The attribution of profits to permanent establishments: testing the interaction of domestic taxation laws and tax treaties in practice

This material was first published by Sweet and Maxwell Limited in the British Tax Review as Celeste M Black, 'The Attribution of Profits to Permanent Establishments: Testing the Interaction of Domestic Taxation Laws and Tax Treaties in Practice' (2017) 2 British Tax Review 172 and is reproduced by agreement with the Publishers. The adoption of the "authorised OECD approach" to the attribution of profits to a permanent establishment (PE) under the business profits article of the OECD Model Tax Convention on Income and on Capital has failed to produce uniformity given the persistence of the alternative relevant business activity approach. Through the analysis of a hypothetical case study involving asset dealings between a foreign PE and the enterprise head office, this article examines the interaction of the domestic law and treaty practice of two jurisdictions that are representative of different approaches to PE profit attribution, the UK and Australia. This study of intra-enterprise dealings involving inventory, depreciating assets and capital assets reveals the potential for mismatches in taxation outcomes, both overlaps and gaps, even in relation to these relatively straightforward transactions.