The Discussion Drafts address one of the most complex areas in international taxation, i.e. how to determine the taxing rights of a country where an enterprise that is resident of another country undertakes business through a permanent establishment (« a PE ») rather than through a subsidiary.

As a first step in its consultation process, the OECD has developed a working hypothesis as to the preferred approach for attributing profits to a PE. In doing so, the OECD examined the feasibility of treating a PE as a hypothetical distinct and separate enterprise and reviewed ways in which the principles of the 1995 OECD Transfer Pricing Guidelines could be applied by analogy in order to attribute profits to a PE in accordance with the « arm's length principle ». This work is of particular importance for a number of highly integrated sectors of activities, e.g. banking and other financial sector activities , where international business models involving permanent establishments are widespread.

Discussion drafts were released for public comments in February 2001in two Parts. Part I was dedicated to PEs in general, whilst Part II concentrated on PEs of banking enterprises. Because of the importance and of the variety of comments received, in April 2002 the OECD held a consultation with business to discuss the comments on the Discussion Drafts.

As the main focus of interest proved to be on the banking sector, it was decided following the public consultation to concentrate first on revising Part II and on issuing a new document (Part III) ,which covers the related topic of the global trading of financial instruments. The OECD is still working on releasing a revised version of Part I, focusing on issues related to intangible property and capital attribution/funding.

We are now (4 March) in a position to release a revised version of Part II and a new Part III. The revised version of Part II (Banks) (also available in French) tries to address the major concerns expressed by the commentators on the earlier version and focuses on issues such as the booking of loans, attribution of "free" capital and the recognition of dealings. A more detailed response to some of the business comments can be found in Annex 2.

Part III (also available in French) is dedicated to the global trading of financial instruments. The starting point for this analysis is naturally the 1998 OECD document « The taxation of Global trading of Financial Instruments », which has been updated to take into consideration changes both in the global financial markets and in thinking about the taxation of PE's. The draft also discusses transfer pricing issues arising where global trading is carried on between associated enterprises. Therefore, Part III contains new developments for example on the role of capital, the transfer of risks and dependent agents.

We invite comments on the two Discussion Drafts to be sent to the OECD Secretariat ( charlotte.todd@oecd.org and copied to john.neighbour@oecd.org) by 30 June 2003.