Mastering U.S. Permanent Establishment Tax Under New OECD Guidance vs. General Tax Treaty Approach

An often complex challenge for U.S. corporate tax advisers of foreign companies is the allocation of U.S. taxable income arising from a “permanent establishment” (PE) in the United States. The critical first step in calculating such income and resulting U.S. tax obligations is determining what standards apply in deciding whether a foreign corporation has a PE that would create a taxable presence. U.S. domestic tax law often conflicts with specific tax treaty provisions, creating both risk and opportunity for corporate tax advisers, and recent OECD guidance likely will create further complications.

Foreign-based multinational companies conducting business in the United States face varied tax treatment of their income and activities, depending on whether the corporation’s country of residence has an income tax treaty with the United States. All U.S. bilateral income tax treaties contain a “permanent establishment” provision, which exempts a nonresident corporation’s business profits from taxation unless the profits are attributable to a permanent establishment within the host country. Depending on the tax rates in the treaty countries, creating a PE in the United States can either reduce or increase a foreign-based multinational’s foreign tax expense, and may be a useful planning tool.

The recent guidance from OECD would further complicates the process of calculating profits attributable to a PE. Under the OECD “authorized approach,” multinationals will be required to treat business units with a PE as “functionally separate entities” which will use arm’s length transfer pricing standards to calculate business profits subject to host country tax. Tax advisers to foreign-based multinationals need to have a working knowledge of the risks and opportunities involved with the OECD permanent establishment approach.

Our experienced panel will provide a practical and thorough approach to the evolving permanent establishment rules for foreign-based multinational companies with U.S. branch operations to minimize costly withholding, reporting requirements and significant tax and penalties.

1. Effectively connected income vs. permanent establishment
2. Business profits attributable to a permanent establishment under U.S. Treaties
3. Authorized OECD approach
   1. Transfer-pricing guidelines
   2. Comparison to the 2016 U.S. Model Treaty
   3. Permanent establishment treated as “functionally separate entity”
4. Forgoing treaty benefits
   1. A treaty’s reduction (possibly to 0%) of the Code’s standard 30% withholding tax on dividends, interest and royalties
   2. Future impact of forgoing treaty benefits
   3. Consistency principle

The panel will review these and other key issues:

• What factors should tax advisers to multinationals consider when deciding what standard to use in determining whether to avail the branch of treaty benefits under a permanent establishment analysis?
• What are the possible advantages of the new OECD “authorized approach” to multinationals with U.S.-based permanent establishment branches
• When should a multinational elect to forego treaty benefits?

Learning Objectives

After completing this course, you will be able to:

• Identify the benefits and burdens of new OECD “autorized approach” vs. existing U.S. treaty approach in calculating business profits directly attributable to a U.S. branch deemed to have a PE in the United States
• Recognize when a U.S. branch of a foreign-domiciled multinational should consider foregoing tax treaty benefits
• Ascertain when the OECD approach can lessen U.S. tax exposure through development of an integrated transfer pricing model
• Determine filing requirements under various approaches to calculating and reporting business profits attributable to a U.S. permanent establishment.

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules; supervisory authority over other preparers/accountants. Specific knowledge and understanding of the authorized Organisation for Economic Co-operation and Development (OECD) approach, a specific set of income attribution rules contained in the 2006 and 2016 United States Model Income Tax Conventions and recently enacted U.S. treaties.

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).