A recent OECD discussion draft illustrates how profits could be attributed to a dependent agent permanent establishment (DAPE), created through associated service entities or a fixed place of business, like a warehouse. This follows the OECD’s work strengthening the PE definition as part of its Base Erosion and Profit Shifting (BEPS) project. The following examples are presented:
Example 1: A foreign producer (Prima) sells its product using a local sales agent (Sellco). While Sellco is a DAPE for Prima, no profit is attributed to the PE as the head office (Prima) undertakes the significant people functions (SPFs) in relation to sales, marketing, inventory, and receivables.
Example 2 varies example 1 by having Sellco undertake SPFs in relation to inventory and receivables. The DAPE is assumed to have economic ownership of the inventory. The profit attribution is a return for funding the inventory.
Example 3 replaces Sellco with an employee performing the same functions. The attributable profits are those above the salary paid to the employee.
Example 4: Both Prima and Sellco perform credit risk functions. The profit split between head office and the DAPE is based on sharing of credit risks.
Example 5 involves attribution of profits to a warehouse PE, where this activity is (i) the core business, (ii) an internal function, and (iii) internal but run by a third party. The attributable profits are commensurate with the economic ownership of the warehouse and any routine functions performed.
The discussion draft's key conclusions/discussion points:
The OECD is yet to endorse the discussion draft. It is illustrative to garner feedback, rather than guidance, at this stage.