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The Profit Split Method: Insights from BEPS Follow-Ups
This article is the third part of a three-part contribution that attempts to provide the historical development, status quo, and future direction of the profit split method, especially by taking into account the OECD/G20 BEPS project. This article ponders the role of the profit split method in the future BEPS work, namely the application within the Report on the Attribution of Profits to Permanent Establishments and the possibility of being a toolkit for developing countries.
1. Work on the Authorized OECD Approach
The 2008 Report on the Attribution of Profits to Permanent Establishments for the first time introduced the AOA (the so-called “Authorized OECD Approach”) for attributing profits to a permanent establishment (hereinafter “PE”). The 2010 Report embeds the latest version of AOA, which comprises a two-step framework:
The first step is to hypothesize the PE with legal personality as if it were a separate and independent entity. As a result, it needs to allocate the free capital to the PE first, and then attribute debts only if there is still room left to do so. The reason behind is that a PE with hypothesized legal personality should possess a capital structure to support its f...