Apportionment of Profits to a Permanent Establishment: Similarities and Differences in the UK, the US and the Republic of Korea
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Apportionment of profits to a permanent establishment is to determine the taxable business profits of a part of a multinational enterprise within the source country. The recent position of the OECD is to apply the separate enterprise approach with the functional and factual analysis. This article focuses on two aspects. The first one is to characterize the activities carried through a permanent establishment when it deals with the head office or the other parts of the same enterprise. The second is the deductibility of expenses which includes the question of notional charges on internal dealings and the issue of indirect expenses incurred by the enterprise as a whole for the common purposes. The UK, the US and Korea have had different tax law to deal with these issues, while they have shared some similarities. The relevant Articles of the current OECD Model Convention and the Commentary will be analysed in advance, as it helps to interpret and understand those different systems and provides a certain guidance to compare them. Several problems contained in the authorized OECD approach and some possible solutions will be discussed at the final part of this article.
Abstract
Apportionment of profits to a permanent establishment is to determine the taxable business profits of a part of a multinational enterprise within the source country. The recent position of the OECD is to apply the separate enterprise approach with the functional and factual analysis. This article focuses on two aspects. The first one is to characterize the activities carried through a permanent establishment when it deals with the head office or the other parts of the same enterprise. The second is the deductibility of expenses which includes the question of notional charges on internal dealings and the issue of indirect expenses incurred by the enterprise as a whole for the common purposes. The UK, the US and Korea have had different tax law to deal with these issues, while they have shared some similarities. The relevant Articles of the current OECD Model Convention and the Commentary will be analysed in advance, as it helps to interpret and understand those different systems and provides a certain guidance to compare them. Several problems contained in the authorized OECD approach and some possible solutions will be discussed at the final part of this article.
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