handbook-tb

Preventing avoidance of permanent establishment status5.5 Transfer pricing rulesUnless they are reformed or reinterpreted, transfer pricing rulesundoubtedly have a role to play regarding the avoidance of PE status,albeit a limited one. Such an objective also seems to be one of thegoals of the OECD project on BEPS. As explained above, the currentframework of transfer pricing and attribution of profits to PEs andsubsidiaries promotes, rather than prevents, the separation of economicactivities from tax bases for source countries. As is the casewith PEs, developing countries need a clear agenda with regard to theimplementation and application of the arm’s length principle that theycurrently do not have. 127 Consequently, transfer pricing rules, as theyare today, are of limited use in the context of artificial fragmentationof operations or transactions undertaken to avoid having a PE in ajurisdiction. As noted earlier, the current conventional transfer pricinganalysis can frequently be used as a shield to defend artificiallyfragmented structures, even if this result is questioned more and moreby tax administrations.Apart from the complexity of transfer pricing (and the need tohave adequate legislation and experts within the tax administration),ineffective transfer pricing analysis may explain why tax administrationshave avoided challenging business restructuring with transferpricing rules. Instead, they have resorted to the threat of PE, either asa bargaining tool to obtain more reasonable attribution of profits tolocal subsidiaries or as a device of last resort, which is relatively easierto apply than transfer pricing. This is because if substantial risks aresingled out in a jurisdiction, tax administrations presume that most ofthe benefits of the foreign company attributable to the source State arelocated in the PE and only a minor part is attributed to the head office(for example, on a cost-plus basis).However, if improved, transfer pricing rules could help a sourcecountry retain a relevant part of the tax base that might otherwisebe allocated to the residence country. Several options are being consideredand developed either by international institutions or by somedeveloping countries. As it is not the objective of the present chapter127See, for instance, IMF, “Spillovers in International Corporate Taxation,”supra note 27.401