CIOT submission on the OECD Discussion Draft of February 2001, sent on 3 July 2001. This paper sets out the comments of the Chartered Institute of Taxation on the paper issued by the OECD Committee on Fiscal Affairs in February 2001. Our comments are confined mainly to Part I of the paper.
We agree with the working hypothesis of the document to adopt the “functionally separate entity” approach to determining the profits attributable to a permanent establishment (paragraph 27 of Part I).
We also agree that a strict application of this hypothesis to a bank PE which has the same credit rating as the enterprise of which it is a part regardless of its notional credit rating as a deemed separate entity would produce an artificial result and therefore a different approach is required for banks, as demonstrated in Part II of the paper.
In general, we support the approach of identifying which parts of an enterprise use assets and assume risk in respect of them (paragraphs 53-58 of Part I).
As regards internal services, there is a case for saying that certain activities performed by a head office should be treated as equivalent to services provided by a parent company as shareholder of a subsidiary, the cost of which therefore is not properly attributable to the PE’s business (paragraph 126).
As regards the allocation of free capital (paragraphs 137-154) our view is that the thin capitalisation rules should operate to restrict the amount of attributable debt, but that the PE should not be regarded artificially as being more highly capitalised than the entity as a whole.
With regard to paragraph 161, we agree that no “interest” should be imputed on internal movements of funds in a non-financial institution.
We agree with the document’s approach to the interpretation of Article 7 paragraphs 3, 4 and 5 of the OECD Model Tax Convention (paragraphs 168 – 183).
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