddressed in the 2008 71 and 2010 72 Reports), which has evolved since2001, has also had an impact on current developments and on the attitudesof taxpayers and tax administrations. 73 Two main features ofthe reports on attribution of profits stand out. First, because a PE ispart of an entity, there is no possibility of contractual allocation ofrisks within the same corporation, unlike between associated companies.Risks follow functions and these are located where significantpeople in a corporation carry out their job; capital and assets are to70Paragraph 9.182 in Chapter IX of the OECD Transfer Pricing Guidelines(2010) manifestly recognizes this: “Provided functions, assets and/orrisks are actually transferred, it can be commercially rational from an Article9 perspective for an MNE group to restructure in order to obtain tax savings.However, this is not relevant to whether the arm’s length principle is satisfiedat the entity level for a taxpayer affected by the restructuring.” See also, forinstance, Example (A) in paragraph 9.188 in Chapter IX of the OECD TransferPricing Guidelines.71OECD, Report on the Attribution of Profits to Permanent Establishments(Paris: OECD, 2008) (2008 Report).72OECD, 2010 Report on the Attribution of Profits to Permanent Establishments(Paris: OECD, 2010) (2010 Report).73The 2008 and 2010 Reports have an important impact on the interpretationof Article 7 of the OECD Model Convention (1963-2008 versionsand 2010-2014 versions, respectively). As a result, these Reports project theireffects upon both existing and new tax treaties.362