OECD Authorized OECD Approach Permanent Establishment Profit Attribution Framework
The Authorized OECD Approach attributes branch profits by treating permanent establishments as separate enterprises through functional and economic analysis.
Branch Taxation
Meaning
A fiscal regime applies corporate income tax directly to the profits of a permanent establishment of a foreign company. Under branch taxation, the home country is not the only authority that taxes the branch profits, as the host country levies tax on income generated within its borders. This regime treats the local operations of the foreign corporation as a taxable entity, separate from the parent company.
It does not apply to the activities of legally independent subsidiaries.
Rate Parity
Tax jurisdictions often seek to equalize the tax burden between branch offices and local subsidiaries. This policy is implemented through additional levies such as branch profits tax on deemed distributions to the head office.
Fiscal Sovereignty
Host states assert their right to tax economic activities conducted within their territory by foreign corporations. This exercise of jurisdiction prevents foreign enterprises from operating locally with a competitive tax advantage over domestic businesses. The resulting tax revenue contributes to the public infrastructure and services that support the business operations.
This maintains the domestic tax base.
Reporting Duty
Foreign corporations must maintain separate accounting records for their branches to enable accurate profit calculation. This requirement involves allocating head office expenses and determining the internal transfer prices of goods and services exchanged between units. If the branch accounts are inadequate, the tax authority may estimate the taxable profit using formulaic apportionment.