The Approach Of The Attribution Of Profits To Permanent Establishments In OECD And The Uses For Reference On Tax Administration Of Associated Enterprises In China

It is mainly discussed that the preferred tax interpretation and application of Article 7 in"Report on The Attribution of Profits to Permanent Establishments"which is published on 17 July 2008 .The PartⅠof this Report provides general background and further information about the authorised OECD approach in relation to the first five paragraphs of Article 7. It includes six sections: Section B provides a summary of the basic principles of the authorised OECD approach. Section C analyses Article 7, paragraph 1, which provides the central rule concerning the allocation of taxing rights over the business profits of an enterprise between the country in which the PE is situated (the"host country") and the country of residence of the enterprise (the"home country"). Section D analyses Article 7, paragraph 2, which provides the central rule concerning the attribution of the business profits of an enterprise to a PE and the statement of the arm′s length principle in the context of PEs .Section E to G examine Article 7, paragraph 3 to 5.The Report which has substantial content is one of the most important documents on the international taxation. This text interprets on some significant issues. Based on the interpretation and the analysis, it is states in the article that it is of benefit to overcome the difficulties about the associated enterprises and transactions for tax purposes that refers to the authorised OECD approach and its basic premise. Through the analysis of the factors of the functions, risks and assets, etc., it can improve the transfer pricing methods which are applied in our current tax administration. And it is proposed in the article that the approaches and the contents of the analysis should be referred to the relevant legislation by means of the loose leaves, so that they can be well applied authoritatively and flexibly.The full text altogether divides into three parts:The first part generally introduces the approach of the attribution of profits to permanent establishments in OECD. Firstly it compares the"functionally separate entity approach"to the"relevant business activity approach". Secondly it introduces the reasons why the functional and factual analysis is adopted in a PE context. Thirdly it talks about the two steps of the attribution of profits to the PEs.The second part mainly discusses the factors that influence the attribution of profits to the PEs. It includes the functions which the PE performs, the risks which the PE assumes, the assets (tangibles and intangibles) which the PE uses, the rights and obligations which the PE has, the capital which the PE acquires, the recognition of"dealings"which the PE deals with other parts of the enterprise that it belongs to, and the documents which the PE should prepare for the tax administration.The last part is about the uses for reference on tax administration of associated enterprises in our country. It is helpful to use the functional and factual analysis to recognize the associated relations and the associated transactions, helpful to adjust for tax purpose with the associated transactions. It may improve the uses of the traditional methods of transfer pricing in practice, through the analysis of the factors which influence the attribution of profits. It is useful to add the loose leaves in the laws and regulations relating to the taxation in our country.