9.

42 Permanent Establishments

to carry out as the level of documentation of arrangements between PE

and head office may not be the same as that between two separate (but
related) companies. In essence, the more risks that are managed by the
PE, the higher the share of the profit of the enterprise to be attributed to
the PE. The 2008 Report looks for the place of active decision taking,
rather than mere ‘rubber stamping’ of decisions taken elsewhere in the
enterprise. For instance, for trade intangibles to be attributed to a PE, it
would be expected that personnel based at the PE would be responsible
for:2
—— designing the test specifications and processes within which the
research is conducted;
—— reviewing and evaluating the data produced by the tests; and
—— setting the ‘stage posts’ at which decisions to quit or proceed fur-
ther with the project are taken. Note that there is a distinction made
between enterprises in the financial sector and other enterprises.
No separation of asset management and risk assumption functions
is required for financial ­sector enterprises because it is considered
highly likely that these ­functions would be carried out by the same
people.
1 ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ (1994
1995 and 2010).
2 OECD 2008, para 119.

Step 2: allocating profits to the PE

9.42 Taking into account the picture built up in Step 1, the profits of the
PE must then be established. This is relatively simple in respect of dealing
between the PE and independent third parties, but the profits from dealings with
other parts of the same enterprise will be determined by using the rules laid
down in the OECD’s Transfer Pricing Guidelines (see Chapter 13 for details
of these).
Dealings between the PE and the rest of the enterprise are compared with trans-
actions between independent enterprises. There is a difficulty in that there are
unlikely to be any transactions between the PE (which is in essence a branch)
and the rest of the enterprise in the same way that there are legally binding
transactions between companies, even those in the same group. ‘Dealings’
include physical transfers of stock, the provision of services, use of intangible
assets, use of capital assets, transfer of financial assets and so forth. The pric-
ing of the ‘dealings’ is examined using the normal transfer pricing methods –
preferably comparable uncontrolled price but if that is impossible, one of the
other methods laid down in the OECD’s Transfer Pricing Guidelines.
Two particular problems arise from the fact that the PE is not a separate legal
entity: First, the PE has no sources of finance separate from the enterprise so
it is difficult to determine the level of return on finance (eg interest payable)
which ought to be deducted from the taxable profits of the PE. Second, the

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