Cost Allocation to a Saudi Permanent Establishment

Where an Austrian enterprise carries on its business through a permanent establishment in Saudi Arabia, the attribution of profits to the permanent establishment has to be determined in accordance with Article 7 of the Double Taxation Convention between Austria and Saudi Arabia. Pursuant to paragraph 2 of Article 7, the permanent establishment has to be treated, for this very purpose of profit attribution, as a separate entity, which implies that the business relations between the head office and the permanent establishment have to be established at arm’s length. This requires the application of an appropriate transfer pricing methodology.

However, under Article 7 such a (fictitious) separate entity approach is applied with certain restrictions and exceptions. Paragraph 5 of the Article provides that instead of using transfer pricing methodology, a mere cost allocation method can be employed if the head office has incurred payments for the purpose of its permanent establishment. This cost allocation concept of paragraph 5 of Article 7 of the tax treaty with Saudi Arabia is based on the respective provision in Article 7 para. 3 of the UN Model Tax Convention, which in turn is based i...