The goal of Action 7 is to prevent

The goal of Action 7 is to prevent the ‘‘artificial’’
avoidance of permanent establishment (PE) status.
Commissionaire arrangements are specifically in the
sights of the OECD, which considers that companies
use these arrangements to replace structures where a
local subsidiary had acted as a distributor in order to
shift profits out of the country where sales take place
without any substantive change in functions. The
work here will also involve review of ‘‘specific activity
exemptions’’ (i.e., the exceptions in Article 5(4) of
the OECD Model Tax Convention for storage and display,
preparatory and auxiliary and similar ancillary
activities). The OECD believes that multinationals are
‘‘artificially’’ fragmenting their operations among
multiple entities to qualify for these exceptions to PE
status. The Action Plan also contemplates a review of
the related profit attribution issues.
The target of this work overlaps significantly with
Action Item 1, regarding issues arising from the digital
economy. The concern involves foreign companies
doing a substantial amount of business with local customers
over the Internet, but without physical presence
that would satisfy the PE threshold and allow the
country where sales are taking place to impose its corporate
income tax. These are the same issues that
were examined in the 2002 e-commerce report.38 Providing
digital content or services over the Internet,
however, does not differ in any meaningful way from
a situation where a local country customer places an
order over the phone or through the mail for tangible
goods to be delivered from a foreign provider with no
physical presence in the country of sale; in neither
case would it be appropriate for the local country to
consider that the foreign provider had enough nexus
to impose its corporate income tax. Nonetheless, it is
not unlikely that some OECD member countries will
advocate for some sort of ‘‘economic presence’’ test,
or for a services PE clause. Finally, the reference to
doing further work on attributing profits to permanent
establishments is curious, as the OECD recently completed
(in 2010) a major multiyear project to give just
such guidance.39 It would be strange to alter that guidance
in any significant manner so quickly, but perhaps
there is pressure by some countries simply to do
something to allow for more profits to be attributed to
a PE.
The next three action items are efforts to ‘‘[a]ssure
that transfer pricing outcomes are in line with value
creation.’’ The OECD states its concern that multinationals
have been able to ‘‘misapply’’ the arm’s-length
principle to separate income from the economic activities
that produce it in order to shift it into low-tax
jurisdictions. The OECD believes this is done by
transfers of intangibles for less than full value, the
over-capitalization of low-taxed group companies,
and from contractual allocations of risk to entities in
low-tax jurisdictions in transactions that are unlikely
to occur between unrelated parties. The OECD explicitly
rejects formulary apportionment as a basis for
new transfer pricing rules, and yet indicates a willingness
to adopt rules that are inconsistent with the
arm’s-length principle.
Action 8 will address those concerns by adopting a
broad definition of intangibles, designing rules to ensure
that profits from intangibles will be allocated in
accordance with ‘‘value creation,’’ developing ‘‘special
measures’’ for hard-to-value intangibles, and updating
the existing guidance on cost contribution arrangements.
Shortly after the Action Plan was released, the
OECD also released a Revised Discussion Draft on
Transfer Pricing Aspects of Intangibles (Revised Discussion
Draft) (July 30, 2013). The Revised Discussion
Draft makes good on the promise to adopt a
broad definition of intangibles; it employs a negative
definition, essentially defining an intangible as anything
that is not a physical asset or a financial asset.40
Adopting a broad definition of intangibles, however,
is unlikely to combat any perceived transfer pricing
abuses; as the Revised Discussion Draft notes, the label
attached to a particular transaction is not important,
the key consideration is whether a transaction
conveys economic value, no matter what it is called.41
Transfer pricing is about amount, not categorization,
so whether or not a transaction is classified as a transfer
of intangibles, a transfer of tangibles, or the performance
of services should not matter for determining
the arm’s-length price of the transaction. Adopting
a broad definition of intangibles is likely to simply
lead to more disputes and double taxation, as countries
search for novel intangibles and assign high
value to them.
The Revised Discussion Draft also sheds light on
how the OECD believes it can ensure that profits from
intangibles are allocated in accordance with ‘‘value
creation,’’ and to prevent separating income from the
‘‘economic activities’’ that produce it. Viewed through
the lens of the authors of the Revised Discussion
Draft, value is apparently created by performing certain
‘‘important functions,’’ such as design and control
of research and marketing programs, management and
the