Canadian and US competent authorities agree to adopt the 2010 OECD Report on the Attribution of Profits to Permanent Establishments

CRA announced in late July that the Canadian and US competent authorities had agreed that Article VII of the Canada-US Income Tax Convention would be interpreted consistently with the 2012 OECD 2010 Report on the Attribution of Profits to Permanent Establishments.

In Annex B to the Fifth Protocol to the Convention, they had already agreed that the OECD Transfer Pricing Guidelines would apply for purposes of determining the profits to be attributed to a permanent establishment.  However, these guidelines, which apply to separate legal entities (e.g., parent and sub), do not address the issues as to how to allocate assets, and debt and equity capital, to permanent establishments which, in fact, do not legally have assets and capital separate from the rest of the same legal entity.

The 240 page Report addresses these questions among others.  It indicates that "economic ownership of an asset...in particular rests upon performance of the significant people functions relevant to ownership of the asset," and that "capital needed to support risks is to be attributed to a PE by reference to the risks attributed to it and not the other way around."

Neal Armstrong    Summaries of 2010 Report on the Attribution of Profits to Permanent Establishments and of CRA Notice dated 19 July 2012 under Treaties, Article 7.