Tax Cooperation Policy Brief 3, August 2018
Interaction of Transfer Pricing & Profit Attribution: Conceptual and Policy Issues for Developing Countries
Till 2010, model tax conventions treated profit attribution to permanent establishments and transfer pricing under different articles, and profit attribution under Article 7 allowed sales to be taken into account both in the direct accounting method as well as the indirect apportionment method. However, the revised Article 7 in the 2010 update of the OECD Convention approximated profit attribution with transfer pricing and omitted the option of apportionment, thereby undermining sales and contributions made by market jurisdiction to business profits. When a tax treaty retains Article 7 based on the UN Convention or the earlier OECD Convention, Contracting States can take sales into account and also opt for apportionment. Developing countries need to fully understand these implications of Article 7 in their tax treaties, and opt for informed choices for transfer pricing and profit attribution to permanent establishments, including apportionment that takes sales into account.
This brief is part of the South Centre’s policy brief series focusing on tax policies and the experiences in international tax cooperation of developing countries.
Efforts to reform international cooperation in tax matters are exhibiting a distinct acceleration. The direction of change must recognize and incorporate innovations in developing country policies and approaches, otherwise the outcomes will obstruct practical paths to development.
The policy brief series is intended as a tool to assist in further dialogue on needed reforms.
*** The views contained in the policy briefs are personal to the authors and do not represent the institutional views of the South Centre or its Member States.
Download the tax cooperation policy brief below :
This article was tagged: Profit Attribution, Tax Cooperation, Tax Cooperation Policy Briefs, Tax Policy, Transfer Pricing