Global Tax Alert (News from Transfer Pricing) | 8 August 2013

US-Belgium Competent Authority Agreement signed

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Executive summary

A recent competent authority agreement (CA Agreement) between the US and Belgium clarifies that the principles of the “authorized OECD approach” or “AOA” apply for purposes of the determination of business profits attributable to permanent establishments (PEs).

Detailed discussion

In November 2006, the United States and Belgium signed the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (The Convention). Article 7 (Business Profits), Paragraph 1 of the Convention states that:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment.

In addition, article 1 of the Protocol accompanying the Convention explains that the principles of the OECD Transfer Pricing Guidelines (TP Guidelines) will apply for purposes of determining the profits attributable to a PE when required by Article 7 of the Convention.

The OECD issued the TP Guidelines in 1995 and indicated that it would analyze the application of the arm’s length principle to PEs in future work. In 2008 the OECD published a report titled “Attribution of Profits to Permanent Establishments” which was later revised in 20102 (the Report), that is after the Convention was signed.

The CA Agreement clarifies that it was the intention of both governments that the conclusions of the “Report” (the AOA) applied to Article 7 of the Convention.

Basic premises of the AOA

The Report explains that the AOA “only sets a limit on the amount of attributable profit that may be taxed in the host country of the PE.”3 On the other hand, the profits to be attributed to a PE “are the profits that the PE would have earned at arm‘s length, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise, determined by applying the Guidelines by analogy.”4

Implications

Taxpayers should be aware that the CA agreement applies to taxable years beginning on or after 1 January 2013 but taxpayers are allowed to apply the entirety of the CA agreement for all taxable years beginning after 31 December 2008.

In addition, from a strategic perspective, taxpayers should closely follow the OECD developments as they emerge from the recently approved BEPS Action Plan.5 In particular, Action item no. 7 calls for the prevention of the artificial avoidance of the PE status and will look into developing changes to the definition of PE to prevent the artificial avoidance of PE status. In addition, it is expected that this work will also address related profit attribution issues.

Endnotes

1. Agreement signed by US Competent Authority on 17 June 2013 and by the Belgian Competent Authority on 16 July 2013.

2. See OECD Report on the Attribution of Profits to Permanent Establishments (2008) and (2010).

3. See OECD Report on the Attribution of Profits to Permanent Establishments (2010), Part I, Section B-2, paragraph 9.

4. See OECD Report on the Attribution of Profits to Permanent Establishments (2010), Part I, Section B-2, paragraph 9.

5. See Action Plan on Base Erosion and Profit Shifting, OECD 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services - Transfer Pricing, Washington, DC

  • Steve Wrappe
    +1 202 327 7956
    steven.wrappe@ey.com
  • Ken Christman
    +1 202 327 8766
    kenneth.christmanjr.@ey.com
  • Carlos Mallo
    +1 202 327 5689
    carlos.mallo@ey.com

EYG no. CM319