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.
Force of Attraction
Meaning
A tax rule permits a country to tax all income of a foreign enterprise from sources within its territory, whether or not that income is linked to a local permanent establishment. The force of attraction rule allows the host state to tax direct sales made by the foreign head office if those goods are similar to those sold by the local branch. This principle prevents foreign companies from bypassing their local branch to reduce tax liabilities.
It does not apply under modern treaties that follow the arm’s length profit attribution standard.
Treaty Limitation
Most double taxation treaties restrict this taxing right to maintain a fair distribution of revenue between states. Modern international standards require that profits must be directly attributable to the activities of the permanent establishment to be taxable there.
Economic Consequence
The application of this principle can significantly increase the tax liability of a multinational company operating in a developing economy. It discourages direct cross-border sales by making them subject to local corporate income tax if a branch exists. Corporations must carefully structure their local operations to avoid triggering this consolidated tax exposure.
It influences corporate structuring decisions.
Tax Planning
Businesses operating in jurisdictions that use this rule often establish separate legal subsidiaries rather than branch offices. This corporate separation prevents the automatic attraction of the parent company’s direct trade profits to the local tax jurisdiction. By using independent subsidiaries, the foreign entity isolates its international trade from the local tax net.