Navigating Permanent Establishments in International Tax Law

Our latest episode of “GILTI Conscience” features an in-depth discussion on the complexities of profit attribution to permanent establishments (PEs) under international tax law. Skadden’s Nate Carden, David Farhat and Stefane Victor are joined by EY managing director Mike McDonald and Mary Bennett, former head of tax treaties and transfer pricing at the OECD. The conversation explores a wealth of topics, including practical aspects of the Authorized OECD Approach (AOA), challenges of attributing profits to PEs and the ongoing debates about the appropriate allocation of profits in cross-border transactions.

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When goods, services and rights go back and forth within a company, how do you attribute profit or loss to one part of the company versus another? Former OECD head of tax treaties and transfer pricing Mary Bennett and EY’s Mike McDonald join this episode of “GILTI Conscience” for a detailed discussion on the attribution of profits to permanent establishments. Skadden tax partners David Farhat and Nate Carden and associate Stefane Victor host the discussion, which explores, among other topics, critical differences between Articles 7 and 9 of the OECD Model Tax Convention and why these distinctions matter for multinational businesses.

Top takeaways from this episode

★ Origins of the AOA: Mary and Mike discuss the historical development of the OECD guidelines on profit attribution, particularly focusing on the financial services industry. They explain how the U.S. and U.K. were instrumental in driving the initial efforts to address profit attribution in the banking sector, leading to the creation of the Authorized OECD Approach (AOA).

★ Article 7 Versus Article 9: While Article 7 borrows insights from Article 9, it is crucial to understand that they are not interchangeable and have distinct applications.

★ Practical Implications and Challenges: The episode addresses the practical challenges faced by companies in managing permanent establishments and transfer pricing risks. They discuss the importance of internal documentation and the need for companies to proactively characterize their situations to align with OECD guidelines.