OECD Approves New Updates On Tax

by Ulrika Lomas, Tax-News.com, Brussels

27 July 2010

The Organisation for Economic Co-operation and Development (OECD) Council have approved the 2010 versions of the OECD’s Model Tax Convention, the 1995 Transfer Pricing Guidelines and the 2008 Report on the Attribution of Profits to Permanent Establishments. The updates are the result of several years of work to improve these core OECD instruments in the area of international taxation.

The OECD’s Committee on Fiscal Affairs works on an ongoing basis to revise the Model Tax Convention and its Commentaries to address changing economic conditions. The 2010 update to the Model Tax Convention includes a new Article 7 (Business Profits), which completes the Committee’s work on the attribution of profits to permanent establishments.

It also introduces new text relating to the granting of the benefits of tax treaties with respect to the income of collective investment vehicles, the application of tax treaties to State-owned entities (including sovereign wealth funds), tax treaty issues relating to common telecommunications transactions, and the application of Article 15 (Income from Employment) to employees who work for a short duration in a foreign country.

The 2010 revision to the Transfer Pricing Guidelines is the first major revision to this document since the Guidelines were first released in 1995. It contains new, more detailed guidance on how to perform comparability analyses in practice in order to compare the conditions of transactions between associated enterprises with those of transactions between independent enterprises.

It also includes new guidance on how to select the most appropriate transfer pricing method to the circumstances of the case and on how to apply in practice two of the OECD-approved transfer pricing methods, referred to as “transactional profit methods”, namely the transactional net margin method and the transactional profit split method. This update also includes a new chapter providing detailed guidance on the transfer pricing aspects of business restructurings.

The Report on the Attribution of Profits to Permanent Establishments, approved in its original form by the OECD Council on July 17, 2008, provides guidance on the manner in which the arm’s length principle can be used in determining the profits attributable to a permanent establishment under Article 7 of the OECD Model Tax Convention.

In order to fully implement the conclusions of the 2008 Report, the Committee on Fiscal Affairs decided to draft a new version of Article 7, which now appears in the 2010 update to the Model Tax Convention. The Committee also decided to publish simultaneously with that update a modified 2010 version of the Report, which does not change the conclusions of the 2008 Report but simply deletes obsolete cross-references and aligns the Report’s wording with the text of the new Article 7 and the revised Transfer Pricing Guidelines.

Hard copies of the 2010 versions of the Model Tax Convention and the Transfer Pricing Guidelines will be available in September.

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