On 3 August 2004, the OECD released a revised Part I (General) of its Report on the Attribution of Profits to PEs which took into account many of the comments provided by business. Two weeks later it shared revised versions of Part II (Banking) and Part III (Global Trading) with commentators who had contributed to the earlier consultations on these Parts. Comments were invited by 28 September 2004.
The August release attracted a number of thoughtful comments from business and a day with financial sector representatives was added to the October 2004 WP6 meeting to discuss further the comments received on Parts II and III. The Business and Industry Advisory Committee (BIAC) were also provided with an opportunity to present their view to WP6 on Part I.  The views of business were that whilst they generally endorsed the principles behind the OECD approach, there were concerns about:

• Timing Issues: It was clear that the timing originally envisaged to finalise Parts I to III was too optimistic (the idea was that these parts would be finalised by the CFA in January 2005 and released immediately thereafter)
• Transition Issues: A number of transitional issues were identified.  For example, questions were asked about the legal status of the current drafts pending finalisation of the work on changes to the OECD Model.  On the practical side, the Report developed an approach for determining which part(s) of an enterprise owns intangible developed by the enterprise, which raises issues on how to deal with an intangible developed in the past.
• Outstanding issues needing clarification:  Clarification was sought on the meaning and role of the key entrepreneurial risk taking functions in the OECD approach. Valuable factual information was provided as to what might be the key entrepreneurial risk taking factors in various business models.  Another key issue was the scope for double taxation that might arise from the Report’s conclusion that there was more than one valid approach for attributing capital to a PE. Clarification was sought on how the Report’s proposed solution to this problem – the symmetrical application of the approved approaches – would work in practice. 

A Proposed Revision of the Process

In the light of the latest business comments, WP 6 will propose to the CFA that the process for taking this work forward be reviewed. A final decision on these proposals will be made when the CFA meets at the end of January 2005.  It already seems clear, however, that the final versions of Parts I-III will NOT be released in January 2005 as originally intended.  Instead further work would be undertaken on the two elements necessary to finalise the project:

• Refining and finalising Parts I-IV (a draft of Part IV is to be released in the first half of 2005) in light of business comments, with a view to producing guidelines on the practical application of the approach.
• Revising the Commentary on Article 7 and dealing with transitional issues. A joint group of WP1 and WP6 delegates will undertake this work.

These two elements will be done simultaneously, rather than sequentially. The originally projected completion date of no later than January 2007 will not be affected by the change in the process. The intention is that a package of both Commentary changes to the OECD Model Tax Convention and supplementary guidance based on Parts I–IV would be finalised and released at the same time.

Throughout this process business will continue to be consulted, with the consultation focusing on ensuring that the text provides the necessary clarity and guidance needed to implement the principles which the OECD has developed.